What is issuance of shares for consideration other than cash (ISCOC)?
Shares are one of the most important instrument to raise capital at all stages of business. Issue of shares seems to be a simple process and most of the people know about it in its general form only, i.e. shares issued for cash.
However, Shares can also be issued as a mode of payment for acquiring assets/business, know how or any other services without any cash outflow from the business. Such an issue of shares is termed as “Issue of Shares for Consideration Other Than Cash” (ISCOC).
How is ISCOC used across transactions?
ISCOC is an integral component of an M&A deal structuring wherein a company issues it’s own shares as consideration for acquiring other company’s shares.
Acquiring Company or an IP
The promoters of the acquired company/ owner of patent can be paid by way of shares in the acquiring company. This way they will enjoy certain control in the new company.
Services that Company can’t pay for
At times company faces cash crunch but needs certain services which will enlighten company’s success path. Diluting control by way of issuing shares for these services is a way out from this cash crunch.
Advisors, Strategic Investors
Advisors, Mentors and Strategic investors guide the company with an objective to increase the value of the company. They expect consideration in the form of share issued at no cost to them which can be achieved with ISCOC.
We’ve put together Tax and Regulatory aspects of Issuing shares for consideration other the cash here below :
(A) REGULATORY : COMPANIES ACT, 2013
1. MODE OF OFFER
Shares for consideration other than cash can be allotted only by way of Preferential Allotment mode as provided under Section 62(1)(c) of the Companies Act 2013, also termed as Private Placement.
The company has to convene an extraordinary general meeting (EGM) to pass a special resolution to obtain approval from its shareholders to issue shares for consideration other than cash.
The notice of the meeting shall be annexed with an Explanatory statement which shall include various details such as required under the Companies Act.
The company will have to file form MGT 14 with the Registrar of Companies (ROC) and will have to keep a record of Private placement in form PAS 5 which shall be filed with ROC along with PAS 3 at the time of allotment.
2. VALUATION REPORT FOR ISSUING SHARES
As per Rule 13(2)(g) read with Rule 13(3) of the Companies (Share Capital and Debenture) Rules, 2014:
“The Price of the Shares to be issued shall not be less than the price determined on the basis of Valuation Report by Registered Valuer”
The report should be obtained at least thirty days prior to the date on which the general meeting (EGM) of the company is scheduled to be held.
3. VALUATION REPORT FOR CONSIDERATION
As per Rule 13(2)(i) read with Rule 13(3) of the Companies (Share Capital and Debenture) Rules, 2014:
“The valuation of consideration needs to be carried out by Registered Valuer giving justification for the Valuation”
The report should be obtained at least thirty days prior to the date on which the general meeting of the company is scheduled to be held.
4. AUTHORIZATION IN ARTICLES OF ASSOCIATION
The AOA of the company should allow issue of shares for consideration other than cash, otherwise the company will have to alter its AOA prior to making such offer.
Know more on FEMA, Tax and Valuations for issue of shares for consideration other than cash, Scroll to the next page
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