Can loans be converted into equity shares in the absence of a special resolution authorizing such conversion at the time the loan was granted?

The answer is a resounding "YES!"

Let’s explore how.

First, it’s important to understand the relevant section of the law that addresses this matter:

Section 62(3):

"Nothing in this section 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:

Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of the loan by a special resolution passed by the company in a general meeting."

From this, two key points emerge:

1. Loans can indeed be converted into shares.

2. A special resolution is required for such conversion, but only if it was pre-approved at the time the loan terms were established.

However, the section specifies that it applies only when prior approval was obtained. 

So, how can the loan still be converted if no such approval existed ?

Section 62(3) begins with the phrase, "Nothing in this section shall apply," meaning that if a special resolution had been passed initially, the provisions of this section would not be applicable to the conversion process. 

Therefore, the reverse is: if no prior approval was obtained, all the provisions of this section will apply.

CONCLUSION:
In such a case, you will need to pass a new special resolution and comply with the conditions and rules under Section 62. Once such special resolution is passed, the loan can be converted into equity shares.

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From the desk of CS Sharath