Issuing shares at premium

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

28 June 2014 Hi,

Ours is a 1.5 yr old Pvt Ltd company in ecommerce industry. We have an online store that has been doing good with consistent growth. Recently we have agreed upon having a new director on board who will invest 36 lakhs for 1/4th share in the company. His investment will be in the form of monthly payments of 1.5 Lakhs for 24 months.

Below are some details about our company.

Total sale Revenue generated : 1.2 cr

Company's Profit/Loss: - 4 Lakhs

Total paid up capital: 12 Lakhs

No. of current directors: 3 (each having 40k shares @ 10 rs / share)

Our online store has a very good brand value with a strong customer base.

We are not sure about how to issue shares to the new director. According to his investment, we need to issue him shares at a premium of Rs.90. Do we have to pay any tax if we issue shares at premium? If the tax people do not agree to our valuation of Rs.90/share then what happens?

How do we bring his investment into the company and offer him equal share ? Please guide us.

Thanks !

CA. Amit G. Chandani

CA. Amit G. Chandani (Expert)
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28 June 2014 If you issue shares at premium, premium will be taxable, in case the issue price : face value + premium (Rs. 100) is less than FMV of share. If FMV of share is above Rs. 10, first raise the price of share to correspond with FMV and not making the excess amount taxable.

Querist : Anonymous

Querist : Anonymous (Querist)

28 June 2014 Thanks for your answer. Few more questions.

How do I know what is the FMV of our share?
How to raise the price of share?

Querist : Anonymous

Querist : Anonymous (Querist)

30 June 2014 Hi, appreciate if you can guide us with regards to above question.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2024 Determining the Fair Market Value (FMV) of a share and raising its price involve different strategies and considerations. Here’s a brief overview of each:

### Determining the FMV of a Share

1. **Valuation Methods**:
- **Discounted Cash Flow (DCF)**: This method involves estimating the future cash flows of the company and discounting them back to their present value. This requires making assumptions about growth rates and discount rates.
- **Comparable Company Analysis**: This involves comparing your company to similar publicly traded companies and looking at valuation multiples like Price-to-Earnings (P/E) ratio, Price-to-Book (P/B) ratio, etc.
- **Precedent Transactions**: Examining recent transactions involving similar companies to gauge the value.
- **Net Asset Value (NAV)**: Calculating the value of the company’s assets minus its liabilities. This method is often used for companies with significant tangible assets.

2. **Professional Valuation**:
- For accurate results, especially for private companies, hiring a professional appraiser or valuation expert can be beneficial. They use various methods and industry knowledge to provide a detailed analysis.

3. **Market Conditions**:
- FMV can be influenced by market conditions, economic factors, and industry trends. Keeping an eye on these factors is essential for an accurate valuation.

### Raising the Price of Your Share

1. **Improving Company Performance**:
- **Increase Revenue and Profitability**: Focus on growth strategies, cost management, and improving operational efficiency.
- **Product or Service Innovation**: Develop new products or enhance existing ones to drive growth.

2. **Enhancing Investor Relations**:
- **Transparency and Communication**: Regularly update investors about company performance, strategies, and future plans.
- **Strong Financial Reporting**: Ensure clear and accurate financial reporting to build investor confidence.

3. **Market Perception**:
- **Brand Strength**: Build a strong brand reputation that can positively impact investor perception.
- **Strategic Partnerships and Alliances**: Forming strategic partnerships can boost market confidence and potential for growth.

4. **Share Buybacks**:
- **Buy Back Shares**: Companies can buy back their own shares to reduce the number of shares in circulation, which can potentially increase the share price.

5. **Dividends**:
- **Paying Dividends**: Regular dividends can make the stock more attractive to investors, potentially raising its price.

6. **Strategic Planning**:
- **Long-Term Strategy**: Develop and communicate a clear long-term strategy for growth and value creation.

7. **Market Conditions**:
- **Timing**: Sometimes, external market conditions can impact share price. Being strategic about timing when announcing new initiatives or financial results can influence share price.

Raising the share price is often a combination of improving company fundamentals, strategic market positioning, and effective communication with investors.

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