Can a company convert a loan into equity?

Yes, a company can convert a loan into equity shares under Section 62(3) of the Companies Act, 2013. However, this is only permitted if the loan agreement includes a clause for conversion into equity and such a proposal is approved by the shareholders through a special resolution.

Who can provide loans to a company that can later be converted into equity?

Loans can be received from directors, their relatives, or other corporate entities. Loans from directors and their relatives (out of their own funds) are treated as exempt deposits under Section 73(2) read with the Companies (Acceptance of Deposits) Rules, 2014, making them legally permissible for conversion subject to conditions.

Can shareholders provide loans to a company?

Yes, shareholders can lend to a company. However, under Rule 3 of the Companies (Acceptance of Deposits) Rules, 2014, such loans are subject to a cap of 35% of the company's paid-up share capital, free reserves, and securities premium. Notably, private companies have been granted certain exemptions, allowing them to accept loans exceeding this limit under specific conditions notified by the Ministry of Corporate Affairs (MCA) on June 13, 2017.

What conditions must be met for a loan to be converted into equity?

The loan agreement must include a clear clause permitting future conversion into equity. A special resolution must be passed by shareholders authorizing such conversion. A formal loan conversion agreement must be executed. The lender (director or relative) must declare that the loan is from their own funds and not borrowed from others, as per Rule 2(c)(viii) of the Companies (Acceptance of Deposits) Rules, 2014.

What compliances are required at the time of accepting a convertible loan?

Convene a Board Meeting and approve the acceptance of the loan with an option to convert it into equity. Conduct an Extraordinary General Meeting (EGM) and pass a special resolution for the same. Execute a loan conversion agreement between the company and the lender. File Form MGT-14 with the Registrar of Companies (ROC) within 30 days of passing the special resolution.

What formalities must be completed when converting a loan into equity?

Conduct a Board Meeting to approve the allotment of equity shares against the loan amount. Prepare and finalize the list of allottees. File Form PAS-3 (Return of Allotment) with the ROC within 30 days. Issue share certificates to the lenders and ensure their names are entered in the statutory register of members. Pay applicable stamp duty on share certificates.

Are there borrowing limits for private companies under the Companies Act, 2013?

No, as per MCA Notification dated June 5, 2015, the provisions of Section 180 relating to borrowing limits do not apply to private limited companies. Therefore, private companies can borrow without the need for shareholder approval under this section.

What are the advantages of converting loans into equity shares?

Reduces the company's debt obligations, thereby improving its financial health. Strengthens the company's balance sheet by enhancing equity capital. Lenders gain ownership interest and may benefit from the company's future growth and profitability.

What are the potential drawbacks of loan-to-equity conversion?

Dilution of existing shareholders' equity and control. Lenders take on equity risks, including exposure to market volatility and performance-based returns. It may impact internal dynamics or decision-making due to the change in ownership structure.

Is payment of stamp duty necessary after conversion?

Yes, stamp duty must be paid on the issuance of share certificates as per applicable state laws. The company is also required to deliver share certificates to the respective shareholders and update its statutory registers accordingly.

Can a loan be converted into preference shares under Section 62(3)?

No. Section 62(3) permits conversion only into equity shares. Preference shares are separately governed by Section 55 of the Companies Act, 2013. There is no mechanism under Section 62(3) that authorises loan conversion into preference shares. If a conversion into preference shares is intended, a separate route must be considered at the time of structuring the loan, not at conversion.

What if the company did not pass a special resolution before accepting the loan?

The conversion cannot proceed under Section 62(3) if the special resolution was not passed before the loan was raised. A retroactive special resolution at the time of conversion does not satisfy the statutory requirement. The company must consider alternative routes such as a fresh preferential allotment under Section 62(1)(c), which requires a fresh valuation and its own compliance process.

Is a valuation certificate mandatory for conversion under Section 62(3)?

Section 62(3) does not explicitly mandate valuation. However, a valuation by a registered valuer (IBBI) is practically necessary at the time of conversion to determine the fair share price, comply with the Companies (Share Capital and Debentures) Rules, 2014, address Section 56(2)(x) income tax exposure, and comply with FEMA pricing guidelines if the lender is a foreign entity.

Can a secured loan be converted into equity?

Yes, but additional steps apply. The lender must consent to release the security, and Form CHG-4 (Intimation of Satisfaction of Charge) must be filed with the ROC within 30 days of satisfaction of the charge. An unsatisfied charge cannot be carried forward post-conversion.

Is loan-to-equity conversion reversible?

No. Once shares are allotted and Form PAS-3 is filed, the conversion is permanent. The only mechanism to undo it is a buyback of shares under Section 68 of the Companies Act, 2013, which is a separate statutory process requiring sufficient free reserves, board and shareholder approvals, and compliance with buyback size restrictions.

What are the tax implications of converting a loan into equity?

If shares are issued below their fair market value at the time of conversion, Section 56(2)(x) of the Income Tax Act, 1961 may treat the difference between the FMV and the issue price as deemed income in the hands of the recipient shareholder. A valuation certificate dated to the conversion date, confirming that the issue price is at or above FMV, is the primary protection against this exposure. The conversion itself does not attract GST.

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Home > Compliance > Conversion of Loan into Equity : Under the Companies Act, 2013 – Complete Guide

Conversion of Loan into Equity : Under the Companies Act, 2013 – Complete Guide

Written By

Darshana Chauhan

Published on

May 13,
2026

Last updated on

May 13, 2026
18:28

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Conversion of Loan into Equity : Under the Companies Act, 2013 – Complete Guide

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May 13,
2026

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May 13, 2026
18:28

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Conversion of Loan into Equity : Under the Companies Act, 2013 – Complete Guide

Written By

Published on

May 13,2026

Last updated on

May 13, 202618:28

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Ensure compliant loan-to-equity conversion.

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May 13,
2026

May 13, 2026
18:28