Conversion of loan into equity

Procedure for converting loan amount into equity shares 

Section 81(3) of the Companies Act, 1956 states the following:

“Nothing in this section shall apply

-(a) to a private company; or (b) to the increase of the subscribed capital of a public company cause byan exercise of an option attached to debentures issued or loans raisedby the Company-(i) to convert such debentures or loans into shares in the Company,or (ii) to subscribe for shares in the Company:Provided that the terms of issue of such debentures or the terms of such loansinclude a term providing for such option and such term-(a) either has been approved by the Central Government before the issueof debentures or the rising of the loans, or is in conformity with the rules,if any, made by that Government in this behalf; and(b) in the case of debentures or loans other than debentures issued to, or loans obtained from, the Government or any institution specified by theCentral Government in this behalf, has also been approved by a specialresolution passed by the Company in general meeting before the issueof the debentures or the raising of the loans.

”

Steps

1. Convene a Board Meeting after issuing notices to the directors of theCompany as per Section 286 to decide about increase in paid-up sharecapital and to fix up the date, time, place and agenda for convening aGeneral Meeting and to pass a Special Resolution for the same.2. Every officer of the Company whose duty is to give notice of the BoardMeeting as aforesaid and who fails to do so will be punishable with fineupto Rs. 1,000 (

Section 286(2)

).3. Issue notices in writing at least 21 days before the date of the GeneralMeeting (

Section 171(1)

) with suitable Explanatory Statement (

Section 173(2)

).4. Hold the General Meeting and pass the Special Resolution by threefourths majority (

Section 189 

) as the case may be as required under Step 1.