Issuing Shares for Non-Cash Consideration – Companies Act, 2013

Issuance of Shares for Consideration Other Than Cash under Right Issue or otherwise under the Companies Act, 2013

File No. ROC(B)/Adj.Ord.454-62(3)/Dhiomics/Co.No.102947/2023/

This article examines whether a company may issue shares under a rights issue or otherwise, for consideration other than cash, under the Companies Act, 2013. It delves into the statutory provisions, rules, regulatory requirements, interpretations, and case law to ascertain what is permissible, what is not, and under what conditions.

1.Introduction

The issuance of additional shares by a company is a key mechanism to raise capital. Under the Companies Act, 2013 (“the Act”), one of the recognised routes for fresh issue of shares is via rights issue to existing shareholders. Generally, rights issues are associated with payment in cash. However, there is frequent debate whether non-cash consideration (assets, liabilities, services, etc.) is permissible under a rights issue or other modes, and under what legal requisites. 

2. Statutory Provisions

• Section 62 deals with Further Issue of Share Capital. Sub-section (1) has three clauses:
• • Clause (a): Rights issue — offer to existing shareholders in proportion to their holding.
  • Clause (b): Issue of shares to employees under ESOP etc.
  • Clause (c): Issue of shares to “any persons” (which may include non-shareholders), if authorised by a special resolution, either for cash or for a consideration other than cash, subject to valuation report of a registered valuer, and compliance with other applicable provisions.
• Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 governs with Preferential Allotment, which includes pricing when shares are issued either for cash or for consideration other than cash. It mandates:
• • Valuation by a registered valuer to fix the price when non-cash consideration is involved.
  • Treatment of non-cash consideration in the company’s books: if asset is depreciable/amortizable, compliance with accounting standards etc.
• Companies (Registered Valuers and Valuation) Rules, 2017 require that valuation reports under such provisions be issued by Registered Valuers.

3. Interpretation: Rights Issue vs Preferential Issue & Non-Cash Consideration

• Under Clause (a) of Section 62(1) (rights issue), the statutory language speaks of “issue of further shares … offered to existing equity shareholders … in proportion …” and refers to sending a “letter of offer”, acceptance, etc. The inherent implication is subscription by payment, i.e. cash. There is no express provision in Section 62(1)(a) which allows acceptance via an asset or liability or “in kind”.
• Clause (c) of Section 62(1) is the relevant clause when one intends to issue shares to any persons (including non-shareholders), for cash or other than cash, with the required special resolution and valuation. That is essentially the “preferential issue / further issue” path.
• Therefore, non-cash consideration is statutorily recognised only under preferential/allotment under Section 62(1)(c) or other applicable avenues, not under the rights issue mechanism as per Section 62(1)(a).

4. Legal Requirements When Issuing for Consideration Other Than Cash

Where non-cash consideration is permissible (e.g., under Section 62(1)(c)), the following legal prerequisites arise:

• Special Resolution
• Valuation Report by a Registered Valuer: To determine:
• • the price of shares being issued; and
  • fair value of the asset/liability or other consideration.
• Compliance with Rules & Filings
• • The issue must comply with Rule 13 of Share Capital Rules for preferential issues.
  • Accounting for non-cash consideration in books as per accounting standards (if depreciable asset, treat accordingly; if not, expensed etc.).
  • Forms to be filed with Registrar of Companies (such as PAS-3)
• Disclosure Requirements – Transparent disclosure in the notice, offer document, financials as per Act & SEBI ICDR & Listing Regulations .

5. Case Law / Examples

ROC Karnataka v. Dhiomics Analytics Solutions Pvt. Ltd. (Adjudication Order, 2023)

The recent adjudication order in the matter of Dhiomics Analytics Solutions Pvt. Ltd. of 2023 is instructive. The company had converted loans advanced by its promoters into equity shares but incorrectly classified the allotment as a rights issue under Section 62(1)(a) instead of following the route under Section 62(1)(c) read with Section 42.

The Registrar of Companies observed that:

1.Section 62(3) permits conversion of loan into equity only if the terms of conversion are approved prior to raising of the loan through a special resolution. Since this prerequisite was not complied with, the benefit of Section 62(3) was unavailable.

2. Issuing shares for consideration other than cash necessarily attracts Section 62(1)(c), requiring special resolution, valuation, and compliance with Section 42 (private placement norms).

3. By misclassifying the allotment as a rights issue and failing to follow Section 42 procedures, the company violated Sections 62(1)(c), 42, and 62(3),attracting penal liability under Sections 450 and 42(10).

JCT Limited v. Securities Appellate Tribunal (SAT), Case No. 553/2019 Dated: 12th November 2020 — In this case the issue and allotment of equity shares on a preferential basis were challenged due to absence of complete cash component. One argument advanced was that the allotment was for consideration other than cash (since there was a component that was interest liability converted to NPV). The Tribunal examined compliance with Section 62, Rule 13, and whether price determination, special resolution etc were satisfied and then allowed the appeal.

These cases illustrate that courts/regulators enforce strictly the statutory requirements (special resolution, registered valuer, pricing, etc.) when non-cash consideration is involved.

6. Analytical Conclusions

• A rights issue (Section 62(1)(a)) is not a route for issuing shares for non-cash consideration, unless there is some interpretative exception or waiver. The law and commentary typically treat rights issue as requiring cash subscription.
• Non-cash consideration is recognised and permissible, but only under preferential/allotment modes (Section 62(1)(c)) or other suitable statutory routes.

7. Practical Implications / Risks

• If non-cash consideration is attempted via rights issue without proper statutory basis, allotment may be struck down, or challenged by shareholders or regulator.
• Incorrect valuation or failure to use a registered valuer could lead to regulatory penalties under the Act.
• Accounting / tax consequences – valuation differences may cause taxable implications, or issues under tax law (e.g. “money’s worth” or fringe benefits, etc.).
• For listed companies, investor perception, SEBI scrutiny, and compliance burdens increase.

8. Conclusion

In sum, companies cannot use the rights‐issue route to allot shares purely in exchange for non-cash consideration. Rather, the preferential/allotment path under section 62(1)(c) is the correct legal vehicle for such issuances. Compliance with statutory requirements, especially valuation, special resolution, and filings, is indispensable to avoid legal invalidity or regulatory censure.