Summary: The Companies Act, 2013 allows companies in India to issue shares for non-cash consideration, such as acquiring assets, businesses, converting loans, or settling liabilities, as outlined under Section 62(1)(c) and related rules. This process necessitates authorization through a special resolution and a valuation report from a registered valuer to ascertain the fair value of the non-cash consideration. While Section 62(1)(c) specifically applies to equity shares, other securities follow different regulatory paths. A rights issue is not a permissible route for non-cash share issuance. The procedure involves several steps, including identifying the nature of consideration, obtaining valuation reports for both shares and the non-cash asset, holding board and general meetings, passing necessary resolutions (including filing MGT-14), issuing offer letters (PAS-4), executing agreements, allotting shares in a subsequent board meeting, filing PAS-3 with the Registrar of Companies, issuing share certificates, updating the register of members, and paying stamp duty. Compliance with timelines and proper documentation are crucial for such issuances.
Introduction
Shares are generally allotted for consideration payable in cash. But nothing prevents a company from allotting shares for consideration other than cash (or non-cash consideration). As a matter of fact, the Companies Act does recognise this, which is evident from section 75 and Schedule V to the Companies Act 1956. Consideration may be in cash or kind, money or money’s worth. It may be transfer or sale to the company of any property or the rendering to it of any services.
Legal Provisions:
Section/ Rules Involved:
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Section 62(1)(c) | Further Issue of Share Capital |
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Rule 13 | Companies (Share Capital and Debentures) Rules, 2014 |
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Section 42 | Private Placement |
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Rule 14 | Companies (Prospectus and Allotment of Securities) Rules, 2014. |
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Section 39 | Allotment of Securities by Company |
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Rule 12 | Return of Allotment |
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Rule 13(2)(g) | Valuation requirement – As per Rule 13(2)(g) and Income Tax Act (FMV). |
Forms Involved:
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MGT-14 | Within 30 days of passing of Special Resolution |
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PAS-3 | Within 30 days of passing the board resolution for allotment of shares. |
A. Whether Company can issue securities like (Debentures, share warrant etc) by following section 62(1)(c) other than cash consideration?
No, Section 62(1)(c) refers only to “shares” — not all securities.
To issue other securities (like convertible debentures or preference shares), one must invoke Section 42 (Private Placement) and Section 62(3) (for convertible instruments), and in some cases, Section 55 or Section 54, etc., depending on the type of security.
Text of Section 62(1)(c):
“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—
… (c) to any persons, if it is authorised 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…”
What does Section 62 deal with?
- Section 62 is specifically titled:
“Further issue of share capital” - It applies only to equity shares (and optionally convertible preference shares if already authorized).
- It does not govern issuance of non-convertible debentures, convertible debentures, preference shares (initially), or any other “securities” unless they convert into equity shares.
When can “Securities” (other than equity shares) be issued?
| Security Type | Governing Section | Notes |
|---|---|---|
| Equity shares | Sec 62(1)(a)/(b)/(c) | For cash or other than cash |
| Convertible Debentures | Sec 42 + Sec 62(3) | Terms of conversion pre-approved |
| Non-convertible Debentures (NCDs) | Sec 42 or Sec 71 | Sec 62 not applicable |
| Preference Shares | Sec 55 + Sec 42 | Sec 62 not directly applicable |
| Sweat Equity | Sec 54 | Not under Sec 62(1)(c) |
| ESOPs | Sec 62(1)(b) | Specific route for employees |
B. Whether Shares Can Be Issued for Consideration Other Than Cash Through a Rights Issue?
No. A rights issue is primarily meant for raising capital against cash consideration from existing shareholders in proportion to their shareholding. Issuance of shares for non-cash consideration cannot be done under a rights issue.
Statutory Basis – Section 62(1)(a):
“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 persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares at that date.”
“…such offer shall be made by notice … and the offer shall be open for a minimum period of fifteen days and shall be deemed to include a right to renounce the shares offered to him in favour of any other person…”
🔸 Interpretation:
- This provision clearly contemplates an offer to shareholders for subscription, which involves payment (i.e., cash or through banking channels).
- There is no mechanism under rights issue to accept non-cash assets or services in exchange for shares.
Legal Position in Practice:
| Mode | Consideration Other Than Cash Allowed? | Explanation |
|---|---|---|
| Rights Issue | × Not allowed | It is an offer to existing shareholders to subscribe to shares by paying cash. |
| Private Placement (Sec 62(1)(c) + Sec 42) | √ Yes | If supported by valuation and special resolution. |
| Preferential Allotment | √ Yes | Subject to pricing rules, valuation and special resolution. |
| Conversion of Loan (Sec 62(3)) | √ Yes | Allowed if pre-approved. |
Practical Note:
Even if the existing shareholder is the person contributing the non-cash asset or service, the company must proceed through the route of Section 62(1)(c) (i.e., preferential issue), not 62(1)(a).
Compliance At time of Issuance of Shares
STEP- I- Identify the Nature of Consideration
- Clearly determine if the consideration is in the form of:
- Purchase of assets
- Acquisition of business
- Services already rendered
- Any other non-cash considerations
STEP- II- Obtain Valuation Report
Mandatory to obtain:
- Valuation of shares (Fair value) and
- Valuation of non-cash consideration
Must be from a Registered Valuer as per the Companies (Registered Valuers and Valuation) Rules, 2017
STEP- III- Holding of Board Meeting
i. Identify the person to whom you will issue shares.
ii. Adopt Valuation report of registered valuer for shares.
iii. Adopt valuation report for valuation of consideration.
iv. Enter into contract pursuant to which the securities are allotted.
v. Prepare offer-cum-application (PAS -4 in case of private placement or Simple letter in other cases)
vi. Pass Board Resolution for approval of issue of shares for consideration other than cash.
vii. Issue Notice of General Meeting. (As per Section- 101(1) issue notice of General Meeting at least 21 days before General meeting).
Information required to be mention – Explanatory Statement
(d) The company shall make the following disclosures in the explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 of the Act:
i. the objects of the issue;
ii. the total number of shares or other securities to be issued;
iii. the price or price band at/within which the allotment is proposed;
iv. basis on which the price has been arrived at along with report of the registered valuer;
v. Relevant date with reference to which the price has been arrived at;
vi. the class or classes of persons to whom the allotment is proposed to be made;
vii. intention of promoters, directors or key managerial personnel to subscribe to the offer;
viii. the proposed time within which the allotment shall be completed;
ix. the names of the proposed allottees and the percentage of post preferential offer capital that may be held by them;
x. the change in control, if any, in the company that would occur consequent to the preferential offer;
xi. the number of persons to whom allotment on preferential basis have already been made during the year, in terms of number of securities as well as price;
xii. the justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered valuer.
xiii. The pre issue and post issue shareholding pattern of the company
STEP- IV- Holding of Extra Ordinary General Meeting:
viii. Company shall pass Special resolution for issuance of shares for consideration other than cash u/s 62(1)(c) read with Section 42 (private placement).
ix. File e-form MGT-14 within 30 days of passing Special Resolution with ROC.
STEP – V- Issuance of Offer Letter
x. Offer letter to be issued to proposed allottees within 30 days of passing the special resolution.
xi. Board to maintain a record of such offer in Form PAS-5.
Compliance after receiving of Consideration
STEP- VI- Holding of Board Meeting (within 60 days of receiving of consideration).
i. Present List of Allottees before the Meeting.
ii. Pass Board Resolution for allotment of shares
iii. Pass Resolution for issue of Share Certificate in same Meeting.
iv. Authorize two directors and a authorize person to sign share certificate.
STEP- VII- File form with ROC:
File PAS-3 with the Registrar of Company within 15 days of passing of Board resolution for allotment of shares.
Attachments:
v. List of Allottees. (make sure list of allottees signed by the signatory of PAS-3 and prepare in the format given by instruction kit of pas 3)
vi. Board Resolution for allotment of Shares.
vii. copy of the contract, duly stamped, pursuant to which the securities have been allotted together with any contract of sale if relating to a property or an asset, or a contract for services or other consideration
STEP- VIII- Issue of Share Certificates
viii. Issue share certificates within 2 months from date of allotment.
ix. Share certificates must be signed and stamped as per Section 46 and Rule 5 of the Share Capital Rules.
x. Make necessary entries in Register of Members (Form MGT-1).
STEP- IX- Stamp Duty Payment
xi. Pay stamp duty on share certificates as per the respective State Stamp Act or Indian Stamp Act, as applicable.
xii. Typically done through SHCIL or respective state e-stamping portals.
Important Points
- No cash consideration must be routed through banking channels.
- Ensure proper contractual documentation (e.g., asset transfer agreement, business purchase agreement).
- Maintain board and general meeting minutes meticulously.
- If consideration is in the form of services, it must be rendered before issuance, not prospective.
📝 Process Table: Issue of Shares for Consideration Other than Cash
| S. No. | Step | Description | Relevant Provisions/Forms |
|---|---|---|---|
| 1 | Identify the Nature of Consideration | Determine if consideration is in form of assets, business acquisition, service rendered, loan conversion, etc. | — |
| 2 | Valuation Report | Obtain valuation of shares and non-cash consideration from a Registered Valuer. | Rule 13(2)(g) of Share Capital Rules; Income Tax Rules |
| 3 | Board Meeting – In-Principle Approval | Board to approve: valuation, proposal for allotment, draft PAS-4, and call EGM. | Section 173; Rule 13 |
| 4 | Shareholders’ Approval | Hold EGM and pass special resolution for issuance of shares for non-cash consideration. | Section 62(1)(c), Section 42; File MGT-14 |
| 5 | Circulation of Offer Letter | Circulate Form PAS-4 to the identified allottees. | Section 42(3); Rule 14 |
| 6 | Maintenance of PAS-5 | Maintain record of offer in Form PAS-5. | Rule 14(3) |
| 7 | Execution of Agreements | Execute agreement/contract evidencing non-cash consideration (e.g., business transfer, asset purchase). | Section 42(7); Attach to PAS-3 |
| 8 | Board Meeting for Allotment | Allot shares through Board Resolution within 60 days of receipt of consideration. | Section 42(6); Rule 14 |
| 9 | Filing of PAS-3 | File PAS-3 within 15 days of allotment. Attach valuation report, list of allottees, agreement, resolutions. | Section 42(8); Rule 14 |
| 10 | Issue Share Certificates | Issue certificates within 2 months of allotment. Sign and stamp as required. | Section 46; Rule 5 |
| 11 | Update Registers | Update Register of Members (Form MGT-1) and other statutory records. | Section 88 |
| 12 | Payment of Stamp Duty | Pay stamp duty on share certificates as per state laws (via SHCIL or State e-stamping). | Indian Stamp Act / State Stamp Act |
Conclusion
Issuance of shares for consideration other than cash is a legitimate and strategic mode of raising capital, particularly in scenarios involving asset acquisitions, business takeovers, loan conversions, or services rendered. However, such issuance requires strict compliance with the provisions of the Companies Act, 2013, read with the relevant rules and allied regulations. Key compliances include obtaining a valuation report from a Registered Valuer, securing shareholder approval, executing definitive agreements, and timely filings with the Registrar of Companies.
Proper documentation, adherence to procedural timelines, and maintaining transparency in dealings are critical to ensure regulatory scrutiny is avoided. Professionals like Company Secretaries and Chartered Accountants play a pivotal role in advising and executing such transactions to ensure legal robustness and operational efficiency. Thus, while the route offers flexibility and strategic advantages, it demands a meticulous and compliance-oriented approach.
Note: 1. http://ebook.mca.gov.in/default.aspx
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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).
