Pricing of Issue of Further Shares by Unlisted Companies

Dear Bala,

The Provisions of Sec 81 are attracted for preferential allotment of shares by a public Co, either a special resolution or an ordinary resolution with Central Govt approval is required for preferential allotment.

Also refer Unlisted Public Companies (Preferential Allotment) Rules, 2003.

Regarding ur queries:

A) Whether the company can issue shares at par to the directors?

No issue of shares on a preferential basis can be made by a company unless authorized by its articles of association and unless a special resolution is passed by the members in a General Meeting authorizing the Board of Directors to issue the same. The special resolution shall be acted upon within a period of 12 months.

The explanatory statement to the notice for the general meeting as required by section 173 of the Companies Act, 1956 shall contain the following particulars:

 

1. the price or price band at which the allotment is proposed;

 

 

2. the relevant date on the basis of which price has been arrived at;

 

 

3. the object/s of the issue through preferential offer;

 

 

4. the class or classes of persons to whom the allotment is proposed to be made;

 

 

5. intention of promoters/directors/key management persons to subscribe to the offer;

 

 

6. shareholding pattern of promoters and others classes of shares before and after the offer;

 

 

7. proposed time within which the allotment shall be completed;

 

 

8. whether a change in control is intended or expected

 

B) Whether the investors are aggrieved by such issue of shares to directors?

Investors approval are obtained through special resolution.

C) Is there any violation of Companies Act or other guidelines?

Comply with Sec 81 and Unlisted Public Companies (Preferential Allotment) Rules, 2003.

D) If so what are the consequences?

The allotment is voidable at the option of the Company and penalty as prescribed U/s 629A becomes applicable.

How do we determine the price or price band at which shares are issued under preferntial allotment basis in an unlisted company.

Dear Dimple

You can go by NAV method....

whether fbt is attracted on the allotment of preferential shares to employees? 

yes, in all its probability this may be considered as ESOP/SWEAT.

"The Finance Act, 2007 changed the taxation of securities issued by an employer to its employees from April 1, 2007 (assessment year 2008-2009), by levying fringe benefit tax (FBT) on the employer in respect of securities, defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956, including Employees’ Stock Options (ESOP), and sweat equity shares, which may be allotted or transferred directly or indirectly to the employees (former or current) free of cost or at concessional rate for consideration other than cash for providing know-how, intellectual property rights or value additions.

The value of the fringe benefit (FB) shall be the fair market value (FMV) of the security or sweat equity shares on the date on which the option vests with the employee, as reduced by the amount actually paid by, or recovered from, the employee in respect of the security or shares. FMV is to be determined as per rule 40C of the Income-tax Rules, 1962 (Rules) notified on October 23, 2007. But, rule 40C of the Rules defines the valuation norms only for listed or unlisted shares and not other securities.

The rate of FBT on the value of such FB is 30% plus surcharge and education thereon"