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 has to be with an Investment Size of not less than twenty thousand rupees of face value of securities.

(It is advisable that Services provided by the Advisors should be of such value or should be valued in such manner such that at least 2000 shares issued to each of the Advisors, Assuming FV per Share Rs.10/- each. Alternatively, Separate class may be created with face value higher than FV of Rs. 10/- each. Example 5000 shares be issued for 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.

Author Bio

Qualification: CS
Company: Nitin Narang & Associates
Location: North East Delhi, Delhi, India
Member Since: 23 Jul 2020 | Total Posts: 10
Ayushi Verma is a Professional, Corporate Trainer , Sociopreneur, and a Perceptive Communicator with the capacity to engage, compel and liaise with colleagues, executives & external stakeholders. She is a Researcher, Writer and Outspoken activist. View Full Profile

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May 2021