Conversion of Loan into Equity u/s 62(1)(c) of the Companies Act, 2013

Conversion of Loan into Equity u/s 62(1)(c) of the Companies Act, 2013. Penalty for non compliance of Section 62(3) and Section 42 of the Companies Act, 2013
The Companies Act, 2013 provides a clear framework for regulating corporate behavior in India. It includes strict rules to ensure companies comply with legal obligations, especially regarding share allotment, conversion of loans, and disclosures. Ajmera Fashion Limited, a company based in Surat, Gujarat, faced scrutiny from the Registrar of Companies (ROC), Ahmedabad, for violating rules about private placement of shares and loan conversions. The company and its directors were fined under Section 450 of the Act after failing to meet the requirements of Section 42 and Section 62(3).
This case demonstrates that corporate decisions, even if seen as simple mistakes or oversights, draw attention from regulators when they violate legal standards. The order against Ajmera Fashion Limited under Section 454 shows how seriously these violations are treated, regardless of the company’s claims of acting in good faith.
Facts of the Case
Ajmera Fashion Limited, with CIN U17299GJ2022PLC129445, is registered under the Companies Act and has its office at Surat Textile Market, Surat, Gujarat. The directors involved in this case are Vijaykumar Jain (DIN 08729046), Ajaykumar Nagarmal Jain (DIN 08729047), and Rachna Ajaykumar Jain (DIN 08729048).
On 26 December 2023, ROC Ahmedabad received an application under Section 454 of the Act from the company and its directors regarding non-compliance with Section 42. Later records showed that the company had filed e-form GNL-1 on 6 December 2024, admitting to the violation. The application revealed that Ajmera Fashion Limited had allotted shares after converting a loan of Rs.2.97 crore under Section 62(1)(c). Out of this loan, Rs.1,00,000 was received after the shares were allotted, violating Section 42(6).
The company issued 29,70,000 shares at Rs.10 each to its three directors in exchange for the loan. While Section 62(1)(c) allows such an allotment with a special resolution and a valuation by a registered valuer, the company did not follow Section 62(3) regarding prior approval of conversion terms and Section 42 about private placement procedures.
The explanatory statement attached to the application was incomplete. Rule 13 of the Companies (Share Capital and Debenture) Rules, 2013 requires proper disclosures, including valuation details. Instead, the company claimed that, being a new entity with no business operations, shares were offered at par and no valuation report was obtained. Later, the company claimed it mistakenly failed to attach the valuation report and stated it was merely a human error without malicious intent.
A hearing was set for 9 May 2025, where Mr. Ranjit Kejriwal represented the company and its directors online. Authorization documents had been submitted beforehand.
Issues Raised

Did the allotment of shares in exchange for loan conversions without prior approval and not following private placement rules violate Sections 42 and 62(3)?

Can the company’s claim of failing to attach the valuation report absolve it from liability?

Did receiving part of the loan funds after the allotment invalidate the transaction?

What penalty applies when violations are admitted but described as unintentional?

Relevant Sections
The adjudication concerning Ajmera Fashion Limited focused mainly on Sections 42, 62(1)(c), 62(3), 450, and 454 of the Companies Act, 2013, along with Rule 13 of the Companies (Share Capital and Debenture) Rules, 2013. A closer look at these provisions shows why the company’s actions were deemed violations.
Section 42- Section 42 addresses private placement of securities. It sets a strict procedure, allowing offers or invitations only to a limited group of identified persons, not exceeding two hundred in a financial year. Sub-section (6) requires that the company must receive the full payment for securities before allotment to ensure transparency and prevent companies from issuing shares without proper capital inflow. In Ajmera Fashion’s case, since Rs.1,00,000 of the loan came in only after the allotment, it violated this requirement.
Section 62(1)- Section 62(1)(c) permits companies to issue more shares to any person, including through preferential allotment, as long as it is authorized by a special resolution passed by shareholders. Such allotment also needs a valuation report from a registered valuer to ensure fair pricing. This requirement protects existing shareholders from losing ownership. Ajmera Fashion Limited claimed to have offered shares at par without a valuation because it was a new company, but this reasoning did not meet legal standards.
Section 62(3)- Section 62(3) allows for the conversion of loans or debentures into shares. However, it requires prior approval of conversion terms through a special resolution. Shareholders must be informed in advance that their loan or debenture could be converted into equity. The company did not secure this prior approval, making the conversion illegal.
Rule 13- Rule 13 of the Companies (Share Capital and Debenture) Rules, 2013 supports Section 62(1)(c). It states that explanatory statements for special resolutions regarding preferential issues must include detailed information such as the purpose of the issue, total number of shares issued, issue price, the basis for the price, and valuation details. Ajmera Fashion Limited acknowledged it failed to attach the valuation report with the explanatory statement, which it attributed to a human error. However, the ROC emphasized that such omissions cannot be dismissed as they undermine the goal of transparent disclosure.
Section 450- Section 450 is a general penalty provision that applies when no specific penalty exists elsewhere in the Act. It imposes a basic fine of Rs.10,000 and if the default continues, an additional Rs.1,000 per day, with a cap of Rs.2,00,000 for the company and Rs.50,000 for each officer responsible. As there was no separate penalty specified for violations of Sections 42 and 62(3), Section 450 was used in this case.
Section 454- Section 454 establishes the penalty adjudication process. It allows the Registrar of Companies to act as the adjudicating officer and issue penalty orders. It also gives companies and their directors the right to appeal to the Regional Director within sixty days of receiving the order. In this matter, ROC Ahmedabad used its authority under Section 454 and allowed the company and directors to appeal by filing Form ADJ.
Courts Judgment
After considering submissions, the ROC concluded that Ajmera Fashion Limited did not comply with Section 42 and Section 62(3). The issuance of 29,70,000 shares in exchange for loan conversion was invalid since Rs.1,00,000 of the loan was received after the shares were allotted, violating Section 42(6). Furthermore, the lack of prior approval by special resolution for conversion terms under Section 62(3), coupled with the failure to attach a valuation report, showed a breach of statutory provisions.
The company’s assertion that not attaching the valuation report was human error did not negate the violation. A mistake or oversight in compliance filings does not free companies from liability. The ROC noted that explanatory statements must adhere strictly to Rule 13, which the company did not achieve.
Penalty
As a result, penalties were imposed under Section 450 since no specific penalty was defined elsewhere. The penalties included:

On Ajmera Fashion Limited: Rs.10,000 (up to a maximum of Rs.2,00,000).

On Vijaykumar Jain: Rs.10,000 (up to a maximum of Rs.50,000).

On Ajaykumar Nagarmal Jain: Rs.10,000 (up to a maximum of Rs.50,000).

On Rachna Ajaykumar Jain: Rs.10,000 (up to a maximum of Rs.50,000).

The order required that the defaults be corrected and penalties paid within ninety days of receiving it through the MCA e-Adjudication portal. It also specified that directors must pay penalties from their personal incomes. The order allowed for an appeal to the Regional Director, Ahmedabad, within sixty days in Form ADJ, along with a certified copy of the order.
Final Note of the Article
The case of Ajmera Fashion Limited shows that corporate law in India demands ongoing compliance without allowance for casual oversights. The company and its directors failed to meet the requirements of Section 42 and Section 62(3) during loan conversions to equity. Their argument of human error and lack of intent was not accepted, and penalties were appropriately imposed under Section 450.
By imposing these penalties, ROC Ahmedabad affirmed that share allotment procedures are critical to good governance. Whether a company is large or newly formed, it must meet requirements for special resolutions, valuation reports, and full explanatory statements without exception. Directors must remain vigilant because their accountability is personal and direct.
For the corporate community, this order serves as a reminder that procedural slips, no matter how minor they may seem, will be treated as violations under the law. Regulatory bodies will not overlook omissions, even if they are corrected later. The case of Ajmera Fashion Limited exemplifies how adhering to legal procedures is crucial to maintaining stakeholder trust and avoiding unnecessary penalties. 
Download MCA Adjudication Order

Penalty for non compliance of Section 62(3) and Section 42 of the Companies Act, 2013

The Companies Act, 2013 provides a clear framework for regulating corporate behavior in India. It includes strict rules to ensure companies comply with legal obligations, especially regarding share allotment, conversion of loans, and disclosures. Ajmera Fashion Limited, a company based in Surat, Gujarat, faced scrutiny from the Registrar of Companies (ROC), Ahmedabad, for violating rules about private placement of shares and loan conversions. The company and its directors were fined under Section 450 of the Act after failing to meet the requirements of Section 42 and Section 62(3).

This case demonstrates that corporate decisions, even if seen as simple mistakes or oversights, draw attention from regulators when they violate legal standards. The order against Ajmera Fashion Limited under Section 454 shows how seriously these violations are treated, regardless of the company’s claims of acting in good faith.

Facts of the Case

Ajmera Fashion Limited, with CIN U17299GJ2022PLC129445, is registered under the Companies Act and has its office at Surat Textile Market, Surat, Gujarat. The directors involved in this case are Vijaykumar Jain (DIN 08729046), Ajaykumar Nagarmal Jain (DIN 08729047), and Rachna Ajaykumar Jain (DIN 08729048).

On 26 December 2023, ROC Ahmedabad received an application under Section 454 of the Act from the company and its directors regarding non-compliance with Section 42. Later records showed that the company had filed e-form GNL-1 on 6 December 2024, admitting to the violation. The application revealed that Ajmera Fashion Limited had allotted shares after converting a loan of Rs.2.97 crore under Section 62(1)(c). Out of this loan, Rs.1,00,000 was received after the shares were allotted, violating Section 42(6).

The company issued 29,70,000 shares at Rs.10 each to its three directors in exchange for the loan. While Section 62(1)(c) allows such an allotment with a special resolution and a valuation by a registered valuer, the company did not follow Section 62(3) regarding prior approval of conversion terms and Section 42 about private placement procedures.

The explanatory statement attached to the application was incomplete. Rule 13 of the Companies (Share Capital and Debenture) Rules, 2013 requires proper disclosures, including valuation details. Instead, the company claimed that, being a new entity with no business operations, shares were offered at par and no valuation report was obtained. Later, the company claimed it mistakenly failed to attach the valuation report and stated it was merely a human error without malicious intent.

A hearing was set for 9 May 2025, where Mr. Ranjit Kejriwal represented the company and its directors online. Authorization documents had been submitted beforehand.

Issues Raised

Did the allotment of shares in exchange for loan conversions without prior approval and not following private placement rules violate Sections 42 and 62(3)?
Can the company’s claim of failing to attach the valuation report absolve it from liability?
Did receiving part of the loan funds after the allotment invalidate the transaction?
What penalty applies when violations are admitted but described as unintentional?

Relevant Sections

The adjudication concerning Ajmera Fashion Limited focused mainly on Sections 42, 62(1)(c), 62(3), 450, and 454 of the Companies Act, 2013, along with Rule 13 of the Companies (Share Capital and Debenture) Rules, 2013. A closer look at these provisions shows why the company’s actions were deemed violations.

Section 42- Section 42 addresses private placement of securities. It sets a strict procedure, allowing offers or invitations only to a limited group of identified persons, not exceeding two hundred in a financial year. Sub-section (6) requires that the company must receive the full payment for securities before allotment to ensure transparency and prevent companies from issuing shares without proper capital inflow. In Ajmera Fashion’s case, since Rs.1,00,000 of the loan came in only after the allotment, it violated this requirement.

Section 62(1)- Section 62(1)(c) permits companies to issue more shares to any person, including through preferential allotment, as long as it is authorized by a special resolution passed by shareholders. Such allotment also needs a valuation report from a registered valuer to ensure fair pricing. This requirement protects existing shareholders from losing ownership. Ajmera Fashion Limited claimed to have offered shares at par without a valuation because it was a new company, but this reasoning did not meet legal standards.

Section 62(3)- Section 62(3) allows for the conversion of loans or debentures into shares. However, it requires prior approval of conversion terms through a special resolution. Shareholders must be informed in advance that their loan or debenture could be converted into equity. The company did not secure this prior approval, making the conversion illegal.

Rule 13- Rule 13 of the Companies (Share Capital and Debenture) Rules, 2013 supports Section 62(1)(c). It states that explanatory statements for special resolutions regarding preferential issues must include detailed information such as the purpose of the issue, total number of shares issued, issue price, the basis for the price, and valuation details. Ajmera Fashion Limited acknowledged it failed to attach the valuation report with the explanatory statement, which it attributed to a human error. However, the ROC emphasized that such omissions cannot be dismissed as they undermine the goal of transparent disclosure.

Section 450- Section 450 is a general penalty provision that applies when no specific penalty exists elsewhere in the Act. It imposes a basic fine of Rs.10,000 and if the default continues, an additional Rs.1,000 per day, with a cap of Rs.2,00,000 for the company and Rs.50,000 for each officer responsible. As there was no separate penalty specified for violations of Sections 42 and 62(3), Section 450 was used in this case.

Section 454- Section 454 establishes the penalty adjudication process. It allows the Registrar of Companies to act as the adjudicating officer and issue penalty orders. It also gives companies and their directors the right to appeal to the Regional Director within sixty days of receiving the order. In this matter, ROC Ahmedabad used its authority under Section 454 and allowed the company and directors to appeal by filing Form ADJ.

Courts Judgment

After considering submissions, the ROC concluded that Ajmera Fashion Limited did not comply with Section 42 and Section 62(3). The issuance of 29,70,000 shares in exchange for loan conversion was invalid since Rs.1,00,000 of the loan was received after the shares were allotted, violating Section 42(6). Furthermore, the lack of prior approval by special resolution for conversion terms under Section 62(3), coupled with the failure to attach a valuation report, showed a breach of statutory provisions.

The company’s assertion that not attaching the valuation report was human error did not negate the violation. A mistake or oversight in compliance filings does not free companies from liability. The ROC noted that explanatory statements must adhere strictly to Rule 13, which the company did not achieve.

Penalty

As a result, penalties were imposed under Section 450 since no specific penalty was defined elsewhere. The penalties included:

On Ajmera Fashion Limited: Rs.10,000 (up to a maximum of Rs.2,00,000).
On Vijaykumar Jain: Rs.10,000 (up to a maximum of Rs.50,000).
On Ajaykumar Nagarmal Jain: Rs.10,000 (up to a maximum of Rs.50,000).
On Rachna Ajaykumar Jain: Rs.10,000 (up to a maximum of Rs.50,000).

Final Note of the Article

The case of Ajmera Fashion Limited shows that corporate law in India demands ongoing compliance without allowance for casual oversights. The company and its directors failed to meet the requirements of Section 42 and Section 62(3) during loan conversions to equity. Their argument of human error and lack of intent was not accepted, and penalties were appropriately imposed under Section 450.

By imposing these penalties, ROC Ahmedabad affirmed that share allotment procedures are critical to good governance. Whether a company is large or newly formed, it must meet requirements for special resolutions, valuation reports, and full explanatory statements without exception. Directors must remain vigilant because their accountability is personal and direct.

For the corporate community, this order serves as a reminder that procedural slips, no matter how minor they may seem, will be treated as violations under the law. Regulatory bodies will not overlook omissions, even if they are corrected later. The case of Ajmera Fashion Limited exemplifies how adhering to legal procedures is crucial to maintaining stakeholder trust and avoiding unnecessary penalties.