Very Urgent - Capital Structure

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

22 May 2010 A Private Company is incorporating the subsidiary company. The project cost is 5 crore, but the promoters do not want have paid up capital as 5 crore. And they are planning to issue 5% of the initial paid up capital to one of the first directors (A) under ESOP/ Sweat Equity Plan over the period of three years i.e, 1.67% at the end of each year.

Can a company issue the shares at premium for the first allotment?

Please guide me to structure the capital of the Company, and what will be share of the promoter Company and the director A (Remember Company wants Rs. 5 crore for its project). Its urgent, please help me out

daya shankar singh

daya shankar singh (Expert)
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22 May 2010 Company can issue its share at premium at first allotment.
If the amount raised through issue of share is not sufficient then company can borrow long term loan from bank or borrow loan from holding. In capital structure the amount of debt and equity should be balanced

Querist : Anonymous

Querist : Anonymous (Querist)

24 May 2010 They don't want borrow the loan also. Can u be more specific with ur answer.

Rasesh

Rasesh (Expert)
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26 May 2010 I presume that the subsidiary need not be a wholly owned subsdiary. In such case, the holding company should, in any event, be holding not less than 50% of the equity of the subsidiary.

The initial allotment i.e. subscription money at the time of incorporation of the company cannot be done with a premium. The simple logic is that the company is not in existence and hence cannot command a premium. Once the incorporation is done, shares can be issued by the subsidiary at a premium.

The shares can be alloted to the Director under ESOP/sweat equity. The paid up capital can be increased gradually as and when the shares are to be issued or the right to be exercised. If the holding company is a listed company, then the subsidiary issuing shares as sweat equity or ESOP to Director will be a question and has to be well justified. However, in such case, how will the funding be managed? You will have to find some other source of funding in such scenario.

If the nature of the project allows for gradual release of funds by the project purchaser, then your funding can be managed. This also eliminates the requirement of unnessarily having a higher paid up capital.