Converting a Loan explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A loan can be turned into equity shares in two broad ways: through an option written into the loan terms and approved by special resolution before the loan is raised, or through an ordinary further issue of shares under section 62(1)(c). Which route is open depends on what the lender and the company agreed at the start. This guide reads the Companies Act, 2013 in the Ministry's consolidated text (last updated 29 July 2022) and the Rules as consolidated in the Ministry's e-book, consulted on 3 October 2026; later amendments should be checked.
Under section 62(3), the rights-issue procedure of section 62 does not apply to an increase of capital caused by exercise of an option attached to debentures or a loan to convert them into shares, if the terms of the loan containing that option were approved by a special resolution in general meeting before the loan was raised. If no such option and prior resolution exist, a conversion is an ordinary issue of shares, which needs its own special resolution and a registered valuer's price under section 62(1)(c).
Route 1: option in the loan terms (section 62(3))
If you are weighing a conversion now, our loan to equity conversion service can test the loan terms against the sections below.
Section 62(3) says nothing in section 62 "shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company". The proviso adds one condition: the terms of issue of the debentures or loan containing the option must have been approved before they were issued or raised, by a special resolution passed by the company in general meeting.
Three things follow from the words:
- The option must be a term attached to the loan, written in the loan terms.
- The special resolution must come before the loan is raised, not after the money is in.
- The exemption is from section 62 only. Other provisions, such as those on authorised capital and the return of allotment, still have to be met. If authorised capital is short, see our increase of authorised capital service.
For the rights-issue side of section 62, see our guide on rights issues under section 62.
Route 2: a conversion not covered by section 62(3)
Where the loan was raised without a conversion option, or the option was not approved by special resolution before the loan, section 62(3) does not help. The conversion is then a further issue of shares. Section 62(1)(c) allows it to any persons if authorised by a special resolution and if the price is determined by the valuation report of a registered valuer, as the section prints. Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 adds the conditions for an unlisted company's preferential issue, including the explanatory statement items and the twelve-month window for the allotment.
Where the lender is a person who is not yet a shareholder and the issue is to a select group, section 42 on private placement applies as well; see our private placement guide. Where shares are issued against something other than money, see our guide on shares for consideration other than cash.
Route 3: Government-ordered conversion (section 62(4) to (6))
Section 62(4) lets the Government, where debentures were issued or a loan was obtained from any Government, direct by order that they be converted into shares on terms it considers reasonable, in the public interest, even if the original terms had no conversion option. If the company does not accept the terms, it may appeal to the Tribunal within sixty days of the communication of the order. Section 62(5) lists what the Government must have regard to, and section 62(6) provides that where the order increases the authorised capital, the memorandum stands altered and the authorised capital stands increased by the value of the shares into which the debentures or loan are converted.
How the deposit rules treat the money
A loan taken from a person other than a bank may be a "deposit". Rule 2(1)(c) of the Companies (Acceptance of Deposits) Rules, 2014 defines a deposit to include any receipt of money by way of deposit or loan, and then lists amounts that are not deposits. Items that matter for conversion planning:
- clause (viii): money received from a director, or from a relative of a director of a private company, if a written declaration is given at the time that the money is not out of funds he acquired by borrowing or accepting loans or deposits from others; the company discloses the details in the Board's report;
- clause (ix): bonds or debentures compulsorily convertible into shares of the company within ten years, in the words of the clause, and secured bonds or debentures within the conditions printed;
- clause (xvii): an amount of twenty five lakh rupees or more received by a start-up company, by way of a convertible note, in a single tranche, from a person, where "start-up company" and "convertible note" have the meanings given in the explanation;
- clause (vi): any amount received by a company from any other company.
Read the exact clause for your lender before assuming an exemption. For an overview, see our guide on deposit exemptions under the rules.
Table: lender type, route and approvals
| Lender | Possible route (as the texts print) | Approvals to check |
|---|---|---|
| Existing member or director, loan has a conversion option approved before it was raised | Section 62(3) | Special resolution before the loan; articles; authorised capital |
| Same lender, no option or no prior special resolution | Section 62(1)(c) issue | Special resolution; registered valuer's price; rule 13 conditions; section 42 if a private placement |
| Another company | Section 62(1)(c) issue; the loan itself is outside "deposit" under clause (vi) | As above |
| Start-up company, convertible note of the size printed in clause (xvii) | Terms of the note | Conversion as per the note; check section 62 |
| Government lender | Section 62(4) to (6) order | Appeal to the Tribunal within sixty days if terms not accepted |
| Non-resident lender | Section 62 plus foreign exchange rules | FEMA texts, below |
A non-resident lender
For a lender resident outside India, the Foreign Exchange Management Act texts also apply, including the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and the foreign exchange rules on borrowing and lending. This article states no FEMA condition; check those texts and take advice before converting. See our FDI reporting service for the reporting side.
Worked example (invented names and figures)
Beta Foods Private Limited raised a loan of Rs 20,00,000 from its director Ravi Nair. The loan terms said the lender could convert the amount into equity shares of face value Rs 10 at Rs 50 per share, and the members had passed a special resolution approving those terms before the loan was taken. On conversion: 20,00,000 / 50 = 40,000 shares. Section 62(3) applies because the option was a term of the loan and the special resolution came first. Had the option been added after the loan was received, the company would have used section 62(1)(c) with a fresh special resolution and a registered valuer's report.
Common mistakes
- Passing the special resolution after the loan is received.
- Writing the conversion price as "to be agreed later" and leaving no basis for it.
- Forgetting authorised capital for the new shares.
- Treating the conversion as a book entry only and skipping the return of allotment.
- Missing the director's written declaration for a loan that must stay outside "deposit".
Need help with converting a loan into equity?
If you are planning a conversion, we can review the loan terms, prepare the resolutions and the return of allotment, and check whether the lender's money qualifies as an exempt amount. See our loan to equity conversion service.
Key takeaways
- Section 62(3) needs the option in the loan terms and a special resolution before the loan.
- Without that, use section 62(1)(c): special resolution and registered valuer.
- Government lenders have their own order route under section 62(4) to (6).
- Deposit exemptions in rule 2(1)(c) turn on who lent and on what terms.
- Foreign lenders bring FEMA into the picture.
Read next
- Issue of Shares for Consideration Other Than Cash
- Funding Options for a Private Limited Company
- Loans to a Private Company From Directors, Shareholders and Firms
- Section 62: Rights Issue Procedure
Disclaimer: Based on the Companies Act, 2013 in the Ministry of Corporate Affairs consolidated text (last updated 29 July 2022), the Rules as consolidated in the Ministry's e-book and the other official texts named in this article, as consulted on 3 October 2026. Later amendments, notifications, circulars, forms and fees should be checked. Formats are general drafts to be adapted to the company's articles and facts. This article is general information, not legal advice; check the official text before acting.