Issue of Shares to Service Provider For Consideration Other Than Cash

The issuance of shares to service providers in exchange for consideration other than cash is a common practice in the corporate world. This arrangement allows companies to compensate individuals or entities for their services while preserving their cash resources. In this article, we will explore the concept of issuing shares to service providers, the benefits and considerations involved, and some examples of how this practice can be implemented.

Understanding the Concept: When a company engages a service provider, such as a consultant, advisor, or contractor, they often have the option to offer shares in the company as compensation instead of cash. This arrangement is commonly referred to as “issue of shares for consideration other than cash.” The shares are allocated to the service provider based on their value or as agreed upon in the contractual agreement.

Benefits of Issuing Shares:

i. Alignment of Interests: Issuing shares to service providers can align their interests with the long-term success of the company. By becoming shareholders, they have a stake in the company’s performance and are motivated to contribute to its growth and profitability.

ii. Conservation of Cash: Companies can conserve their cash resources by compensating service providers through share issuance. This approach allows them to retain liquidity for other business activities while still providing fair compensation to the service provider.

iii. Attracting Talent: Offering shares as compensation can be an attractive proposition for service providers, especially in startups or high-growth companies. It provides them with the opportunity to participate in the company’s success and potentially benefit from future capital appreciation.

An Indian Company limited by shares has received certain services in the form of technical knowhow and expertise for its business operation from certain advisors residing in and outside India (Advisors). In recognition and in exchange of their Advisory Services, the Company desirous of Issuing certain shares in the Company to such Advisor:

The Ways a Company can do so as follow:

1. If the Advisor is providing Services as Employee of the Company:

The Advisor shall be paid a fixed amount of Remuneration for its services and shares will be issued as an incentive.

Shares can be issued under following two routes:

i. Employee stock Option

• Right of Employee:

ESOP is not an obligation rather it is a right of the employee to purchase certain amount of share of the company at a pre decided price.

• Time Period:

There shall be a minimum period of one year between the grant of options (when company offer ESOP) and vesting of option (when securities are allotted).

• Pricing:

The companies granting option to its employees pursuant to Employees Stock Option Scheme will have the freedom to determine the exercise price in conformity with the applicable accounting policies, if any.

• Taxation:
  • For the Company:
    •  Can Claim ESOP as deduction
    •  Tax at the time of buy back
  •  For Employee:
    •  Tax at the time of Exercising the option
    •  Tax at the time of sale of shares.
  • GST:

No GST will be applicable in provision of service by Employee to its employer.

ii. Issue of Sweat Equity Shares

Only Equity Shares Can be issued under this Scheme.

• Consideration for creation of Intellectual Property Rights:

Sweat Equity Shares are issued as consideration for creation or transfer of intellectual Property Rights to the company or as other value addition.

• Pricing:

Pricing guidelines are defined for Sweat Equity shares which are required to be determined by a registered valuer.

• Lock in Period:

The shares allotted shall be locked-in for a period of 3 Years from the date of Allotment

• Taxation:

For Employee:

• Tax at the time of allotment of shares

Taxable in the hands of employee under head “Salary”

• Tax at the time of sale of shares.

Capital gains are taxable in hands of employee in year in which shares/securities are transferred

2. If the Advisor is providing Services as Marketing Professional to the Company:

i. Preferential Allotment:

A Company can issue shares or other securities on a preferential basis to any person irrespective of whether such person is an existing equity shareholder, an employee of the company or otherwise, if such issue is authorized by Special Resolution passed in General Meeting. Such issue of shares can be made either for cash or for consideration other than cash

Meaning of Preferential Allotment under Companies Act, 2013:

Allotment of Shares or Other Securities (including equity shares, fully or partly convertible debentures or other securities convertible or exchangeable with equity Share) can be made by private and unlisted public Company

• Condition:

a) Price of such shares or other securities to be issued for cash or for consideration other than cash is determined by Valuation Report of Registered Valuer.

b) Authorized by AOA

c) Authorized by Shareholders by passing SR.

• Pricing Guidelines:

Price as may be determined by Chartered Accountant as per internationally accepted pricing methodology on arm’s length basis.

• Minimum Value of shares allotted per Person:

The value of such offer or invitation per person should be accompanied by an investment size of no less than twenty thousand rupees, based on the face value of securities.”

Regarding the advisory services, it is recommended that the value of services provided by the advisors should be equivalent to or evaluated in a way that ensures each advisor receives a minimum of 2000 shares. Assuming the face value per share is Rs. 10/- each. Alternatively, a separate class may be created with a higher face value than Rs. 10/- each, for example, issuing 5000 shares at Rs. 40/- each.

• Taxability of Services by Advisor:

Marketing and Pre-sales Technical Support Services will be Classified as Intermediary Services and GST will be applicable on provision of such service.

Conclusion: The practice of issuing shares to service providers for consideration other than cash offers companies a flexible and attractive compensation option. It aligns the interests of the service providers with the company’s success and allows businesses to conserve cash while rewarding valuable contributions. However, it is crucial for companies to carefully evaluate the valuation, establish appropriate shareholder agreements, and comply with relevant regulations when implementing such arrangements. By considering these factors, companies can effectively utilize the issuance of shares as a compensation tool while nurturing valuable partnerships with service providers.