Conversion of unsecured loan into equity shares

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Chirag (Querist)
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17 June 2015 Dear All,

Can anybody advice me in following query?
Conversion of unsecured loan into equity share by private Company is treated consideration other than cash?

Chirag

Chirag (Querist)
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17 June 2015 Its urgent. Anyone please advice.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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20 July 2024 Yes, the conversion of unsecured loans into equity shares by a private company is treated as consideration other than cash under the Companies Act, 2013. Here’s how it is treated and what considerations apply:

### Treatment of Conversion:

1. **Consideration Other Than Cash:**
- When unsecured loans provided by directors or shareholders are converted into equity shares, it is considered as providing consideration other than cash.

2. **Valuation Requirement:**
- A valuation report is required from a registered valuer to determine the fair value of the equity shares to be issued against the unsecured loans. This valuation report ensures that the conversion complies with regulatory requirements and establishes transparency in the transaction.

3. **Compliance with Companies Act:**
- The conversion must comply with the provisions of the Companies Act, 2013, including obtaining approval through a special resolution of shareholders and filing necessary forms with the Registrar of Companies (ROC).

4. **Accounting Treatment:**
- From an accounting perspective, the transaction involves recognizing the fair value of the equity shares issued as consideration for the extinguishment of the unsecured loans. The fair value is determined based on the valuation report provided.

5. **Tax Implications:**
- There may be tax implications associated with the conversion, particularly concerning the treatment of any gain or loss arising from the difference between the carrying amount of the unsecured loans and the fair value of the equity shares issued.

### Documentation and Compliance:

- **Valuation Report:** Obtain a valuation report from a registered valuer to determine the fair value of the equity shares.

- **Board and Shareholder Resolutions:** Pass necessary resolutions by the board of directors and shareholders approving the conversion.

- **Filing with ROC:** File Form MGT-14 with the ROC along with the necessary documents within the stipulated time frame.

### Conclusion:

Converting unsecured loans into equity shares involves careful adherence to legal and regulatory requirements under the Companies Act, 2013. It is considered consideration other than cash, and therefore, proper valuation and compliance with procedural requirements are essential to ensure transparency and regulatory compliance. It’s advisable to consult with a professional such as a company secretary or a legal advisor to navigate through the process effectively.

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