The Indian Company Law is about to undergo a major overhaul in the next few months. The journey has already started, the transformation has begun and we are awaiting the final implementation date of the new Company Law. This has been designed keeping in mind the latest needs of the industry and to empower Indian economy take on global competition and also bring in a lot more transparency, global best practices and enhance corporate social responsibility etc.
For the last few quarters, one provision of the existing Company Law, which also gets carried forward to the new law, has been bothering me a lot and I have been toying with the idea of having 1 Paisa Company in India. I firmly believe that this will offer Indian companies higher flexibility in distributing wealth among various stake holders and also help it align to best global practices.
What is 1 Paisa Company? Let’s look at it in detail:
The concept of 1 Paisa Company
- 1 Paisa Company refers to a private limited company whose shares have a face value of 1 Paisa (INR 0.01)
- Most of the companies incorporate with INR 100,000 capital, which is minimum requirement by Company Law, and have about 1,000 shares (of face value INR 100) or 10,000 shares (of face value INR 10) or 100,000 shares (with face value of INR 1).
- The face value of one share is a derived by dividing authorized capital by number of constituent shares.
- So if face value of a share is 1 Paisa, a company shall have 10,000,000 shares for an authorized capital of INR 100,000.
Advantages of 1 Paisa Company
- 1 Paisa offers greater liquidity and better affordability of shares for the company (at least 100x considering current minimum of INR 1 face value).
- It empowers startups to offer higher stocks to employees and other stake holders and still preserve the essence of it.
Let’s imagine you have incorporated a company with INR 1 as face value and have allotted a pool of 15% for ESOPs on an INR 200,000 capital base. This offers 30,000 shares for ESOP pool, which should ideally be distributed among initial 50-100 team members as the company grows. Let’s imagine that you are hiring an employee and wish to offer about 50 shares of the company (about 0.025% of the company). These shares are offered over a four-year vesting schedule as per global ESOP practices. So for every year of service, the employee gets 12.5 shares (to be precise). You convey this to the hire and check his reaction about stock options. He will literally reject it or will not even look at it as something which will play a role in his decision making to join your company.
If the shares are of 1 Paisa, the same equation changes to 5000 shares overall and 1250 shares per year. If you feel this is a little higher number, you can even look at reducing this to 3000 or 2000 shares overall (thus saving the balance stock for other employees). Now also imagine the reaction of the hire when you give these numbers. I am sure he will be excited with stock options here which may result in a successful hiring.
During fund raising process, many investors recommend increasing the authorized capital of the company post funding. One reason is to accumulate more shares to the base and reduce the overall premium paid on each share during funding. Having handled multiple investments for our clients @ eLagaan, I have been a witness to this process time and again, and specially in larger funding rounds (about 200K USD or more).
Let’s assume you are raising about USD 1M for 25% stake. Your current authorized capital is INR 200,000 with INR 1 as face value. In the above deal, the investors get each share at a price of INR 1200 per share. If you have just started operations (under one year of operation), this number is huge by any means. So the investors ask for increase of capital to reduce this to somewhere in INR 200-400 per share. The reasons why investors want this are many:
- For a new company, it’s challenging to justify such premiums levels.
- The risk factor for investors goes very high with extra-ordinarily high premium.
- Some time back, India introduced a new rule to tax any amounts received in excess of fair value (popularly known as Startup tax).
With 1 Paisa Company, the above example results into just INR 12 per share, without changing the capital base or any other efforts, and resulting in substantial savings on time and costs.
Both the examples show how 1 Paisa changes the numbers. Many times, it may or may not yield much direct financial benefits to the company depending on their specific scenario, but the numbers do give an edge and many indirect benefits. The companies spend good amount of money to hire the talent pool, to keep them motivated etc. as they do not value the ESOP numbers much.
What’s prevalent across the globe?
- It’s a common practice in most of the developed countries to allow promoters to choose their face value (XX amount of authorized capital divided into YY shares as per promoter’s preference). This gives unparalleled flexibility to promoters to pick numbers that suits their scenario best. In the US, most of the startups are incorporated with USD 1000 as capital base and underlying shares in the range of 10M to 100M (in either scenario the face value works much lower than even 1 cent).
- It is also possible to form companies without any face value in few places.
What does Indian Company Law say?
- The Indian Company Law is silent on face value and does not specify any limits (minimum or maximum) for face value.
- It just specifies a minimum of INR 100,000 as the authorized capital to start a Pvt. Ltd. company. The companies are incorporated with INR 10 face value (most of them), INR 100 or INR 1.
- SEBI, which governs the rules for listing of a Public Limited company in a stock exchange, specifies a minimum face value of INR 1. This is not applicable or connected to a Private Limited Company in any way.
I strongly believe that Indian companies deserve a fair platform to empower themselves with global best practices. It shall ease out lot of their pains and get more bandwidth to focus on the core activities. Human Resources has been one of the most challenging area for startups and this can possibly become a game changer for hiring and retaining right talents. It is time that India sees the rise of the 1 Paisa Company.
We at eLagaan have already started our journey to incorporate India’s first 1 Paisa Company (LawArmy India Private Limited) at Bangalore. I shall continue to share the experiences that we encounter during the process to make this change happen.
Navin Rungta is co-founder of eLagaan. He is a passionate Entrepreneur committed to ease out multiple pain points existing in Legal, Taxation and Business compliance domain using technology as a major disruptive force to change some of the age old practices prevalent here. Having worked on both sides of the table – Customer & Service Provider, he had opportunities to experience the pain points on both sides and is working towards addressing it.