Conversion of Loan into Equity under the Companies Act, 2013

Introduction 

A company may accept loans from its director, or their relatives, or from other companies for various reasons such as to meet its working capital needs or grow its existing facilities etc., Further, the Company is obligated to repay the debt within the timelines and as per the terms agreed with the lender. However, a company may opt to convert such a loan into shares if the same is agreeable to the lender instead of repaying it back. 

In accordance with Section 62(3) of the Companies Act of 2013, a Company may convert the loan into equity after obtaining the approval from its members by way of special resolution. 

Client requirement  

We undertook this task for a client primarily engaged in the business of software products and software services. To meet its working capital requirement, the client had borrowed loans from its directors on the terms to repay the loan within 2 years. However, the client proposed to convert the loan into the equity instead of repaying the loan after receiving the consent of the lenders.  

In this regard, the client approached us sharing the facts of the case and seeking advisory & assistance for converting its unsecured loan into the equity capital. After understanding the facts of the case in detail, we initiated the process. We provided the client a detailed note and an action plan with the steps involved in this exercise. 

Our work 

Converting loan into the equity capital involves series of activities which were undertaken by us and the same are mentioned below: 

As a first step, we had to analyse whether the terms of the Loan Agreement had a condition to convert the loan into equity and if the client had obtained prior approval from the members. In the present case, there was no specific term in the agreement between the client and lender to convert the loan into the equity before raising the loan. 

In this regard, we advised the client to enter into an addendum agreement with the lender for including the term of converting the loan into the equity after obtaining the approval from the members by way of special resolution. We drafted the addendum and other requisite documents as required.  

We also checked the capital structure to know if there was any requirement of increasing the authorised capital of the client. 

We initiated the process by coordinating with the client and preparing the requisite documentation i.e., addendum agreement, Board and general meeting related documents, and other miscellaneous documents. Thereafter, the members approval by way of special resolution was obtained and Form MGT-14 was filed with the RoC within 30 days. 

Post filing of the Form MGT-14 with RoC officials, a Board meeting was called for allotment of equity shares pursuant to conversion of the loan into the equity. Consequently, Form PAS-3 (return of allotment) was filed with the RoC within 30 days. 

Thereafter, necessary entries were made in the register of members of the Company and share certificates were issued to the allottees within 60 days. 

The entire assignment was completed in a smooth & seamless manner. Our experience of handling  various assignment of conversion of loan into equity has given us considerable exposure on the critical aspects to be looked into, in the process.  We have undertaken similar assignments for other companies as well and the process has been smooth & seamless. 

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