Article explains and compares Governing Section, Meaning, Applicability, Conditions / Restriction, Pricing / Valuation Report for issue of share capital under Rights Issue, Employee Stock Option Scheme, Sweat Equity Shares and Preferential Issue.

A Comparative Chart showing the different ways of issue of share capital under Rights Issue, Employee Stock Option Scheme, Sweat Equity Shares and Preferential Issue

Particulars Rights issue to existing Shareholders Employee Stock Option Plan Sweat Equity Shares Preferential Issue
Governing Section Section 62 of Companies Act, 2013 contains provisions on “further issue of capital”, and enacts the principle of pre-emptive rights of shareholders of a company to subscribe to new shares of the company. Provisions of Section 62 of Companies Act, 2013 are mandatory for all private companies, public companies, and listed as well as unlisted companies. Section 62(1)(b) of the Companies Act, 2013 provides that where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to employees under a scheme of employees’ stock option, subject to a special resolution passed by company and subject to such conditions as may be prescribed. As per Section 54(1) of the Companies Act, 2013, notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely:—

(a) the issue is authorized by a special resolution passed by the company;

(b) the resolution specifies the number of shares, the current market price, consideration if any, and the class or classes of directors or employees to whom such equity shares are to be issued;

(c) not less than one year has, at the date of such issue, elapsed since the date.

on which the company had commenced business; and

(d) where the equity shares of the company are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

As per Section 62(1)(c) of the Companies Act, 2013 where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to any persons, if it is authorized by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribed.
Meaning A rights issue is a direct offer of shares to all the existing shareholders of the Company in proportion to their current holding. The company also sets a time limit for the shareholder to buy the shares. Companies pursue Rights Issue as an avenue to raise funds for various reasons, ranging from expansion or acquisitions to paying down debts. Employees’ Stock Option” means the option given to the directors, officers or employees of a company or of its holding company or subsidiary company or companies, if any, which gives such directors, officers or employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price. As per Section 2(88) of the Companies Act, 2013 “sweat equity shares” means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. The expression ‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities.
Applicability Firstly, note that the shares can be issued only to the existing shareholders. Secondly, such an offer has to be mandatorily extended to all the existing shareholders.

In case the option is exercised by all the shareholders, then the percentage of shareholding will remain the same and unchanged.

Right Issue cannot be made for consideration other than cash.

In view of the above, the Right Issue can be made, provided the existing shareholders other than the Management Group are ready to renounce their rights in this regard.

However, since the consideration for such shares under Right Issue has to be mandatorily paid in cash, the option is not tenable.

 

 

For the purpose of section 62(1)(b) of the Companies Act, 2013, the ‘employee means:

a)   a permanent employee of the company who has been working in India or outside India; or

b)   a director of the company, whether a whole-time director or not but excluding an independent director; or

c)   an employee as defined in clause (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company

but does not include—

an employee who is a promoter or a person belonging to the promoter group; or

a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company.

Sweat Equity shares can be issued to either a Director or the employees.

 

Please also note that there will be a lock-in period of 3 years with respect to such shares.

As per the reading of Section 62(1)(c) of the Companies Act 2013, we understand that the shares under this scheme can be issued also for consideration other than cash.

However, the justification for the allotment of shares for consideration other than cash has to be provided.

In view of the above, the shares can be issued to an identified person under preferential allotment scheme for consideration other than cash at a price not less than the face value of the shares.

Conditions / Restriction The shares under this section can only be issued to the existing shareholders of the Company. The shares under this section can only be issued to the directors, officers or employees of a company or of its holding or subsidiary company. 1-   The company shall not issue sweat equity shares for more than fifteen percent of the existing paid-up equity share capital in a year or shares of the issue value of rupees five crores, whichever is higher. Since the value of shares issued shall not be more than INR 5 crores, this condition is fulfilled.

2-   The issuance of sweat equity shares in the Company shall not exceed twenty-five percent, of the paid-up equity capital of the Company at any time. In this regard, the sweat equity shares shall not be more than 25% of the revised equity share capital.

It can be stated that the issue of shares by way of preferential allotment is not as restrictive and regulated as opposed to stock options and sweat equity shares. More importantly, as explained above, the issue of shares can be made to the advisors, who are not employees or directors in the Company, only by way of preferential allotment.

Where the shares are allotted for consideration other than cash, valuation should be done by a registered valuer who shall submit a valuation report to the Company giving justification for the valuation.

For the issue of equity shares to its advisors, the value of services and technical know-how provided may be determined by the Company based on any agreement or unwritten arrangement between the Company and such advisor.

Pricing / Valuation Report Valuation is not mandatory. Valuation is not mandatory. Valuation is mandatory with respect to the price of the share as well as of the intellectual property rights or of know-how or value additions for which sweat equity shares are to be issued. Valuation is mandatory.

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