A company (including Private company) having a share capital can increase its subscribed capital by issue of further shares to persons who are holders of equity shares of the company in proportion to the paid up share capital on those shares, by sending a letter of offer.
Conditions:
1. The offer shall be made by notice specifying the number of shares offered and limiting a timenot being less than 15 days and not exceeding 30 days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;
2. The notice shall be dispatched through registered post or speed post or through electronic mode to all the existing shareholders at least 3 days before the opening of the issue.
3. The offer shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the letter of offer shall contain a statement of this right;
4. After the expiry of the time specified in the letter of offer, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not disadvantageous to the shareholders and the company;
It shall not apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company:
The terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.
A company having a share capital may issue further shares to employees under a scheme ofemployees’ stock option, subject to special resolution passed by company and subject to such conditions as prescribed under Rule 12 of the Companies (Share Capital and Debentures)Rules,2014;
Issue of Employee stock options:
According to Section 2(37) of Companies Act,2013, “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;
A company, other than a listed company, which is not required to comply with SEBI Employee Stock Option Scheme Guidelines shall not offer shares to its employees under a scheme of employees’ stock option [hereinafter referred to as “Employees Stock Option Scheme” (ESOS)], unless it complies with the following requirements, namely:-
Approval by shareholders:
The issue of Employees Stock Option Scheme has been approved by the shareholders of the company by passing a special resolution.
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 of a subsidiary, in India or outside India, or of a holding company of the company or of an associate company but does not include-
(i) an employee who is a promoter or a person belonging to the promoter group; or
(ii) 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.
Disclosure in Notice:
The company shall make the following disclosures in the explanatory statement annexed to the notice for passing of the resolution-
a. the total number of stock options to be granted;
b. identification of classes of employees entitled to participate in the Employees Stock Option Scheme;
c. the appraisal process for determining the eligibility of employees to the Employees Stock Option Scheme;
d. the requirements of vesting and period of vesting;
e. the maximum period within which the options shall be vested;
f. the exercise price or the formula for arriving at the same;
g. the exercise period and process of exercise;
h. the Lock-in period, if any ;
i. the maximum number of options to be granted per employee and in aggregate
j. the method which the company shall use to value its options;
k. the conditions under which option vested in employees may lapse e.g. in case of termination of employment for misconduct;
l. the specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of employee; and
m. a statement to the effect that the company shall comply with the applicable accounting standards .
Exercise Price:
The companies granting option to its employees pursuant to Employees Stock Option Scheme will have the freedom to determine the exercise price in conformity with the applicable accounting policies, if any
Obtaining Separate Resolution by the Company:
The approval of shareholders by way of separate resolution shall be obtained by the company in case of-
a. grant of option to employees of subsidiary or holding company; or
b. grant of option to identified employees, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant of option.
Variation in terms of ESOS:
a. The company may by special resolution, vary the terms of Employees Stock Option Scheme not yet exercised by the employees provided such variation is not prejudicial to the interests of the option holders.
b. The notice for passing special resolution for variation of terms of Employees Stock Option Scheme shall disclose full of the variation, the rationale there for, and the details of the employees who are beneficiaries of such variation.
Period of ESOS:
a. There shall be a minimum period of one year between the grant of options and vesting of option. In a case where options are granted by a company under its Employees Stock Option Scheme in lieu of options held by the same person under an Employees Stock Option Scheme in another company, which has merged or amalgamated with the first mentioned company, the period during which the options granted by the merging or amalgamating company were held by him shall be adjusted against the minimum vesting period required under this clause;
b. The company shall have the freedom to specify the lock-in period for the shares issued pursuant to exercise of option.
c. The Employees shall not have right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to them, till shares are issued on exercise of option.
Forfeiture/Refund of amount by the Company:
The amount, if any, payable by the employees, at the time of grant of option-
(a) may be forfeited by the company if the option is not exercised by the employees within the exercise period; or
(b) the amount may be refunded to the employees if the options are not vested due to non-fulfilment of conditions relating to vesting of option as per the Employees Stock Option Scheme.
Status of ESOS:
a. The option granted to employees shall not be transferable to any other person
b. The option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.
c. In the event of the death of employee while in employment, all the options granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.
d. No person other than the employees to whom the option is granted shall be entitled to exercise the option.
e. In case the employee suffers a permanent incapacity while in employment, all the options granted to him as on the date of permanent incapacitation, shall vest in him on that day.
f. In the event of resignation or termination of employment, all options not vested in the employee as on that day shall expire. However, the employee can exercise the options granted to him which are vested within the period specified in this behalf, subject to the terms and conditions under the scheme granting such options as approved by the Board.
Disclosure in Boards’ Report:
The Board of directors, shall, inter alia, disclose in the Directors’ Report for the year, the following details of the Employees Stock Option Scheme:
- options granted;
- options vested;
- options exercised;
- the total number of shares arising as a result of exercise of option;
- options lapsed;
- the exercise price;
- variation of terms of options;
- money realized by exercise of options;
- total number of options in force;
- employee wise details of options granted to;-
(i) KMP;
(ii) any other employee who receives a grant of options in any one year of option amounting to 5% or more of options granted during that year
(iii) identified employees who were granted option, during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant;
Register of ESOS:
a. The company shall maintain a Register of Employee Stock Options in Form No. SH.6 and shall forthwith enter therein the particulars of option granted under section 62(1)(b)
b. The Register of Employee Stock Options shall be maintained at the registered office of the company or such other place as the Board may decide.
c. The entries in the register shall be authenticated by the company secretary of the company or by any other person authorized by the Board for the purpose.
SEBI Regulations:
If the equity shares of the company are listed on a recognized stock exchange, the Employees Stock Option Scheme shall be issued, in accordance with the regulations made by the SEBI in this behalf.
Section 62 of the Companies Act,2013 deals with the Further Issue of share capital to Employees under Employee Stock Options Scheme and to any persons on preferential basis. In my previous article (Part –I), I have discussed about the Issue of shares to the employees under Employee Stock Options Scheme (ESOS).
Now in this article (Part-II), I am going to discuss about the Issue of shares on preferential basis.
A company having a share capital may issue further shares to any persons, if it is authorised by a special resolution,, 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 prescribed under Rule 13 of the Companies (Share Capital and Debentures)Rules,2014
Issue of Shares on Preferential basis:
For the purposes of section 62(1)(c), if authorized by a special resolution passed in a general meeting, shares may be issued by any company in any manner whatsoever including by way of a preferential offer, and such issue on preferential basis should also comply with conditions laid down in section 42 of the Act.(Private Placement)
The price of shares to be issued on a preferential basis by a listed company shall not be required to be determined by the valuation report of a registered valuer.
‘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;
"shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.
Preferential offer of shares or other securities:
Listed Company
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Unlisted Company
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The preferential offer of shares or other securities shall be made in accordance with theprovisions of the Act & rules and regulations made by the Securities and Exchange Board
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The preferential offer of shares or other securities shall be made in accordance with the provisions of the Act and rules.
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Conditions:
Authorised by AoA:
The issue is authorized by its articles of association;
Authorised by Special Resolution:
The issue has been authorized by a special resolution of the members;
Fully Paid up:
The securities allotted by way of preferential offer shall be made fully paid up at the time of their allotment.
Disclosure in notice:
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 KMP 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 in the following format-
S.No
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Category
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Pre Issue
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Post Issue
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No. of
Shares held
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% of share holding
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No. of
Shares held
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% of share holding
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A
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Promoters’ holding
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1
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Indian :
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Individual
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Bodies Corporate
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Sub total
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2
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Foreign Promoters
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Sub total (A)
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B
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Non-Promoters’ holding
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1
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Institutional Investors
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2
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Non-Institution:
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Private Corporate Bodies
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Directors and Relatives
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Indian Public
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Others (Including NRIs)
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Sub Total(B)
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GRAND TOTAL
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Period of Preferential allotment:
The allotment of securities on a preferential basis made pursuant to the special resolution passed shall be completed within a period of 12months from the date of passing of the special resolution.
If the allotment of securities is not completed within twelve months from the date of passing of the special resolution, another special resolution shall be passed for the company to complete such allotment thereafter.
Share Price determined by valuation report:
The price of the shares or other securities to be issued on a preferential basis, either for cash or for consideration other than cash, shall be determined on the basis of valuation report of a registered valuer.
If convertible securities are offered on a preferential basis with an option to apply for and get equity shares allotted, the price of the resultant shares shall be determined beforehand on the basis of a valuation report of a registered valuer and also complied with the provisions of section 62 of the Act.
Preferential offer for consideration other than cash:
If shares or other securities are to be allotted for consideration other than cash, the valuation of such consideration shall be done by a registered valuer who shall submit a valuation report to the company giving justification for the valuation
If the preferential offer of shares is made for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company-
Non-Cash Consideration
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Treatment
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It takes the form of a depreciable or amortizable asset
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It shall be carried to the balance sheet of the company in accordance with the accounting standards
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If it is not applicable
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It shall be expensed as provided in the accounting standards.
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