Generally in Private Limited Company when unsecured loan is received from its share holders/ Promoters no agreement is entered into in most of the cases.   Even in the absence of agreement, unsecured loan can be converted in equity share capital if both shareholder and company agree to the same. There are no issues for the same.   On the safer side you should get a share application forms filled and signed from that shareholder and pass resolution for conversion of USL into share capital.

There is no bar for conversion of loan into share capital. You are required to enter into agreement with lender for conversion of loan into capital.

Case Study

A Private Limited Company has received unsecured loans from its share holders/ Promoters. Amounted Rs. 34 Lakhs. Now It wants to issue Equity Shares of  Rs. 9 Lakhs out of Rs. 34 Lakhs of unsecured Loan. Balance of Rs. 25 Lakhs out of Rs. 34 Lakhs of Unsecured loan is going to be treat as Security premium for above mentioned Equity shares issue. For this purpose that company what meeting should conduct to pass the resolution for the above activity? Is this is possible to do. if yes means what are all the procedures to follow? Any changes require in Memorandum and Articles? Unsecured loan is showned on last year Balance sheet.

Answer to the Case Study

Generally in Private Limited Company when unsecured loan is received from its share holders/ Promoters no agreement is entered into in most of the cases.   Even in the absense of agreement, unsecured loan can be converted in equity share capital if both shareholder and company agree to the same. There are no issues for the same.   On the safer side you should get a share application forms filled and signed from that shareholder and pass resolution for conversion of USL into share capital.

The resolution for the same will be as:-

“RESOLVED that the following persons who have applied for xxxxxxx equity shares of Rs. 10/- each (Fully paid up) with a premium of Rs. 40/- per share and is regard to allotment of shares their loan account debited in respect of allotment amount of Rs. Xxxxxxxx , be  and hereby allotted equity shares :

Sr. No.	Name of the allottee	Address	Occupation	No. of shares allotted	Amount per shares (in Rs.)

“Further resolved that in relation to the allotment of shares made by the company, Shri ABC, Director of the Company be and is hereby authorized to file the return of allotment with the Registrar of Companies”

Another case study

A pvt company is having equity share capital of Rs. 100000/- at the beginning of the F.Y. & Rs. 500000/- as an unsecured loan from the directors . During the year company increases the paid up capital to Rs. 2000000/- in which Rs. 500000/- of unsecured loan is converted into Equity share capital

Whether the following conversion will attract provisions of Income tax Act . Please also specify whether any separate disclosure is required under companies Act.

The restriction imposed by sec 269T is on the repayment of loan or deposit otherwise than by an account payee cheque , if the amount of loan or deposit is Rs. 20000/- or more. IN the instant case , the deposit is converted into equity share capital and hence sec 269T is not attracted .

Moreover there is no  bar for conversion of loan into share capital. You are required to enter into agreement with lender for conversion of loan into equity.

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