Interesting query: about issue of shares in a pvt ltd co.
This query is : Resolved
27 June 2013
Hello,
A Pvt Ltd Company exists with Rs.1 lac Capital(1000 Equity shares of Rs.100 each). There are 2 Directors(both brothers) and both of them are the only shareholders of the company with 500 Equity shares each.
They've come up with an idea for a huge project. The idea is so good that a couple of investors are willing to put money in the Company provided they get a stake in the profits(i.e. they do not want to show it as a loan). The fact is that the 2 original promoters/directors/shareholders will contribute their 'idea' whereas 2 new investors will contribute 'money'. The profits/losses shold be shared 1:1:1:1(or something like 25.5:25.5:24.5:24.5) among the 4 people since the original directors wish to claim 51% profits and stake.
Now, what are the different alternatives under the Companies Act to show the same?
A Pvt Ltd Company exists with Rs.1 lac Capital(1000 Equity shares of Rs.100 each). There are 2 Directors(both brothers) and both of them are the only shareholders of the company with 500 Equity shares each.
They've come up with an idea for a huge project. The idea is so good that a couple of investors are willing to put money in the Company provided they get a stake in the profits(i.e. they do not want to show it as a loan). The fact is that the 2 original promoters/directors/shareholders will contribute their 'idea' whereas 2 new investors will contribute 'money'. The profits/losses shold be shared 1:1:1:1(or something like 25.5:25.5:24.5:24.5) among the 4 people since the original directors wish to claim 51% profits and stake.
Now, what are the different alternatives under the Companies Act to show the same?
27 June 2013
you can proportionately increase the authorized capital capital and give share to investor.
27 June 2013
If the new investors invest Rs.2 crore and the original(idea) promoters keep their investment to only Rs.1 lac, it will lead to the new investors holding >99%. But the original investors want a >51% stake.
27 June 2013
The company can issue share free of cost to old promoters.
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27 June 2013
Thanks! Please elaborate! Under which section of the Companies Act and what is this concept of giving free shares to promoters called?
01 August 2024
The situation you describe involves structuring the equity and profit-sharing in a Private Limited Company, where new investors are contributing money and existing promoters are contributing an idea, with the aim of achieving specific profit-sharing ratios. Here’s a detailed explanation of how this can be managed under the Companies Act, 2013, and the relevant concepts:
### **1. Issuing New Shares**
**A. Additional Capital Contribution:**
- **Issuance of New Shares:** The company can issue new shares to the investors to raise capital. If the promoters want to retain a majority stake, they will need to negotiate the proportion of shares issued to new investors so that the existing promoters can maintain their desired percentage.
- **Pre-emption Rights:** Existing shareholders usually have the right to purchase additional shares before they are offered to new investors (right of first refusal). This can be waived if the promoters agree to let new investors come in with their capital.
**B. Free Shares or Sweat Equity:**
- **Sweat Equity:** If the promoters contribute only ideas or services, they might receive shares as compensation. Under Section 54 of the Companies Act, 2013, sweat equity shares can be issued to directors or employees as compensation for their contributions.
- **Conditions:** Sweat equity shares must be issued in accordance with the rules prescribed by the Companies Act and require approval by the board and shareholders.
- **Valuation:** The valuation of sweat equity shares should be done in accordance with the regulations laid down by the Act.
### **2. Structuring Profit Sharing**
**A. Profit Sharing Agreements:**
- **Shareholders Agreement:** The profit-sharing ratio can be agreed upon in a shareholders' agreement, irrespective of the equity distribution. This agreement is a private document that details how profits and losses will be shared among shareholders.
- **Dividend Declaration:** The actual dividends paid to shareholders can reflect the agreed profit-sharing ratio, which may differ from the equity holding.
**B. Non-Equity Compensation:**
- **Profit-Sharing Arrangements:** Alternatively, the company can enter into profit-sharing or profit-participation arrangements with new investors that do not directly impact the equity distribution but align with the agreed profit-sharing ratios.
### **3. Share Allocation and Control**
**A. Convertible Instruments:**
- **Preference Shares:** To avoid diluting the control of the promoters, the company can issue preference shares to investors. Preference shares often do not carry voting rights and may have a fixed dividend.
- **Convertible Debentures:** Another option is issuing convertible debentures, which can be converted into equity shares at a later date, based on predetermined terms.
**B. Creating Different Classes of Shares:**
- **Class A and Class B Shares:** The company can issue different classes of shares with varying rights attached, such as voting rights or dividend rights, to balance the control and profit-sharing according to the agreement.
### **4. Legal Framework**
**A. Companies Act, 2013:**
- **Section 62:** Deals with the issue of shares, including rights issue, bonus issue, and preferential issue.
- **Section 54:** Pertains to sweat equity shares and the conditions under which they can be issued.
- **Section 179:** Outlines the powers of the board, including the authority to issue shares.
**B. Shareholders Agreement:**
- A comprehensive shareholders’ agreement should outline the specific profit-sharing ratios, rights, and obligations of each shareholder. This document should be drafted carefully to reflect the agreed terms between the original promoters and the new investors.
### **Summary:**
To achieve the desired outcome:
1. **Issue New Shares:** Determine the amount of shares to be issued to the new investors and at what price.
2. **Sweat Equity:** Consider issuing sweat equity shares to the original promoters based on their contribution of ideas.
3. **Profit-Sharing Agreement:** Draft a shareholders' agreement to detail the profit-sharing ratios that differ from equity stakes.
4. **Alternative Instruments:** Explore convertible debentures or preference shares to manage control and capital requirements.
Consulting with a legal advisor or company secretary is recommended to ensure compliance with the Companies Act, 2013, and to draft appropriate agreements that reflect the intentions of all parties involved.
### **1. Issuing New Shares**
**A. Additional Capital Contribution:**
- **Issuance of New Shares:** The company can issue new shares to the investors to raise capital. If the promoters want to retain a majority stake, they will need to negotiate the proportion of shares issued to new investors so that the existing promoters can maintain their desired percentage.
- **Pre-emption Rights:** Existing shareholders usually have the right to purchase additional shares before they are offered to new investors (right of first refusal). This can be waived if the promoters agree to let new investors come in with their capital.
**B. Free Shares or Sweat Equity:**
- **Sweat Equity:** If the promoters contribute only ideas or services, they might receive shares as compensation. Under Section 54 of the Companies Act, 2013, sweat equity shares can be issued to directors or employees as compensation for their contributions.
- **Conditions:** Sweat equity shares must be issued in accordance with the rules prescribed by the Companies Act and require approval by the board and shareholders.
- **Valuation:** The valuation of sweat equity shares should be done in accordance with the regulations laid down by the Act.
### **2. Structuring Profit Sharing**
**A. Profit Sharing Agreements:**
- **Shareholders Agreement:** The profit-sharing ratio can be agreed upon in a shareholders' agreement, irrespective of the equity distribution. This agreement is a private document that details how profits and losses will be shared among shareholders.
- **Dividend Declaration:** The actual dividends paid to shareholders can reflect the agreed profit-sharing ratio, which may differ from the equity holding.
**B. Non-Equity Compensation:**
- **Profit-Sharing Arrangements:** Alternatively, the company can enter into profit-sharing or profit-participation arrangements with new investors that do not directly impact the equity distribution but align with the agreed profit-sharing ratios.
### **3. Share Allocation and Control**
**A. Convertible Instruments:**
- **Preference Shares:** To avoid diluting the control of the promoters, the company can issue preference shares to investors. Preference shares often do not carry voting rights and may have a fixed dividend.
- **Convertible Debentures:** Another option is issuing convertible debentures, which can be converted into equity shares at a later date, based on predetermined terms.
**B. Creating Different Classes of Shares:**
- **Class A and Class B Shares:** The company can issue different classes of shares with varying rights attached, such as voting rights or dividend rights, to balance the control and profit-sharing according to the agreement.
### **4. Legal Framework**
**A. Companies Act, 2013:**
- **Section 62:** Deals with the issue of shares, including rights issue, bonus issue, and preferential issue.
- **Section 54:** Pertains to sweat equity shares and the conditions under which they can be issued.
- **Section 179:** Outlines the powers of the board, including the authority to issue shares.
**B. Shareholders Agreement:**
- A comprehensive shareholders’ agreement should outline the specific profit-sharing ratios, rights, and obligations of each shareholder. This document should be drafted carefully to reflect the agreed terms between the original promoters and the new investors.
### **Summary:**
To achieve the desired outcome:
1. **Issue New Shares:** Determine the amount of shares to be issued to the new investors and at what price.
2. **Sweat Equity:** Consider issuing sweat equity shares to the original promoters based on their contribution of ideas.
3. **Profit-Sharing Agreement:** Draft a shareholders' agreement to detail the profit-sharing ratios that differ from equity stakes.
4. **Alternative Instruments:** Explore convertible debentures or preference shares to manage control and capital requirements.
Consulting with a legal advisor or company secretary is recommended to ensure compliance with the Companies Act, 2013, and to draft appropriate agreements that reflect the intentions of all parties involved.
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