Loan to convert in equity

[ahsanalpha]

If a company (Pvt) has a loan of 10 m and as well as share premium and loss of 10 m , what can we do to increase its financial health. Regards Ahsan

[kamranACA]

What is the source of loan? It can be converted to share capital if it is from directors. You may need to seek approval from SECP for conversion more specifically if it is to affect the right issue stipulations.

As far as financial health is concerned, it will not improve even by cconversion of loan (unless loan carries huge mark up rate). You will rather require to inject fresh equity, arrange handsome working capital and initiate Business Process Re-engineering, if required. However, first you need to assess the reasons of incurrence of losses previously so that a cohesive strategy be made for the future.

Regards,

[Sh.Mohsin]

Loan may be converted into equity only as per the requirements of section 87 of Companies Ordinance 1984 "Issue of shares in lieu of outstanding balance of any loan"

[kamranACA]

Yes, and SECP's approval is required for conversion.

Regards

[ahsanalpha]

Thanks.

[ahsanalpha]

Dear Kamran

Thank you for your help.
Another question is What will be the treatment of settlement of interst on loan part by cash and part by marketable security?
Thanks

[kamranACA]

Dear

Treatment is very simple to the extent of cash settlement and I guess there is no input required.

Regarding the part payment through marketable securities, it may be more advisable to sell the securities in open market, generate cash and pay off interest. To me this looks more transparent.

Yet; if you need to make a payment in specie, you will have to value the marketable securities at fair value on the date and time of settlement, settle them (at such fair value) against equal portion of interest and the realized fair value gain or loss will be booked in profit and loss.

Say, your securities' carrying value was Rs. 100 and on the date of settlement their fair value was Rs. 120. For simplicity we assume that the outstanding interest (payable) at such date was also Rs 120. [I assume interest has already been accrued as expense and the payable balance is outstanding].

You will pass following accounting entry

... Interest Payable (DEBIT) Rs. 120

............... Marketable securities at carrying amount (CREDIT) Rs. 100
............... Gain on sale (i.e. settlement) of marketbale securities (CREDIT) Rs. 20

I hope you will get what I tried to convey.

(Time for Jummah prayer. Bye Bye....)

Regards,


Kamran.