THE COMPANIES ACT OF 2013 [SECTION 62(3)]
CONVERTING A LOAN INTO EQUITY of a company is a common practice in the market because many companies that have borrowed money from their directors, financial institutions, or any other entity are obligated to repay the debt within the time frame set forth in the loan agreement or on mutual terms agreed upon by the company and the lender. However, many companies have financial challenges in their day-to-day operations and are unable to satisfy their debt commitments to their lenders. As a result, under Section 62(3) of the Companies Act of 2013, such a loan can be converted into shares in the company.
The Debt and Equity Shares Concept
The money invested in a firm by the owners, known as shareholders, is referred to as equity. The shareholder is given voting rights and is able to vote at yearly meetings about the company’s future management.
When and if the firm pays dividends, the shareholder receives a cash flow from the stock he or she holds. When he sells the equity, there may be a profit, a loss, or no change in the original capital invested.
The equity of a firm is derived by subtracting its combined assets from its entire liabilities. The equity of a firm, or what it owns and owes, is represented by its net value.
As a result, debt conversion to equity is a typical financial transaction. A borrower can convert debts into shares or equity in this way.
PROCEDURE FOR CONVERTING A LOAN INTO EQUITY
Step 1: As per Secretarial Standard-1, provide notice and agenda items to the Directors in order to hold a board meeting.
Step 2: Organize a Board Meeting to make decisions and send out notices for a general meeting.
Approve a loan that may be converted into shares by passing a board resolution in a meeting.
Issue a general meeting notice with an explanatory statement, in accordance with Secretarial Standards-2.
Step 3: Organize a general meeting.
Approval of a Special Resolution approving the loan agreement’s terms and conditions.
Within 30 days of passing a Resolution, file eForm MGT-14.
Step 4: Acceptance of the loan and completion of the loan agreement
Step 5: – The loan is converted into equity
Hold a meeting a Board meeting to approve the loan’s conversion to equity.
Pass a board resolution authorizing the lender to receive shares.
Within 30 days following the board’s allocation resolution, submit eForm PAS-3.
Advantages of converting a loan into a company’s equity share capital
The debt-to-equity transfer does not involve any monetary transaction.
Decrease liabilities to increase cash flow.
Due to a lack of financial resources, avoidance is used.
Is it possible to convert an unsecured credit into equity under the Companies Act of 2013?
According to Section 62 (3) of the Companies Act, 2013, the new provision of converting a loan into equity was first introduced in the Companies Act, 2013.
This section allows companies to convert their debt into equity, subject to the requirement that the loan is linked to an option to convert it to equity at some point in the future, and that the option is approved by shareholders through a special resolution. As a result, only those loans that have the option to convert into equity can be converted, and a special resolution has been passed.
Is it possible to convert debt into preferred shares?
A procedure for CONVERTING A LOAN INTO EQUITY is set down in Section 62(3) of the Companies Act 2013 resolution:
Before taking out a loan, approve a special resolution approving the terms of the loan, and file the special resolution in e-Form MGT-14 within 30 days.
By making a resolution at the Board Meeting, convert the loan into shares, and file e-form PAS-3 for allotment of shares under the Companies Act, 2013, within 30 days.
Also, adopt a Board Resolution issuing share certificates and filing an e-form MGT-14 within 30 days to begin the procedure for issuing shares by the private limited company.
The method for converting preference shares into equity shares is nothing more than barter, which is a form of exchange transfer. Section 45 of the Companies Act explains this in detail.
What is the process for converting convertible notes into equity?
Convertible Notes’ recognition as a capital investment mechanism is a significant step toward making the process of investing in Indian firms faster, simpler, and less expensive. It is important to highlight, however, that the benefit is only accessible to recognized start-ups, which implies that non-recognized start-ups are still prohibited from issuing Convertible Notes as a capital instrument or as a non-deposit under the Rules.
Upon the occurrence of specified events and as per the other terms and circumstances agreed to and mentioned in the instrument, a Convertible Note must be repaid or converted into equity shares of a start-up business within 5 years from the date of issue. The instrument would be converted into equity shares if it was converted under Section 62(3) of the Act.
If the Convertible Notes are converted into equity shares at a later date, the conversion will be based on a valuation determined at the time of the conversion. If the Convertible Notes are held by non-resident investors, whether such conversion will be at a discount to the shares being offered to new investors and other terms will have to be carefully reviewed to ensure compliance with applicable regulations, including pricing standards.
If a business took a loan before April 1, 2014 (as per the Companies Act, 1956) and now wishes to convert the loan into equity shares, it cannot do so under section 62 of the Companies Act, 2013, unless the firm approved a specific resolution at the time of loan acceptance. This generally aids a company’s cash flow by lowering its obligations. This action assures that the company’s financial resources are not depleted. This method is extremely useful to small and medium-sized businesses to CONVERTING A LOAN INTO EQUITY.