The procedure to convert the unsecured loan to equity is nowhere specifically mentioned under the companies act 2013. The whole process in this regard is mentioned in this article. Sub-section (3) of section 62 under the companies act 2013 states that “Nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company: Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.” This means that the act allows the company to convert their unsecured loans into equity. Further, the company is required to file the e-form MGT-14 within 30 days, as the share capital of the company is increasing.

In order to convert such a loan, the company must ensure that the articles of association allow the company to make such loan conversion. If such a clause is not mentioned at the time of preparing the Articles, the company has to make sure that it receives an approval from both the directors as well as the shareholders. For the approval of the directors, a board meeting for the same must be conducted. At such meeting, a chairman must be appointed, who is to make sure that the quorum is present. The matter regarding such loan conversion must be kept in front of the board and such matter should be approved by the majority of the directors. After the approval of the board of directors, the board should prepare a notice for conducting an Extra-Ordinary General Meeting. Such a notice should be sent to all the shareholders of the company and the meeting should be conducted after Twenty-One clear days from dispatch of notice. The notice shall clearly state the items (agendas) of the meeting. Such a notice should be sent by registered post.

Further, an Extra-Ordinary General Meeting is conducted. The shareholders are to appoint a chairman (in the manner provided under the companies act), who after which is to make sure that the quorum is present. For the approval of the shareholders, the matter must be passed with an Ordinary resolution (this amendment was made by MCA’s notification on June 2015, prior to which Special resolution was required under section 62 of the Companies Act, 2013). After such an approval of the shareholders, the company is allowed to enter into an agreement with such parties in respect of the loan. Following such an approval, the directors are to prepare a convertible loan agreement before accepting such loan from the parties. The amount of loan can be made in a single tranche as well as in multiple tranches (however a clause in such regard must be mentioned in the loan agreement.) The loan agreement must provide all the clauses which are to be agreed and signed by both the lender as well as the borrower (company).

After such signing of the agreement, the company is to accept the loan from the lender which is to be converted into equity at a future date and in such a manner as provided in the agreement. The loan is then converted on the date mentioned in the agreement. After such successful conversion of the loan, the directors are required to conduct a meeting of the board. At such meeting, the directors are to allot the shares to the lender at such a valuation as deemed to be fair. A document namely the “List of Allottees” is then to be prepared, under which all the details in respect of such transfer should be mentioned. Also, the company is required to file e-form PAS-3 within 30 days of allotment of shares. Once the e-forms are submitted and approved by the Registrar of Companies (RoC), the company is required to provide the lender, the share certificate in respect of such conversion within 30 days. In case the company or any officer fails to comply with any of the provision under this section, Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.  

(This article was prepared with the help of Chirag Gohil from our Corporate Law Team)