How Can You Issue Shares for Consideration Other than Cash?

vakil_searchEquity shares of a company represent units of ownership in the company and as ownership rights have a price attached to them, so do equity shares.

Pricing of equity shares

Equity shares commonly have something called a face value or nominal value, typically Rs. 10, and a premium (depending on the valuation of the company) say Rs. 35.

So in the example above, the price to be paid for acquisition of an equity share is Rs. 45 where Rs. 10 is the face value and Rs. 35 is the premium. This is a pretty straightforward case.

When complications arise

If the company wants to allot shares to, say, a key technical consultant for his contribution to the company, some tricky issues arise.

Such a person cannot be granted employee stock options (as they are not “employees” of the company). This problem also arises in the case of promoter directors. Promoter directors cannot be granted ESOPs as they are not technically in the same category of persons as employees due to their position of control in the company.  Issuing shares for consideration other than cash is therefore a viable alternative for such persons.

The law on the point

Under Section 75 of the Companies Act, 1956, issue of shares for consideration other than cash can be made by a company provided that they also file the relevant contract (such as contract for services, or for sale of assets) pursuant to which such allotment was made to the Registrar of Companies within thirty days of allotment.

For instance, in the case of hiring a technical consultant, you need to file the contract you entered into with the consultant with the Registrar of Companies within 30 days.

But this is not a gift

Issue of shares for consideration other than cash should be differentiated from a gift, in that in an issue for consideration other than cash, there is a consideration which is not in cash, whereas in a gift there is no consideration at all.

Further, issue of shares for consideration other than cash should also not be confused with issue of shares at a discount. Illustrating by way of an example, issue of shares to your technical advisor for services rendered free of cost to him is an issue of shares for consideration other than cash (in which he does not pay even the nominal value), whereas issuing shares at a discount, is, for example, issuing shares valued at Rs. 35 at Rs. 10.

How do you value these shares (issued for consideration other than cash)?

An important aspect to remember when issuing shares for consideration other than cash is valuation. When one refers to valuation in this context it means (a) valuation of the shares (if they are offered for a premium) and, (b) valuation of the services or assets on the basis of which such shares were allotted.

While typically in start-ups, valuation of shares are not required as usually they are allotted at face value, valuation of services or assets is important as that will determine the number of shares which are to be allotted.

As these shares will be issued through a preferential allotment (i.e. allotment to a specific individual as against pro-rata to the shareholders) a special resolution of the board and the shareholders will also be required. If there are investors in the company, it is important therefore to bring them on board before issuing such shares.

Issue of these shares to a non-resident Indian

Earlier, such issue was not permitted by the Reserve Bank of India. These restrictions have now been lifted subject to certain limitations including that it must be against import of capital goods and for incurring pre-operative or pre-incorporation expenses.

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