Share capital

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Querist : Anonymous

Querist : Anonymous (Querist)

02 February 2014 companies can convert longterm loans to share capital? if yes than what is the proceesure. Urgent plz....

Querist : Anonymous

Querist : Anonymous (Querist)

02 February 2014 plz send me the answer urgent

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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25 July 2025 Yes, companies can convert long-term loans into share capital — this is called a debt-to-equity conversion.

Basic Overview:
This usually happens when lenders (creditors) agree to convert their loan amount into equity shares of the company.

It helps improve the company’s debt-equity ratio and eases repayment burdens.

Procedure under Companies Act, 2013:
Board Approval

The Board of Directors must pass a resolution approving the conversion of loan into share capital.

Shareholders’ Approval

If the conversion results in issuance of new shares, an ordinary resolution at a general meeting (AGM/EGM) is required.

Sometimes, if terms of loan agreement require, lenders may have to approve conversion.

Valuation

The price at which shares are issued must be determined as per Section 62(1)(c) (Rights Issue) or Section 62(3) (Price to be decided by Board or Valuer).

Share valuation report may be required from a Registered Valuer.

Alteration of Share Capital

Increase in authorized share capital (if required) must be done by passing a special resolution.

File MGT-7 and SH-7 with ROC for changes in share capital structure.

Issuance of Shares

Issue shares to lenders against loan amount.

File PAS-3 (Return of Allotment) within 30 days of allotment with ROC.

Adjustment in Books

Loan liability reduced and share capital increased in company’s books.

Compliance Under Income Tax Act:
Debt-to-equity conversion may have tax implications for both company and lenders.

Section 43(6) of the Income Tax Act deals with debt-equity distinction.

Capital gains tax may arise for lenders on conversion.

Summary:
Step Details
Board Resolution Approve conversion
Shareholders’ Approval Ordinary resolution for new shares
Valuation As per Section 62 or via registered valuer
Increase Authorized Capital Special resolution if needed
File with ROC SH-7, PAS-3, MGT-7
Issue Shares Against loan amount
Accounting Debit loan account, credit share capital

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