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CS Professional · Strategic Management and Corporate Finance · Raising of Funds from Debt and Procedural Aspects

A company issues debentures carrying an option for the holder to convert them into equity shares later. Under the Companies Act, 2013, what condition must be met so that the rights-issue offer requirements for further shares do not apply to the shares issued on conversion?

The conversion terms must be approved by a special resolution in general meeting before the debentures are issued. Only then does the rights-offer requirement for further shares not apply to shares allotted on conversion. Approval by ordinary resolution or after allotment does not meet the condition.

  1. AThe terms of issue containing the conversion option must have been approved by a special resolution in general meeting before the debentures are issuedCorrect
  2. BThe conversion option must be approved by an ordinary resolution after the debentures are allotted
  3. CThe conversion option must be approved by the Tribunal before issue
  4. DThe conversion shares must first be offered to existing equity holders for at least thirty days

Explanation

The Act says the further-issue offer rules do not apply to capital increased by exercising a conversion option attached to debentures or loans, provided the terms were approved by a special resolution passed in general meeting before the debentures were issued or the loan raised. An ordinary resolution or a post-allotment approval does not satisfy this proviso.

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