CONVERSION OF LOAN INTO EQUITY

CONVERSION OF LOAN INTO EQUITY

INTRODUCTION

When converting debt to equity, the lender converts a loan amount into equity shares. No cash exchange occurs in the debt-to-equity swap. This usually helps a company in increasing cash flow by decreasing liabilities. This move ensures that the company does not face paucity of financial resources.

The given below chart depicts the legal procedural aspect to be attained in order to convert the loan into equity.

CONVERSION OF LOAN INTO EQUITY

1.Private Placement Under Section 42

(a) Under this route, the private placement shall be done to allot the Equity Shares for consideration other cash.

2. Straight through conversion Under Section 62(3)

(a) This route is feasible when the company has already taken Shareholders Approval by way of Special Resolution at the time of raising the loan.

3.By means of Rights Issue under Section 62(1)

(a) This is a possibility whereby the existing debt shall first be repaid and then infused again by way of the allotment of Equity Shares on Rights basis.

PROCEDURE FOR CONVERSION UNDER SECTION 42

The following is the compliance step chart for the conversion of Loan into Equity through Private Placement at a price which shall not be less than the price determined by the Merchant Banker. A point worth noting here is the cost of appointing a Merchant Banker is exorbitantly high and may range between INR 2,00,000 and INR 5,00,000.

STEP- I- Holding of Board Meeting

1. To pass a resolution for conversion of loan into Equity through Private
2. Prepare draft Offer Letter in Form PAS-4.

• To issue Notice for holding of Extra Ordinary General Meeting of

STEP- II- Holding of Extra Ordinary General Meeting:

1. Company shall pass Special resolution for conversion of such loan into Equity share capital through Private
2. File e-form MGT-14 within 30 days of passing of Special Resolution with

• File e-form GNL-2 within 30 days of circulation of offer letter for filing PAS-4 and PAS-5.

STEP-III- Hold Board Meeting for Allotment of Shares:

1. Present list of
2. Pass resolution for allotment of

STEP-IV- Filing Return of Allotment with the Registrar of Companies.

1. File PAS-3 with Registrar of Companies.

PROCEDURE FOR CONVERSION UNDER SECTION 62(3)

The following is the compliance step chart for the acceptance of Loan convertible into Equity:

STEP- I- Holding of Board Meeting at the time of raising the loan

1. To pass a resolution for Acceptance of
2. To pass board Resolution to approve the terms of conversion of such Loan into Equity share Capital of the Company

• To issue Notice for holding of Extra Ordinary General Meeting of

STEP- II- Holding of Extra Ordinary General Meeting:

1. Company shall pass Special resolution for conversion of such loan into Equity share capital of Company in
2. File e-form MGT-14 within 30 days of passing of Special Resolution with

STEP- III- Enter into Agreement:

1. Company shall enter into an agreement of Terms of
2. Such Agreement should contain the term of conversion of such Loan into Equity share capital of Company in

STEP- IV- Holding of Board Meeting at the time of conversion

1. Pass Board Resolution for Allotment of Equity Shares
2. Preparation of List of Allottees

• Filing of e-form PAS-3 for allotment of

PROCEDURE FOR CONVERSION UNDER SECTION 62(1)

In case MGT-14 is not filed by company while raising the loan later convertible into equity and also where going ahead with Private Placement is also not practical, Rights Issue is the way out. In the instant case, the company will have to repay the existing loan and issue the shares by way of Rights Issue. Rights Issue is the pre-emptive right of the existing shareholders to proportionately get the securities on priority in case of further issue of shares. Interestingly, the existing shareholders can either subscribe to the securities offered to them or renounce the same in favour of third person(s). Listed below is the procedure to be followed for this purpose:

1. Repay the existing
2. Hold a Board Meeting to approve Rights Issue including Letter of Offer, which shall include right of Renunciation

• Send offer letter to all existing members as on the date of offer at least three days before opening of the issue. The Offer shall remain open for minimum of 15 days and a maximum of 30 days from the date of circulation of Letter of Offer.

1. Receive acceptance/renunciations/rejection of rights from members to whom offer has been
2. Hold a Board Meeting to approve allotment of shares on rights
3. File Return of Allotment in Form PAS-3 with the Registrar of