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:
i)
Right Issue to Equity
share capital on pro rata basis u/s 62(1)(a).
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.
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:
i)
Issue Expenses, very high
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:
i.
Approve terms of loan by passing special
resolution before taking of loan & file special resolution in E-Form MGT14
within 30 days.
ii.
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. (1) Where 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;
(2) The 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:
i.
Call a Board meeting to approve right issue including “letter of
offer”, which shall include right of renunciation also.
ii.
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.
iv.
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.
v.
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.
vi.
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:
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.
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?
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.
7.
All account payee local cheques / draft
accompanying the application should be drawn in favour of “________________”.
8.
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.
11. 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.
12. The form must
be filled in English and in block capital as applicable/appropriate and delete
whichever is not applicable.
13. 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.
14. 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.
15. 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):
|
|
|
2
|
Number
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
|
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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.
|
1
|
Name
and address of the renouncee(s)
|
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2
|
If
you are existing share holder, please mention folio no.
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3
|
Number of equity shares accepted
|
|
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4
|
Number
of additional equity shares applied by renouncee
|
|
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5
|
Total Number of Shares applied for by
renouncee
|
|
|
6
|
Amount payable with application
|
Rs.
100 per shares applied for.
|
|
7
|
Payment/cheque/DD
details
|
|
Signature of
renouncee(s)
|
Full
name
|
Signature
|
Address
of the fist/sole applicant
|
|
Sole/first
applicant
|
|
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Second
joint applicant
|
|
|
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Third
joint applicant
|
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