When businesses want to raise money for various purposes such as growth or to fund future plans for growth, shares are considered as one of the most valuable instruments to raise the necessary capital. Although issue of shares seems to be quite a simple process, most people are only aware of the general form of issuing shares. Read on to learn about when companies issue shares in lieu of assets.
What does Issue of Shares in Lieu of Asset in an Indian Company mean?
Although shares are usually issued in exchange for cash, companies at times may choose to issue them in lieu of assets as well. When an asset is acquired by any company, the payment for the asset may be made in the form of shares of the company. Such an issue against the assets is known as ‘issue of shares for consideration other than cash.’
The asset acquired in exchange of shares can be both tangible and intangible. There are majorly two approaches that are taken to determine the cost of an asset:
- First, the company sells the shares of stocks after deducting the cost of issuing the same.
- Second, the company issues shares of stocks worth the fair market value of the asset.
Meaning of Preferential Allotment
- Preferential allotment refers to the process where shares are allotted to specific parties, like a company or group of people, interested on a preferential basis at a predetermined price.
- This method of allotment is majorly used when raising capital, where the company may choose to issue shares to people or companies from whom the company will be receiving some assets.
Applicable Rules and Sections
When it comes to issue of shares in lieu of assets in an Indian company, Section 62 (1) (c) is read with rule 13 of Companies (Share Capital and Debentures) Rules, 2014 read with rule 14 Companies (Prospectus and Allotment of Securities) Rules, 2014.
These sections include guidelines that must be followed by the company when issuing shares in lieu of assets for any group of people or company that is interested in the company.
Types of Securities and Valuation Report
- In such cases where payment for assets is to be made, shares of stocks are the only form of security that can be issued for the job.
- The price of shares issued in place of cash for payments shall be determined by the valuation report of a valuer registered with the Insolvency and Bankruptcy Board of India (IBBI).
Who is Eligible to get Securities under Preferential Allotment?
A company may choose to buy assets and issue shares as a form of payment for both existing shareholders and other individuals interested in selling the asset or partnering with the company.
Form to be Filed:
- MGT-14 Passing Special Resolution approving preferential allotment (must be filed within 30 days after the passing of special resolution in general meeting).
- PAS-3 Return of Allotment (within 14 days of allotment of shares).
What is the Procedure for Preferential Allotment?
The procedure for preferential allotment of company’s shares in lieu of assets include sending a notice to the Board meeting to approve the following:
- Issuing securities through Private Placement Basis.
- Total number of securities that need to be issued.
- The confirmation of Draft offer letter in Form PAS-4.
- To take the members approval, approving the notice of calling for an Extraordinary General Meeting of the shareholders of the company.
- Determine the price of securities after taking the Valuation report into consideration.
- Determine the offer period.
- Approve the agendas mentioned in the notice through a Board Meeting at least 7 days after the notice for the same has been issued.
- Set up Extraordinary General Meetings for the following:
- Pass Special Resolution in order to approve Private Placement.
- To file Form MGT-14 with ROC, which must be done within 30 days of passing the Special Resolution that approves the Private Placement.
- To approve the Offer cum Application Letter (Form PAS-4).
- Within 30 days of recording the names of the Identified Persons, send offer letters in Form PAS-4. Maintain the entire record of private placement offer in Form PAS-5.
- Within 15 days of passing Board Resolution for securities’ allotment, file the return of allotment using Form PAS-3.
Conclusion
At times, companies may choose to obtain certain assets that would add exponential value to their businesses. For such instances, they may not necessarily choose to buy these assets with cash but use shares of their company’s stocks as the method of payment. While doing so, it is imperative to understand the complexities of this process to avoid any hindrances in acquiring the desired assets.
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