Issue of Shares for Consideration other than Cash (ISCOC)
Neeraj Agarwal
I Neeraj Agarwal, am a Fellow Member of ICAI, practicing under the banner of M/s AAN & Associates LLP, a firm based out of Banglore Mumbai.
I am also registered under Insolvency and Bankruptcy Board of India as a Registered Valuer for valuation of Security or Financial Assets (Passed in Feb 2020)
I am also holding Bachelor of Commerce (B. Com) degree from Calcutta University (Passed in 2011).
I have corporate working experience in Wipro. After working in Wipro for a short period I started my practice in late 2013 and have been in practice so far for the last 10 years. I have also completed a Certificate Course by ICAI on IND-AS in 2020. I have also cleared Social Auditor Exam conducted by NISM.
I have been inducted as a Special Invitee to the Sustainability Reporting Standard Board, ICAI for the FY 2023-24.
Introduction:
Before the invention of money, a concept known as the Barter System existed worldwide. In this concept, people would exchange services and goods with each other. ISCOC is a much more complex system than the Barter system but, in essence, can be compared to it as it also entails the exchange of goods/services for shares and there is an absence of monetary transactions.
What is consideration other than cash?
In layman’s terms, ISCOC refers to an arrangement in which the issuing entity issues shares, and in exchange for that issue, the company does not receive payment in cash or through banking transactions but via non-cash modes. For example, instead of cash payment, a land holding (whose value can be economically measured) can be given to the company. In this case, the owner of the land will transfer his landholding to the issuing company against the issue of equity capital. Thus, the company does not receive share application money; instead, it acquires a property.
How is it different from no consideration?
As the term itself suggests, “no consideration” refers to giving nothing in return for something and hence there is no quid pro quo in such transactions. One example of such type of transaction is the issue of Bonus Shares by the company.
“No Consideration” is different from “Consideration other than cash” as in the latter case there is an existence of a consideration, it is just that the consideration exists in a form that is not cash.
Rules to follow under the Companies Act 2013:
In the case of ISCOC, the shares can only be issued using private placement as governed by section 42 read with section 62 of The Companies Act, 2013 & Companies (Share Capital and Debentures) Rules, 2014. Private placement, as the name suggests, refers to offering shares to a selected group of individuals, rather than to the public in general. Certain compliances must be fulfilled for the execution of the issue. The placement shall be authorized by Articles of Association (AoA). If not, AoA needs to be amended via Special Resolution (3/4th of total shareholders must agree) and must be passed in the General Meeting. The allotment process then has to be completed by E-filing Form PAS-3.
Requirements of Valuations:
Valuation of Equity Share Capital is required to be done by a Registered Valuer (Class Securities and Financial Assets) for fixing the fair value pricing of shares to be issued.
Section 247 defines a Registered Valuer as a person having the requisite qualifications and experience, registered as a valuer and being a member of an organization recognized, in such manner, on such terms and conditions [as may be prescribed] and appointed by the audit committee or in its absence by the Board of Directors of that company. Currently, individuals who have passed the examinations conducted by the Insolvency & Bankruptcy Board of India (IBBI) for Valuations are eligible for such valuations.
Additionally, the value of the consideration (eg, land, machinery, etc) which is being given will also need to be determined in monetary terms. In cases where the consideration is Land or Building the market value of these has to be determined by a Registered Valuer(Class Land & Building) while in case the consideration is in the form of Plant and Machinery then the expertise of a Registered Valuer(Class Plant and Machinery) has to be sought
Such valuations help in determining the number of shares to be issued in exchange for consideration received.
Simply Put: Market Value or Fair Value of Consideration Received/ Fair Value of Equity Shares
= No of Shares to be issued
The Fair Value of shares can be determined at a premium, discount, or par by the valuer.
When did this concept come into use?
Some of the common cases when consideration other than cash is used:
a) Amalgamation/Merger: This is the most common example of ISCOC. In such cases, the shareholders of the company that is getting merged or amalgamated are issued the shares of the resulting company in a pre-determined ratio.
b) Financial crunch: In times of liquidity crunch this arrangement can be easily used in order to avoid cash outflow for purchases of assets or availing of services. The company with the consent of the vendor can issue them shares instead of paying them cash for the assets purchased from them or for the services availed from them.
c) Joint Ventures (JV): Sometimes when a new JV is formed one or more parties to the Joint Venture may not invest any funds instead they may bring in some technical expertise or some assets against which they may be issued equity of the Joint Venture.
In the case of Foreign Vendor
If the seller of assets or provider of service is a foreign individual or entity then FEMA regulations also come into play. Filing of Foreign currency Gross provisional Return (FC-GPR) is to be filed for allotment of capital instruments by an Indian Company to a foreign individual/entity. Also, the first things to be seen are the percentage of holding allowed by foreigners in the industry in which the issuing company is operating and whether the allotment shall be done via “Automatic Route or Approval Route”.
To fulfill FEMA guidelines, a valuation report must be prepared by a practicing Chartered Accountant/Cost Accountant or a Merchant Banker.
Thus, read with the Requirements of Valuation paragraph it can be inferred that in the case of foreign vendors, there shall be at least two valuation reports required one under Companies Act rules by a Registered Valuer and one under FEMA rules as mentioned above.
Conclusion
This is an innovative way for companies experiencing a cash crunch to barter their shares for capital goods or services. The startup universe is always on the lookout for new and creative ways to save liquid cash, especially in the initial phase of the business, in all these cases ISCOC proves useful.
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