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CONVERSION OF LOAN INTO SHARE CAPITAL & RIGHT ISSUE ARE PRACTICAL WAYS TO RAISE CAPITAL FOR SME

 Introduction: Issue of shares has remained area of concern under the Companies Act, 2013. This article contains the process to raise capital by converting loan into share capital or by right issue. It is also recommend that conversion of loan into share capital or right issue is a simple & more practical process to raise capital under new era for companies specially, small & medium size companies.

 

Different ways of issue of capital as specified under Companies Act, 2013 are as follows:

 

  1. i) Right Issue to Equity  share capital on pro rata basis u/s 62(1)(a).
  2. ii) Preferential Allotment [To predetermined  person(s) including Equity shareholders who agreed to subscribe i.e. “proposed allottee”]for cash or in kind u/s 62(1)(c).

iii)    Private Placement by offer letter [To predetermined  person(s) including Equity  shareholders to whom co offer to subscribe i.e.“proposed offeree”]for cash only i.e .not in kind u/s 42.

  1. iv) Loan or debenture converted into shares u/s 62(3).

 

Problems if capital raised u/s 42 or 62(1)c: A Co wants to raise say, Rs 5 Lakhs by issue of shares. Company faces the following problems:

  1. i) Issue Expenses, very high
  2. ii) Process to raise is very complex

iii)                Process to raise is very time consuming

 

Suggestions to MCA

“Issue size” upto 5 crores / f.y. should be exempted from conditions of minimum application amount per applicant, valuation report, separate bank a/c, and special resolution for all company.

 

Relevant provisions

When a company proposes to increase the share capital by converting loan into share capital or by issue of equity or preference shares to its existing equity shareholders on prorate basis , companies (including private limited companies) have to comply with the new procedures & conditions as specified u/s Section 62(1),(2) & (3) of Companies Act 2013 and Companies(Share Capital and Debentures)Rules 2014.

 

Conversion of Loan into capital[Sec 62(3)

Sec 62(3) states if company takes a loan on the term that loan will be converted into share capital & such an option have been approved before raising of loan by a special resolution, subscribed capital can be increased.

 

Procedure for conversion of loan into shares:

  1. Approve terms of loan by passing special resolution before taking of loan & file special resolution in E-Form MGT14 within 30 days.
  2. Convert loan into shares by passing resolution in Board Meeting & File Eform PAS3 for allotment of shares within 30 days.

iii.            Also issue share certificate by passing Board resolution & file Eform MGT 14 within 30 days for issue of shares.

 

Right issue is also a simple process

A Pvt Ltd is having two members, Mr A & Mrs A. Co wants to raise Rs 2 Lakhs by issue of equity shares.  Mr A & Mrs A do not want to invest further. Even Mrs A wants to sell some shares. However, Mr C wants to invest in the Company.  It is very costly & complex for company to follow preferential allotment provisions. Mr C purchases 100 shares from Mrs A. Now , company have 3 members: Mr A, Mrs A & Mr C. Company comes with right issue, the process of which is very simple i.e. by calling a Board meeting , without any minimum application amount per applicant, without opening a separate bank a/c, without valuation report & without need to pass SR in general meeting. Mr A & Mrs A renounced right in favour of C & company able to raise fund easily.

 

Relevant Provisions

Sec 62. (1Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered—

(a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—

(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;

(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;

 

(2The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be despatched through registered post or speed post or through electronic mode to all the existing shareholders at least three days before the opening of the issue.

 

PROCEDURE:

 

  1. Call a Board meeting  to approve right issue including “letter of offer”, which shall include right of renunciation also.
  2. Send offer letter by registered post or speed post or electronic mode to all existing members as on the date of offer at least 3 days before the opening of the issue.

iii.            Receive acceptance/renunciation/rejection of rights from members to whom offer has been sent /from persons in whose favour right renounced within period of validity of offer, which can be 15 days to 30 days from offer date as specified in offer letter.

  1.  Call a Board meeting  to approve allotment, issue of share certificate & authorize a director to file E-form PAS 3(Return of Allotment) to ROC  & MGT 14 for issue of share. If company  does not receive sufficient money, Board may dispose off shares offered in such a manner which is not dis-advantageous to the shareholders and the company.
  2.  File E-form MGT 14 for issue of share (Allotment of shares & Issue of share certificate: Refer D below) & PAS 3(Return of Allotment) to ROC for allotment.
  3. Issue share certificate       

 

MGT14 is not required to be filed for allotment of shares, however, it is required to be filed for issue of shares:

  1. i) As per sec 179(3)(c), the Board of Directors of a company shall exercise the  powers to issue”securities on behalf of the company by means of resolutions passed at meetings of the Board.
  2. ii) As per sec 117(1)&(3), such resolutions are to be filed to ROC.

iii)                It has been decided by a High court that allotment of shares & issue of share are different. A question arises whether resolution for allotment of shares (which leads to increase in share capital) is to be filled or issue of shares certificate is to be filled?

  1. iv) To avoid dispute, it is suggested to pass both resolutions i.e. a)for  allotment of shares  as well b) for  issue of share certificate in same meeting & file with ROC in MGT14.

 

 

Why it is safer to renounce right in favour of member ?

As per Letter No. 8/81/56-PR, dated 4 November, 1957, the issue of further shares by a company to its members with the right to renounce them in favour of third parties does not require the issue or registration of a prospectus.  However, there is no such circular under Companies Act, 2013.

 

Can company decide to issue Partly paid up right shares?

Yes, there is no restriction to issue only fully paid up shares for right issue. Accordingly, company can plan its fund requirement in future & accordingly, decide calls for issue of partly paid up shares.

 

Is separate Bank account compulsory?

No, there is no requirement u/s 62 to receive application money in a separate bank account.

 

Can company receive money in cash for right issue?

Yes, there is no restriction to receive money only by banking channel u/s 62. However, Eform PAS 3 (Return of Allotment) contains such condition inbuilt in such Eform & without accepting such condition, this eform cannot be filled. In case money is received in cash, it is advised to attach a declaration as optional attachment that company has received the money in cash & there is no such restriction u/s 62. However, it is advised to receive money by banking channel as far as possible.

CONCLUSION & SUGGESTION: Everyone knows that private placement is a very costly & complex process to raise share capital. In India, more than 70% private Ltd companies are small companies. It is neither feasible nor practical for companies including small companies to raise share capital of “small issue size” by private placement. It is advised to exempt issue size upto 5 crores p.a. from the complex & costly procedure of private placement.

DRAFT OFFER LEETER FOR RIGHT ISSUE

Regd. Office: _________________________________________

Notice / Letter of offer

To,

Issue of 200000 equity shares of Rs. 100 each at par aggregating Rs. 200 Lacs to the equity shares holders on right basis in the ratio of _____ equity shares for every _____ equity shares held on ___________ 2014, pursuant to the Board resolution passed in its meeting held on ______________2014

Dear Share holder

You are hereby informed that the Board of Directors has decided to increase the subscribed and paid up capital of the Company by issue of _____________ equity shares of Rs. 100 each by right offer to equity share holders as on ___________ 2014 on proportionate basis and conditions as laid down, inter alia hereunder, in application form and in Board resolution.

As a share holder on the afore mentioned date, being fixed as offer date, we are pleased to inform you that you are entitled to for the “rights shares offer” in reference to details as mentioned in the enclosed application form.

By order of the Board

For ____________Ltd.

 

Director

Date: __________2014

Place: Kolkata

Instructions / Terms

  1. Shares will be issued only in physical form.
  2. You may accept the offer and apply for the Equity shares offered, either in full or in part by filling accordingly the application form.
  3. You may also renounce all or any of the equity shares; you are entitled to in favour of any person. Any renunciation from Resident to Non resident or vice versa is subject to the requisite permission and the said permission must be attached to the application.
  4. You are also eligible to apply for additional equity shares over and above the number of equity shares offered to you provided you have applied for all the shares offered to you without renouncing them in full or in part. However, application for additional shares is subject to sole discretion of Board. Additional equity shares cannot be renounced in favour any person.
  5. Application should be made on the printed form provide by the company. 6.            Full amount i.e. Rs. 100/- is payable with application.
  6. All account payee local cheques / draft accompanying the application should be drawn in favour of “________________”.
  7. Application for accepting the offer/renouncement shall reach at the registered office address of the Company on or before ____________, 2014. 9.            In case your application form completed in all respect is not received on or before ___________________, 2014, your right for applying/renounce the equity shares shall be deemed to be waived and the Board will have absolute power to dispose off such shares in its sole discretion in the best interest of the Company. 10.        Application for total value of Rs. ___________/- or more, applicants’ income tax PAN details and photocopy must be provided along with application.  Applicant(s) who do not have PAN are required to provide a declaration in Form 60/61 prescribed under the I.T. Act along with application. Application without this will be considered incomplete and are liable to be rejected.
  8. In case of application under power of attorney or by a body corporate or by a society, a certified true copy of the relevant power of attorney or resolutions or authority to the signatory to make the investment under this offer and to sign the application and a copy of the Memorandum and Articles of Association or bye laws of such body corporate or society should be accompanies by application.
  9. The form must be filled in English and in block capital as applicable/appropriate and delete whichever is not applicable.
  10. The form found incomplete with regard to any of the particulates required to be given therein and/or which are not compete in conformity with the terms of offer letter are liable to be rejected and money paid in respect thereof will be refunded without interest.
  11. The Board reserves its full, unqualified and absolute right to accept or reject any application, in whole or in part, and in either case without assigning any reason thereto.
  12. The offer shall be valid for …………….. days (a period limiting a time not being less than fifteen days and not exceeding thirty days) from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined.  

______________________

Regd. Office: _________________________________________

Application form

Last date for receipt of application: ____________, 2014

Issue of 200000 equity shares of Rs. 100 each at par aggregating Rs. 200 Lacs to the equity shares holders on right basis in the ratio of ______equity shares for every _____ equity shares held on ______________, 2014

Date: _____________

 

To,

The Board of Directors,

_______________ Limited,

Kolkata.

 

Dear Sir,

Ref.: Notice / offer letter dated____,2014, regarding the decision of Board of Directors in its meeting held on ____,2014 to increase the capital by issue of 200000 equity shares of Rs. 100 each by right offer to share holders as on book closure date ____,2014.

  1. I/we hereby accept and apply for allotment of the below mentioned Equity shares in response to the letter of offer dated ____,2014 offering the Equity shares to me/us on right basis.
  2. I/we also apply for below mentioned additional equity shares and agree to accept these shares as may be decided by the Board of Directors.
  3. I/we agree to accept the “Equity Shares” allotted to me/us and to hold such shares upon the terms and conditions as laid down by the Board of Directors and subject to the provisions of the Companies Act, 2013, Memorandum & Articles of Association of the Company, and all the applicable laws, rules, and guidelines.
  4. I/we authorize you to place my/our name(s) on the register of members.
1

 

Name of the Share holder(s):

 

 

 
2Number of equity shares held :

 

 
3 Number of right share entitled  :

 

 
4 Number of additional shares applied for  :

 

 
5 Total Number of Shares applied for  :

 

 
6 Amount payable with application by a/c payee cheque / DD in favor of the company :

 

Rs. 100 per shares applied for
7 Payment/local cheque/DD details  :

 

 

 

_________________                ___________________              __________________ Sole/first applicant                       Second joint applicant                   Third joint applicant

Signature(s) as per specimen recorded with the Company

______________________

Regd. Office: _________________________________________

Form of renunciation

Date: ______________

 

To,

Board of Directors,

_______________________Limited.

Dear Sir,

Pursuant to the Notice / offer letter dated ___2014 , I/We hereby renounce my/our rights to the _______ Equity Shares in favour of person(s) accepting the same and signing the application form for renouncee(s). I/We have not made any application to the Company for allotment of these equity shares in my/our name(s).

_________________                     ___________________             __________________ Sole/first applicant                       Second joint applicant                   Third joint applicant

Signature(s) as per specimen recorded with the Company

Application by renouncee(s) {to be filled in by renouncee(s) only}

Date:_____________

To,

Board of Directors,

______________Limited.

  1. In terms of letter of offer dated ___2014 and pursuant to the form of renunciation signed by the above mentioned shareholder(s), I/We apply for allotment of below mentioned equity shares.
  2. I/we also apply for below mentioned additional equity shares and agree to accept these shares as may be decided by the Board of Directors.
  3. I/we agree to accept the “Equity Shares” allotted to me/us and to hold such shares upon the terms and conditions as laid down by the Board of Directors and subject to the provisions of the Companies Act, 2013, Memorandum & Articles of Association of the Company, and all the applicable laws, rules, and guidelines.
  4. I/we authorize you to place my/our name(s) on the register of members.
1Name and address of the renouncee(s)

 

 
2If you are existing share holder, please mention folio no.

 

 
3 Number of equity shares accepted

 

 
4Number of additional equity shares applied by renouncee

 

 
5 Total Number of Shares applied for by renouncee

 

 
6 Amount payable with applicationRs. 100 per shares applied for.
7Payment/cheque/DD details

 

 

 

Signature of renouncee(s)

Full nameSignatureAddress of the fist/sole applicant
Sole/first applicant

 

  
Second joint applicant

 

  
Third joint applicant

 

  

 

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