Verify the original option before approving conversion
Section 62(3) of the Companies Act, 2013 excludes from section 62 an increase in subscribed capital caused by exercise of an option attached to debentures issued or a loan raised by the company, where the terms containing that option were approved by a special resolution in general meeting before issue or raising. A later agreement to exchange ordinary debt for equity is not evidence of that original approval. Where the historical test fails, determine a lawful fresh allotment route rather than treating later consent as retrospective section 62(3) approval.
Read the applicable text: India Code: Companies Act, 2013, sections 39, 62 and 117 MCA: PAS-3 instruction kit MCA: MGT-14 instruction kit.
Reconstruct three dates and the operative terms
Identify when the members passed the special resolution, when the loan was raised or the debentures issued, and when the option was exercised. Obtain the actual resolution and attached terms, the executed instrument and evidence of issue or funding. Check the conversion window, holder entitlement, eligible principal, whether any interest is covered, and how the price and fractions are handled. If approval and funding are close in time, establish the actual sequence from contemporaneous records.
Calculate the shares and reconcile the non-cash settlement
Build a debt schedule with opening principal, movements, interest, amount covered and amounts left outstanding. Calculate shares using the approved contractual mechanism. Confirm authorised capital and the applicable allotment approvals before effecting the issue. Separate the nominal amount from the excess issue amount in the corporate capital reconciliation and distinguish the legal debt discharge from any separate accounting measurement under the applicable standards.
Keep the original resolution filing and the allotment filing distinct
Section 117(1) and (3)(a) require filing the special resolution, with the relevant explanatory statement where applicable, within the standard 30-day period, subject to applicable exceptions. File through MGT-14. File the actual allotment separately under section 39(4) and the applicable rules using PAS-3. Rule 12(1) of the Companies (Prospectus and Allotment of Securities) Rules ordinarily requires PAS-3 within 30 days after allotment. Where the allotment is by private placement, the 15-day period in section 42(8) and rule 14(6) applies. Identify the actual allotment route and supporting documents, including non-cash consideration evidence; section 62(3) does not by itself answer every requirement that can apply to the instrument or issue.
Close the transaction in both registers
Reconcile the allotment resolution, updated members and instrument records, PAS-3 evidence, share count and remaining liability. Review separate approvals, securities restrictions and foreign investment rules where applicable. A Government-directed conversion under section 62(4) is a distinct route and is outside this guide.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Convert part of principal
A ₹50 lakh loan has an approved conversion option. ₹20 lakh is validly exercised at ₹100 per share with ₹10 face value. Allot 20,000 shares, a nominal increase of ₹2 lakh and issue premium of ₹18 lakh. Principal still outstanding is ₹30 lakh.
Illustrative example 2: Interest outside approved terms
The balance includes ₹12 lakh principal and ₹90,000 accrued interest. The option covers principal only, and ₹12 lakh converts at ₹60 per share. Allot 20,000 shares and keep ₹90,000 interest separate unless lawfully settled by another route.
Illustrative example 3: Apply the contractual fraction rule
A supported ₹5,00,000 exercise at ₹120 per share permits whole shares only and says the remainder stays payable. Issue 4,166 shares against ₹4,99,920; ₹80 remains payable on the exercise amount.
Illustrative example 4: Check nominal headroom before allotment
The company has ₹8 lakh authorised nominal headroom. The exercise would require 90,000 shares of ₹10 face value, or ₹9 lakh nominal capital. The shortfall is ₹1 lakh; resolve the capital issue before allotting.
Illustrative example 5: Funding before member approval
The loan was raised on 5 June 2026, and the only special resolution on the option was passed on 12 June 2026, seven calendar days later. Even if the proposed exchange is ₹10 lakh at ₹50, or 20,000 shares arithmetically, the stated dates do not support section 62(3).
Illustrative example 6: Separate two eligible exercises
Two valid exercises convert ₹6 lakh at ₹60 and ₹3 lakh at ₹75 under the respective approved terms. They produce 10,000 and 4,000 shares. With 80,000 shares opening and no other changes, closing shares are 94,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Obtain the original debt instrument | Signed agreement or debenture terms |
| 2 | Find the special resolution | Certified minutes and attached option terms |
| 3 | Verify approval preceded raising or issue | Dated funding and issuance evidence |
| 4 | Check resolution filing separately | MGT-14 and filing acknowledgement |
| 5 | Validate the option exercise | Notice, holder and permitted dates |
| 6 | Confirm eligible debt and price | Principal, interest and conversion worksheet |
| 7 | Check share count and capital headroom | Face value and authorised capital records |
| 8 | Approve and record actual allotment | Allotment resolution and list |
| 9 | File the correct return of allotment | PAS-3 and route-specific filing evidence |
| 10 | Reconcile debt and capital after allotment | Updated registers and accounting review |
Sixteen practitioner FAQs
1. Is every debt-for-equity swap within section 62(3)?
No. The section requires exercise of the qualifying original option and prior special resolution.
2. Can a board resolution alone approve the original terms for this purpose?
No. The proviso refers to a special resolution passed in general meeting.
3. Does a special resolution after funding satisfy the timing condition?
No. The approval must precede raising of the loan or issue of the debentures.
4. Can both events occur on the same date?
The legal requirement concerns which happened first. Preserve proof of the sequence and review any ambiguity.
5. Does a resolution without the option terms prove the test?
Check whether the actual terms containing the option were approved, using the documents attached to the decision.
6. Can interest always be added to the amount converted?
No. Check the scope and applicable approvals before including it.
7. What if the conversion price is a formula?
Use the original approved mechanism and evidence of the inputs on its measurement date.
8. Can fractional shares simply be rounded up?
Use the applicable terms and legal mechanics; do not extinguish unsupported debt by rounding.
9. What if the issuer lacks authorised capital?
Resolve the applicable capital increase before proceeding with an allotment beyond existing capacity.
10. Is conversion exercise the same event as allotment?
Record them separately and identify the actual allotment date for reporting.
11. Does MGT-14 record allotment?
No. The special resolution and return of allotment are separate filings.
12. Can the PAS-3 deadline be assumed to be 30 days for every transaction?
No. Check the route under rule 12 and section 42(8). The ordinary 30-day period does not override the 15-day period for a private placement.
13. Can closing books show the loan discharged before the legal event?
Establish the effective settlement and apply the relevant accounting guidance.
14. Does a loan assignment remove the need to verify option rights?
No. Check whether the holder is entitled to exercise under the instrument and transfer documents.
15. Can a foreign lender exercise using only this Companies Act analysis?
Check foreign investment and other applicable requirements independently.
16. Does Government-directed conversion use the same approval test?
Section 62(4) provides a separate mechanism with its own conditions.
Official sources
India Code: Companies Act, 2013, sections 39, 62 and 117 MCA: PAS-3 instruction kit MCA: MGT-14 instruction kit
Gazetted Companies (Prospectus and Allotment of Securities) Rules, 2014, rule 12
MCA: substituted private-placement rule 14, G.S.R. 752(E) of 7 August 2018