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Conversion of unsecured loan to share capital

C Karthik (CS Final Student ) (81 Points)

24 April 2015

Our company is having unsecured loan in the name of the member for several years and now the company wants to convert it to share capital to allot shares equivalent to loan amount.

My doubt whether this transaction will attract deposit rules or not? Can we transfer it share application money and issue shares?

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6 Replies

raghava (cs) (43 Points)
Replied 24 April 2015

Mr. Karthik,

My view is

Basically Pursuant provisions of Section 62(3) of the Companies Act 2013 the unsecured loans can be converted in to share capital.

But at the time of obtaining the loan it should have been approved by special resolution mentioning terms & conditions that the loan shall be converted in to equity capital at a future date.

If that special resolution was not passed by your company at the time of obtaining loan, the same cannot converted under section 62(3).

Regarding treating the loan as Deposit :Recent MCA circular no 5/2015 dated 30.03.2015 clarified that amounts received by private companies from their members, directors or their relatives prior to 1st April, 2014 shall be considered as deposits under the Companies Act, 2013 such amounts received by private companies prior to 1st April, 2014 shall not be treated as 'deposits' under the Companies Act,2013 and Companies (Acceptance of Deposits) Rules, 2014 subject to the condition that relevant private company shall disclose, in the notes to its financial statement for the financial year commencing on or after lsi April, 2014 the figure of such amounts and the accounting head in which such amounts have been shown in the fi nancial statement.

Regarding conversion of share application money in to Equity you may check MCA Companies (Acceptance of Deposits ) Amendment Rules 2015 dated 31.03.2015 Amendment made to Rule 2(1) (c) (vii) (a).

1 Like

CA Neelam Maheshwari (internal Auditor) (497 Points)
Replied 24 April 2015

Raghava sir, a company can borrow only from directors apart from banks and financial institutions provided the director gives a declaration that the amount that he is giving is not out of borrowed funds. Sir there is no need to disclose the loan taken from directors na ???

raghava (cs) (43 Points)
Replied 24 April 2015

Neelam Madam,

You are correct, As per Rule 2 (viii) of Companies Acceptance of Deposit Rules 2014 the Amount received from a person who at the time of the receipt of the amount was a Director of the company, provided that the Director from whom money is received furnishes to the company at the time of giving the money a declaration in writing to the effect that the amount is not being given out of funds acquired by him borrowing or accepting loans or deposits from others, shall not be treated as Deposits. But if no such declaration obtained from Director then such amount shall be treated as Deposit as per the above definition

However

1. companies may obtain deposits from its members in compliance with Section 73 of Companies Act 2013.

2. Eligible companies may obtain deposits from public in compliance with Section 76 of companies Act 2013

C Karthik (CS Final Student ) (81 Points)
Replied 29 April 2015

Mr.Raghav,

The amout is accumulated for several years and the company did not have passed any resolution for conversion of the same into equity capital. Also the circular mentioned is not applicable to us because it is a public company. The member holds the position of the directorship in this company for few years.

Also, to confirm if we allot shares equvalent to his loan amount, whether capital gains will arise?

Thanks in advance

raghava (cs) (43 Points)
Replied 29 April 2015

Mr.Karthik,

As you mentioned there was no such resolution passed for conversion of loan in to equity at the time of obtaining the loan In my view there is no possibility of conversion and allotment of shares. (However you may seek other professionals or experts view in this regard