Unsecured loan from related parties

Save Share

This query is : Resolved

SONAM (Querist)

23 September 2015 IF A COMPANY HAS TAKEN UNSECURED LOAN FROM THE RELATED PARTIES UNDER THE OLD ACT, CAN IT BE CONVERTED INTO SHARE CAPITAL NOW.

Guest

Guest (Expert)

24 September 2015 Yes. It is possible. It can be converted under the category" Consideration other than cash" but valuation report is not insisted surprisingly. SO DONOT WORRY.

SONAM

SONAM (Querist)

25 September 2015 thanks sir can you pl refer the section, rule or notification where it is mentioned along with the initial process to be started and the Agreement format between the company and the investor

Aashok Kumar Sharma

Aashok Kumar Sharma

(Expert)

02 August 2025 Sure! Here’s a detailed response for **conversion of unsecured loan from related parties into share capital under the Companies Act**:

---

### 1. **Legal Provision for Conversion of Loan into Share Capital**

Under the **Companies Act, 2013**, the conversion of unsecured loan into share capital is considered as **"Consideration other than cash"** and is covered under:

* **Section 62(1)(c):**
This section deals with further issue of shares to persons other than existing members by way of **conversion of debentures or loans** into shares.

* **Rule 13 of Companies (Share Capital and Debentures) Rules, 2014:**
Provides procedural aspects of such issue.

---

### 2. **Key Points:**

* **No Valuation Report Mandatory:**
Unlike allotment of shares for cash or other types of consideration, conversion of loan into share capital does **not mandate valuation report** under the Act.

* **Board & Shareholder Approval:**

* The company must pass a **board resolution** approving the conversion.
* If needed, shareholders’ approval by **special resolution** (in general meeting) can be passed, especially if the loan conversion impacts shareholding significantly.

* **Agreement / Terms:**
It is advisable to document the conversion terms via a **Share Subscription Agreement or Conversion Agreement** between company and lender/shareholder, stating:

* Amount of loan to be converted
* Number and type of shares to be allotted
* Rights attached to the shares

* **Filing Requirements:**
File **PAS-3 (Return of Allotment)** with MCA within 30 days of allotment.

---

### 3. **Initial Process to be Started:**

* Review loan agreements to ensure loan amount and terms.
* Call Board Meeting to approve conversion and allot shares.
* If needed, hold EGM to pass Special Resolution.
* Prepare share allotment documents (share certificates, updated registers).
* File necessary forms (PAS-3, MGT-7 if EGM conducted).
* Update shareholding pattern.

---

### 4. **References:**

* **Section 62(1)(c), Companies Act, 2013**
* **Rule 13, Companies (Share Capital and Debentures) Rules, 2014**

---

### 5. **Sample Clause for Conversion Agreement:**

> *“This agreement records the terms of conversion of unsecured loan amounting to Rs. \[amount] into \[number] equity shares of Rs. \[face value] each at par/by premium, fully paid-up, to \[name of lender], as per approval of Board and Shareholders of the Company dated \[date].”*

---

If you want, I can help draft a **simple format of the agreement** or prepare a checklist for you. Would that be helpful?

You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now