what would be impact of converting dues into equity on market cap and capital structure ?
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Converting dues into equity
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| Converting dues (creditors or loans) into equity is called 'Debt-to-Equity Conversion' or 'Issue of shares against consideration other than cash.' Here is the complete guide: 1. Legal Process (Companies Act): - Pass Board Resolution and Shareholder Resolution (Special Resolution if private placement rules apply) authorising the conversion - File Form PAS-3 (Return of allotment) with ROC within 30 days of allotment - If the creditor/lender is a foreign entity: FEMA/RBI approval may be needed (ECB-to-equity conversion has specific RBI guidelines) - Ensure the conversion is at a fair value determined by a registered valuer (Rule 8 of Companies (Share Capital and Debentures) Rules) 2. Accounting Treatment: Entry in Company's Books: Dr. Creditor / Loan Payable A/c Rs. XXXX Cr. Share Capital A/c (face value) Rs. YYYY Cr. Securities Premium A/c Rs. ZZZZ (where YYYY = face value of shares issued, ZZZZ = premium over face value) 3. Valuation: Shares must be issued at a price not less than the fair market value (FMV). For private companies, FMV is determined by a SEBI-registered merchant banker or CA using DCF or NAV method. Shares cannot be issued below face value. 4. Tax Implications: - For the Company: No income tax on such conversion — it is a financing transaction - For the Creditor: The conversion is a 'transfer' of the debt for capital gains purposes. The cost of acquisition of shares = amount of debt converted. Any premium on eventual sale of shares will be capital gains - Section 56(2)(x): If shares are issued to creditor at a value significantly different from FMV, tax implications may arise for the recipient 5. Stamp Duty: Applicable on issue of share certificates as per state-specific rates |
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