A debenture is a long-term security having a fixed rate of interest, issued by a company and secured against assets.
It is a certificate loan where the company is liable to pay the loan at a fixed interest rate. There are two types of debentures:
Equity shares are issued by the general public at large and they are there main function is to provide finance to the company. The Equity shareholders do not have any preferential rights with regard to the repayment of capital and dividend.
Conversion of compulsory debentures into equity shares
This means to convert loan liability into capital liability. After the conversion of the debentures into equity shares, debenture holder becomes shareholder. The Company Act, 2013 gives authorization to the company for issuing of debentures with an option to convert such debenture into shares, either wholly or partly at the time of redemption. But it should be approved by a special resolution passed at the general meeting. The compulsorily convertible debenture is issued by the placement offer made by the company privately.
Section 71(1) of the Companies Act, 2013 authorizes the company to issue debentures with an option of to convert such debenture into shares, either wholly or partly at the time of redemption, provided that it shall be approved by a special resolution of passed at the general meeting. The issuance of a compulsorily convertible debenture is through a placement offer made by the company privately.
Conditions of conversion of Debentures into equity shares
- When the company issues debentures, it has to give the option of conversion debentures into equity shares.
- Debenture holder should notify his intention to convert in the written form to company before repayment of debentures in cash.
Procedure for Conversion of Compulsorily Debentures into Equity Shares
This conversion is not to be considered as a sale for the purpose of capital gains, then there is no tax incidence at this level and the question of taxation would come only at the time of the sale of the shares. If the shares are listed on the stock exchange and there is securities transaction tax paid on it and these are held for a period of more than one year then this would become long term capital gains tax. This would mean that the tax impact of this would become zero and this is a way in which the liability would come down.
Therefore, in this manner the compulsory debentures are converted into equity shares.
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