ROC Mumbai penalises company for converting inter‑company loan into equity before obtaining mandatory approvals

Background and context

The Registrar of Companies, Mumbai I, acting as Adjudicating Officer under Section 454 of the Companies Act 2013, has imposed penalties on COVERFOX INSURANCE BROKING PRIVATE LIMITED and two of its directors for breaching the proviso to Section 62(3) and thereby attracting Section 450.

The non-compliance arose because an advance/loan taken from the holding company was converted into equity shares on the basis of a Memorandum of Understanding (MoU) dated 30.11.2024, whereas the requisite prior approval by special resolution of shareholders and approval of the Board of Directors were obtained only on 08.12.2025.

The adjudicating authority treated the period of default as 374 days and levied the maximum penalty prescribed under Section 450 on the company and on both directors identified as officers in default.

Appointment of Adjudicating Officer

  • The Ministry of Corporate Affairs, through Gazette Notification No. S.O. 698(E) dated 10.02.2026, appointed the Registrar of Companies, Mumbai I as Adjudicating Officer.
  • The appointment is in exercise of powers under Section 454 of the Companies Act 2013, read with the Companies (Adjudication of Penalties) Rules, 2014.
  • The mandate is to adjudicate penalties wherever the Act prescribes a penalty but not a specific punishment (such as fine/imprisonment by court).

Company and officers involved

  • Company: COVERFOX INSURANCE BROKING PRIVATE LIMITED (CIN: U66000MH2013PTC243810)
  • Registered office: C WING, 5100-5110, 5TH FLOOR OBEROI GARDEN ESTATE, CHANDIVALI FARM ROAD, CHANDIVALI, ANDHERI (EAST), MUMBAI, MAHARASHTRA, 400072
  • Directors treated as noticees/officers in default:
    • Mr. ANURAG MEHROTRA (DIN: 01950688)
    • Mr. SANJIB KUMAR JHA (DIN: 02277191)

Statutory provisions applied

  1. Section 62(3) – Conversion of debentures/loans into shares

    The provision states that:

    • Section 62 does not apply to an increase in subscribed capital caused by exercise of an option attached to debentures or loans allowing conversion into shares.
    • Proviso: Such an option for conversion must form part of the terms of issue/loan, and those terms must be approved before the issue of debentures or raising of loan, by a special resolution in a general meeting.

    The controversy in this case centres on non-compliance with this proviso: conversion terms existed in the MoU, but special resolution and Board approval were not taken prior to agreeing on conversion.

  2. Section 450 – Residual penalty provision

    Where the Act provides no specific penalty for a particular contravention:

    • The company and every officer in default (or other person) is:
      • Liable to a penalty of ₹10,000, and
      • In case of a continuing contravention, a further penalty of ₹1,000 per day after the first day,
      • Subject to a maximum of:
        • ₹2,00,000 for the company; and
        • ₹50,000 for each officer in default/other person.

  3. Other relevant provisions:

    • Section 179(3) – Board’s power to issue securities and borrow money (procedural overlap cited by the assessee in its reply).
    • Section 2(60) read with Rule 12(3) of the Companies (Registration Offices and Fees) Rules, 2014 – formal designation of “officer in default” through filing of e‑form GNL‑3.
    • Section 2(85) – Definition of “small company” (held inapplicable as the company is a subsidiary).

Chronology of events and factual matrix

Loan and MoU for conversion

  • The company had received an advance/loan from its holding company, COVERSTACK TECHNOLOGIES PRIVATE LIMITED, on multiple dates.
  • A Memorandum of Understanding was executed on 30.11.2024 which:
    • Recorded that an aggregate loan of Rs. 8,34,30,000/- would be converted.
    • Provided for issue of 69,525 equity shares of face value Rs. 10 each at a premium of Rs. 1190/- per share.
  • Thus, by signing the MoU on 30.11.2024, the company effectively committed to the conversion terms.

Post-facto approvals

  • Board and shareholders’ approval:
    • The company convened its Board and shareholders only on 08.12.2025, more than a year after the MoU date.
    • A special resolution was passed in that general meeting in terms of Section 62(3).
  • Filings:
    • The company filed e‑form MGT-14 with SRN AB9692613 on 09.12.2025 to record the special resolution.

Suo motu adjudication application

  • On 12.01.2026, the company and Mr. Sanjib Kumar Jha filed a suo motu adjudication application under Section 454, admitting that:
    • The loan had been converted into equity without prior Board and shareholder approval as mandated by the proviso to Section 62(3).
    • They sought adjudication and leniency, portraying the lapse as inadvertent and procedural.

Show cause notice and assessee’s submissions

Issue of show cause notice