Allotment of shares against unsecured loan

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P.C. Joshi (Querist)

26 March 2012 Dear friends,

A private limited company wants to allot shars to its promoters to the tune of Rs 15 crores against unsecured loan provided by promoter to te company on various dates since 2000. As far as I know tehre is no restriction under the Companies Act to allot the sahres against unsecured loan. Pls confirm. Also I need a clarification of the following points.

1. Whether the shares allotted against unseucred loan to a promoter is treated as allotment against cash or allotment for consideration other than cash.

2. Whether the unsecured loan should be trabsferred to share application money and then allotment of shares should be made or straightaway we can allot the shares against insecured loan.

Looking for your promot response pls.

Thanks

P.C. Joshi

Ajay Mishra

Ajay Mishra (Expert)

26 March 2012 Hi

1. The shares allotted against unsecured loan will be treated as allotment against cash. You should allot in Board Meeting and file Form-2 with ROC .

2. For converting un-secured loan in to allotment: There should be a written agreement with parties to convert the unsecured loan in to share capital.

To become a shareholder there must be an agreement in writing under section 41(2) of the Companies Act between company and lender.

Please read case In Kumaran Potty V Venad Pharmaceuticals & Chemicals Limited (1996) 2 Comp. L.J. 288 (Ker.).

Regards