Issue of Shares on Preferential Basis [Section 62(1)(c)]

Conditions for Preferential Issue

1. Authorized by Articles of Association (AOA):

   • The company's AOA must explicitly permit the issuance of shares on a preferential basis. This authorization ensures that the company's foundational documents allow such transactions.

2. Special Resolution in General Meeting:

   • A Special Resolution (SR) must be passed at a General Meeting (GM), requiring at least a 75% majority of shareholders present and voting. This approval is essential to authorize the preferential issue.

3. Completion of Allotment within 12 Months:

   • The company is obligated to complete the allotment of shares within 12 months of passing the Special Resolution. Failure to do so will result in the approval lapsing, necessitating a new SR to proceed.

Procedure for Preferential Issue of Shares

1. Board Meeting and Resolution:

   • The process initiates with a Board Meeting (BM) where the Board of Directors passes a Board Resolution (BR) approving the preferential issue. The BR also calls for a General Meeting to seek shareholders' approval.

2. General Meeting and Special Resolution:

   • A General Meeting (GM) is convened where shareholders vote on the Special Resolution (SR). A three-fourths majority is required for the resolution to pass, enabling the company to proceed with the preferential issue.

3. Filing Form MGT-14:

   • Within 30 days of passing the Special Resolution, the company must file Form MGT-14 with the Registrar of Companies (ROC). This form records the resolution and the details of the preferential issue.

4. Completion of Allotment:

   • The company must complete the allotment of shares within 12 months from the date of the Special Resolution. This is a regulatory requirement to ensure timely compliance with the approved issue.

5. Filing Form PAS-3:

   • After the allotment, Form PAS-3 must be filed with the ROC within 30 days. This form provides the details of the allotment, ensuring that the preferential issue is officially recorded.

Valuation Requirements

According to Sub Rule-3 of Rule-13 of the Companies (Share Capital and Debentures) Rules, 2014, the price of shares or securities issued on a preferential basis must not be less than the price determined by a registered valuer's report.

Changes in Valuation Requirements

Current Requirements:

• The Fair Market Value (FMV) of shares is determined under Rule 11UA(2) of the Income Tax Rules. Companies can use the net asset method or other internationally recognized valuation methods, supported by a Merchant Banker's report.
• Private companies issuing shares have been required to obtain:
  • A valuation report from a Registered Valuer as per the Companies Act.
  • A valuation report from a Merchant Banker as per Income Tax Regulations.

Amendment in Finance Act, 2024:

• The Finance Act, 2024, proposes the removal of Section 56(2)(viib) of the Income Tax Act, effective April 1, 2025. This section, known as Angel Taxation, taxed shares issued by private companies above their FMV.
• Moving forward, the requirement for a Merchant Banker's valuation report will be eliminated. Instead, shares can be issued at any price based solely on a valuation report from a Registered Valuer.

Impact and Benefits:

• Streamlining the Share Issuance Process: This amendment simplifies the process for startups and other private companies by removing the need for dual valuation reports.
• Reduction in Compliance Costs: Companies will experience reduced compliance costs and administrative burdens, making it easier to issue shares.
• Increased Flexibility: Companies will have greater flexibility in pricing their shares based on professional valuations, facilitating more straightforward capital-raising efforts.

This amendment marks a significant shift in regulatory requirements, offering a more efficient and less burdensome framework for private companies in India.

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Article Compiled by:-

~Mayank Garg 

+91 9582627751

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.