conversion of shares into debentures

For nearly six centuries, lenders have used mortgages on real property to secure loans made to individual and commercial borrowers. The mortgage of the fourteenth century, however, is but a distant cousin of the various security devices used by commercial lenders today. For most of the period since the fourteenth century, the evolutionary process has been a gradual one. The past ten years, however, have witnessed dramatic changes in real estate secured lending. Inflation, high real and nominal interest rates, the deregulation of financial institutions, the growth of pension funds, the changing role of life insurance companies, the impact of new tax laws and the development of computer programs for sophisticated financial forecasting have all combined to radically change the capital markets and structure of real estate financing.
Two popular new products- the convertible loan and the shared appreciation loan- have been developed in response to these changes. Both products combine traditional debt components with provision that resemble the risk and rewards of an equity position.
In the current strained economic environment, the possibility of default by a debtor is a stark reality. One way of assisting companies through these uncertain times is for shareholders or creditors to convert loan claims against the company into shares.

The conversion or capitalization of debt into shares has various potential tax consequences. For companies with assessed losses, this may result in a reduction of the assessed loss. The reason for this is that the Income Tax Act provides that a taxpayer’s assessed loss must be reduced by the value of any benefit derived by it in consequence of a compromise or concession made with any creditor.

OBJECTIVE

• To study about shares and debentures,
• To study about convertible debentures,
• To analyze the conversion of loans into shares.

DEBENTURES

A Debenture is a unit of loan amount. When a