The Conversion of Debentures into Equity Shares converts the debt obligation into a capital obligation. The Debenture Holder becomes a Shareholder following the Conversion of Debentures into Equity Shares.  

Additionally, the aforementioned individual will have the ability to vote after becoming a shareholder in the business. We’ll talk about the idea of converting debentures into shares in this blog post, along with the steps involved.

Components of Conversion of Debentures into Equity Shares

Debenture: What is it?

The word “Debenture” refers to a Fixed-rate, long-term security issued by a limited company secured by assets. Put differently, a certificate loan granted by a business with a fixed rate of interest is referred to as a debenture. Furthermore, a “Debenture” is defined as a Debenture Stock, bond, or other instrument issued by the company to demonstrate a debt in Section 2(30) of the Companies Act of 2013. Furthermore, the regulatory framework for the issuance of debentures is provided by Section 71 of the Companies Act 2013 and Rule 18 of the Companies (Share Capital and Debenture) Rules 2014.

Convertible debentures

A convertible debenture is a kind of loan that a firm issues and that has the potential to be converted into equity. The cost of a compulsorily convertible debenture is changed, within a predetermined time frame, into an equity share. Another name for it is CCD. A combination of pure debt and pure equity does not make up CCD. The CCD determines the rate at which the ratio of debentures to equity share capital will exist throughout the company’s issuance.

Non-Convertible Debentures

These securities can never be converted into equity shares; they will always have the characteristics of debt. These products often have higher interest rates than other convertible instruments because they cannot be converted into equity shares.

Equity

The Company’s main source of funding is the Equity Shares. Investors who own Equity Shares are entitled to vote, profit-sharing, and asset claims.

In the company, they are also referred to as the Ordinary Shares. These shares receive no preference when it comes to dividend payments or capital repayments. The true proprietors of the company are the equity shareholders.

Capital Authorized for Shares

The highest amount of Capital that will be issued by the Company. The relevant authorities’ consent is required in order to raise the approved capital limit.

Share Capital Issued

The Issued Share Capital is the portion of the Company’s authorized capital that the Company sells to investors.  

Capital Shares Subscribed

It is an agreed-upon and accepted portion of the Issued Capital by the investors.

Paid Up Capital

The amount that a registered company invests in the firm is known as paid-up capital. It is a portion of the capital that investors subscribe to pay the company.

Right Shares

The purpose of issuing these shares is to safeguard the ownership of the Company’s current shareholders. The Company will issue additional shares to you upon an investment in Equity Shares; these newly issued shares are the Right Shares.

Bonus Shares

Bonus Shares are the form in which the Dividend is given to the Company’s stockholders.

Sweat Equity Shares

When directors and staff of the company do their jobs well, they are awarded Sweat Equity Shares.

Requirements for Conversion of Debentures into Equity Shares

The following requirements must be met for Conversion of Debentures into Equity Shares.

1. According to Rule 18 of the Companies Act of 2013, in order to issue secured debentures, the following requirements must be satisfied. It is important to remember that Rule 18 only applies to secured debentures.
2. The corporation will only issue secured debentures if the redemption date is within ten years of now. Secured debentures with terms more than 10 years but shorter than 30 years can only be issued by infrastructure project management firms, non-banking financial corporations, Infrastructure Debt Funds, and organizations approved by the central government, ministry, or RBI.
3. The formation of charges with the interest and payment value of the debentures serves as security for the debentures.
4. The debenture trustee will be named on the charge creation.
5. It is important to make explicit what the trustee of the debenture does and the qualifications needed.
6. The Debenture Trust Deed must adhere to or be as close to Form Sh-12 as feasible.
7. In order to establish a DRR, the corporation must deposit or invest a sum equal to about 15% of the debenture amount that is scheduled to mature on March 31, 2019, no later than April 30.
8. The rule does not apply to any money received by the corporation in exchange for the issuance of commercial paper or to any other instrument involving relevant variables that complies with RBI guidelines, notifications, or regulations.
9. This rule does not apply to Foreign Currency Convertible Bonds and Ordinary Shares Scheme, 1993, or Foreign Currency Convertible Bonds issued in accordance with RBI guidelines or rules.

The process of Conversion of Debentures into Equity Shares

The following procedure is taken into consideration for Conversion of Debentures into Equity Shares.

1. The company’s articles of association should include a conversion option.
2. Call a board meeting, approve the notice of a general meeting for the approval of the company’s shareholders, and pass the board resolution for the conversion of CCD into equity shares.
3. Call a general meeting of the company’s shareholders to approve a special resolution converting CCD into equity shares. An explanatory statement for the extraordinary resolution must be prepared in accordance with Section 62 of the Companies Act, 2013. The declaration ought to include all pertinent Conversion data.
4. After enacting a special resolution, the Registrar of Companies must receive Form MGT-14 within 30 days.
5. The holders of the compulsorily convertible debentures receive a letter with an opportunity to purchase the same. The secretary’s responsibility is to confirm that the debenture holders sent the same approval for the conversion.
6. The value report must then be received by this company in order for it to be converted.
7. The distribution of shares must be finished within a year of the special resolution’s passing. The valuation report serves as the basis for determining the share price.
8. It is required to prepare and issue share certificates in accordance with Form SH-1.
9. Holders receive share certificates, and their names are added to the Register of Members.
10. After Form PAS-3 is allotted, a return allotment of securities must be submitted to the Registrar within 30 days. Together with the list of all holders, the fee must be paid in accordance with the Companies (Registration Offices and Fees) Rules, 2014.
11. A list of allottees, a copy of the board of resolution, a copy of the special resolution, and a valuation report are among the documents needed to be returned with the PAS-3 allocation.

Our team of skilled and knowledgeable individuals at Lawgical Adda is here to help you with the Conversion Process. You will receive assistance from our professionals in completing the Conversion of Debentures into Equity Shares. Our professionals will design the best plans and ensure that your task is completed successfully.