Issuing shares on a preferential basis is a strategic move that allows companies to raise capital from specific investors, often at terms favorable to both parties. Section 62(1)(C) of the Companies Act governs this process, setting forth strict conditions and procedural requirements to ensure transparency and compliance. Recent amendments, particularly those introduced in the Finance Act, 2024, have further streamlined these regulations, making it easier for companies, especially start-ups, to issue shares without the previously burdensome dual valuation requirements.
Issue of Shares on Preferential Basis [Section 62 (1) (C)]
Conditions For Preferential Issue:
- Authorized by AOA:
The Articles of Association (AOA) of the company must explicitly permit the preferential issue of shares. This means that the company’s foundational document must have a clause that allows the company to issue shares on a preferential basis.
- Special Resolution in General Meeting:
The Company must pass a Special Resolution (SR) at a General Meeting (GM) to authorize the preferential issue. This requires at least a 75% majority of shareholders present and voting at the meeting to approve the resolution.
- Complete Allotment in 12 Months of Special Resolution:
The company must complete the allotment of shares within 12 months from the date of passing the Special Resolution. If the allotment is not completed within this timeframe, the approval lapses, and a new Special Resolution would be needed to proceed.
Procedure For Preferential Issue of Shares:
- Board Meeting to Pass Board Resolution:
The process begins with a Board Meeting (BM) where the Board of Directors passes a Board Resolution (BR) to approve the preferential issue and to convene a General Meeting for obtaining shareholders’ approval.
- General Meeting to Pass Special Resolution:
A General Meeting (GM) is held where the shareholders vote on the Special Resolution (SR) for the preferential issue. The resolution must be passed with a three-fourths majority to proceed.
- File Form MGT-14 within 30 Days:
After the Special Resolution is passed, the company must file Form MGT-14 with the Registrar of Companies (ROC) within 30 days. This form is used to submit the resolution and necessary details to the ROC for their records.
- Complete Allotment in 12 Months of Special Resolution:
The company must ensure that the allotment of the preferential shares is completed within 12 months from the date the Special Resolution was passed. This is a critical step to ensure compliance with the timeline specified by regulations.
- File Form PAS-3 within 30 Days of Allotment:
Once the shares are allotted, the company is required to file Form PAS-3 with the ROC within 30 days. This form provides details of the allotment and ensures that the preferential issue is officially recorded with the regulatory authorities.
> Sub Rule-3 of Rule-13 of Companies (Share Capital and Debentures) Rules, 2014
- Price of shares or securities to be issued shall not be less than the price determined on the basis of valuation report of registered valuer.
CHANGES IN VALUATION REQUIREMENTS
√ The Finance Act, 2024 has introduced notable changes to the valuation requirements for private limited companies, by proposing removal of Section 56(2) (viib) of the Income Tax Act with effect from 1st April, 2025. This section imposes tax on shares issued by private limited companies at a price exceeding the Fair Market Value (FMV). This taxation is commonly referred to as Angel Taxation.
v’ CURRENT REQUIREMENTS:
o FMV of shares is determined according to Rule 11 UA (2) of the Income Tax Rules. This rule prescribes the use of the net asset method based on a specific formula or use of other International valuation methods supported by a Merchant Banker’s report.
√ To comply, private companies issuing shares have been required to obtain:
- A valuation report from a Registered Valuer as per the Companies Act.
- A valuation report from a Merchant Banker as per Income Tax Regulations.
Amendment Made in Finance Act, 2024
> Finance Act, 2024 proposes to eliminate the requirement under Section 56(2) (viib) with effect from 1st April, 2025. Moving forward, the issuance of shares will no longer require a Merchant Banker’s valuation report. Instead, shares can be issued at any price based on the valuation report from a Registered Valuer alone.
> Impact and Benefits:
> This amendment is set to streamline the share issuance process for Start-ups by:
1. Removing the dual valuation report requirement.
2. Reducing compliance costs and administrative burden.
3. Providing greater flexibility in pricing shares based on professional valuations.
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