Conversion of Loan into Equity

[Mansi Damania]

Dear Members,

 

Can Loan be converted into an Equity Shares? If so, Please send me checklist for Conversion of Loan into Equity.

Thanks in advance.
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Regards,
CS Mansi Damania
Practising Company Secretary

+91 98333 70 697

[chakri hegde]

 Dear Mansi,

Yes loan can be converted into equity shares provided; the terms of the loan give an option to convert such loans into shares of the company. Such terms and conditions must be in conformity with the rules made by the Government for this purpose before raising of such loans. 

The proposal must be approved by the special resolution passed by Company at the general meeting before raising of the loan. For this purpose, the Central Government has framed the Public Companies (Terms of issue of debentures and raising of loans with option to convert such debentures or loan into equity shares) Rules, 1977. To be concise, the rules say as under:

1.     The debenture or loan is raised or issued either through private subscription or through issue of the prospectus to the public.

2.     The financial institutions specified for this purpose either underwrite or subscribe to the whole or part of the issue of debentures or sanction the raising of loan.

3.     Having regard to financial position of the company, the terms of issue of debentures or terms of loan (e.g. rate of interest payable on debenture and loan the capital of the company, its liabilities and its profits during immediately preceding five years and the current market price of shares of the company), the conversion must be either at par and or at premium not exceeding 25 percent of the face value of the shares.

I herewith attach the extracts of the above said Rules for your perusal.

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With Best Wishes
Chakri G Hegde
Nissin Foods India Ltd.
Bangalore

[Mansi Damania]

Thank you very much.

 

It is very useful.

 

[rajesh n]

Dear Chakri,   Thank You, I was aware that loans can be converted into Equity Shares, but was not aware about the Rules.  Thanks for the update.   Regards, Rajesh --- On Mon, 17/8/09, Mansi Damania <mansid...@gmail.com> wrote:

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[rajesh n]

Dear Chakri,   Are The Rules applicable only to a Public Company, because we had converted loans into equity shares,(for a Pvt Co,) first by entering into a Loan Conversion Agreement between the Creditors and the Company, and then by simply passing a Board Resolution, and after that filed Form 2 with ROC.   Regards,  Rajesh --- On Mon, 17/8/09, chakri hegde <chakri.hegde@gmail..com> wrote:

From: chakri hegde <chakri...@gmail.com> Subject: [CSMysore] Re: Conversion of Loan into Equity To: csmy...@googlegroups.com

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[raja karthik]

Dear Friends,

 

The Rules mentioned are applicable only to public companies issuing debentures or raising loans from Public financial institutions.

 

Anyway it well within the powers of the company to convert a genuine debt payable into shares. For this the company can enter into an agreement with such persons as mentioned by Mr. Rajesh OR a Board resolution will do. In either case twin approvals by Board is necessary firstly of the arrangement and of the allotment.

 

The circular which enable the company to allot shares against the debt was posted in some of the earlier discussions by Mr. Rajesh only I think If I am not mistaken...

 

 

Thanks

Raja Karthik S
 

[chakri hegde]

Dear Rajesh,

It is true that, this rules are not applicable to Private Companies. As in the question, there was nothing about the kind of company, whether Public or Private, I presumed that, it was public Co.

As rightly pointed out by Mr. Raja, these rules are not applicable to private Companies. If the terms of the agreement raising the Loans provide for such conversation, then merely by passing a Board Resolution, the company can convert the loans into Shares.

However, as a part of good Corporate Practices, many Private Companies pass resolution in the Members Meeting before such conversion.

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With Best Wishes
Chakri G Hegde
Nissin Foods India Ltd.
Bangalore

[Mansi Damania]

The Company is Listed entity.

 

will the procedure be same??

 

On 8/17/09, chakri hegde <chakri...@gmail.com> wrote:

[chakri hegde]

Dear Mansi,

If the company is a listed one, then off course, the above said rules will become applicable. In addition to those rules, Provisions of SEBI Takeover Code might be triggered  on such conversion of loans into shares above a thresh hold limit (15% or more  shares or voting rights in the Target Company, if I am not wrong) as specified by the SEBI Takeover Code.

 

In that case, as per Regulation 10 of the Code, A Public Announcement is required to be made. So better keep in mind the Regulations of SEBI Takeover Code.

Other members views solicited..................

With Best Wishes
Chakri G Hegde
Nissin Foods India Ltd.
Bangalore

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[raja karthik]

Dear Friends,

 

The Rules will definitely be applicable provided the other party comes within the meaning of Public Financial Instituition defined under the Rules...

 

As rightly pointed out by Mr. Chakri takeover code to be complied with...

 

Regards,

Raja Karthik S.