Issue of Shares/Convertible Instruments for Consideration Other than Cash

Facts of the Case

1. Entity type: A startup (private company).

2. Initial capitalisation: The promoters initially subscribed to shares at par value (face value, no premium).

3. Subsequent funding round (March 2026): The promoters infused additional capital, along with a new investor, by subscribing to shares at a premium, based on a valuation carried out at that time.

4. Proposed transaction: The company now intends to issue shares to two parties, for consideration other than cash:

• A software vendor: shares to be issued as consideration for services/goods already provided by the vendor to the company.

• An advisor: shares to be issued as consideration for advisory services rendered.

5. Nature of the query: The company is seeking legal, accounting, and tax guidance on this proposed non-cash share issuance to the vendor and the advisor.

6. Assumptions: All parties are Resident; Startup is not DPIIT recognised Startup; AOA permits preferential allotment and headroom in authorised share capital.

Executive Summary

The table below summarises the responses to each query. Detailed analysis, including statutory references, follows in the Legal Analysis section.

Query	Question	Short Answer
Q1	Is it possible to issue shares for consideration other than cash?	Yes, under Section 62(1)(c) of the Companies Act, 2013, subject to special resolution and registered valuer’s report.
Q2	Can shares be issued to the vendor/advisor at the March 2026 valuation?	Yes, subject to re-certification of no material change and independent justification of the non-cash consideration.
Q3	Can a different (including lower) valuation be adopted?	Yes, if independently justified by the Registered Valuer with reference to current FMV.
Q4	Accounting treatment	Expense/Asset debited on accrual basis, Vendor/Advisor account credited; on allotment, Vendor/Advisor account debited to Share Capital and Securities Premium.
Q5	TDS obligations	TDS applies irrespective of cash/kind; Company to fund TDS in cash and recover from vendor/advisor or gross down shares allotted.
Q6	Income-tax implications for recipients	Taxable as Business/Professional Income under Section 26, Income-tax Act, 2025; shortfall in FMV over consideration (beyond ₹50,000) attracts Section 92(2)(m) as Income from Other Sources.

Specific Queries for Opinion

1. Is it possible to issue shares for consideration other than cash?

2. Can the company issue shares to the vendor and the advisor at the same valuation as that adopted during the March 2026 fund raise and record the allotment as being for consideration other than cash?

3. Alternatively, can the company issue the shares at a different (including lower) valuation if supported by a fresh valuation report, or would it be preferable/necessary to adopt the valuation used for the last funding round?

4. What would be the appropriate accounting treatment in the company’s books for such an allotment?

5. Are there any TDS obligations on the company in relation to the issue of shares against non-cash consideration?

6. What would be the income-tax implications for the recipients of the shares?

Legal Analysis

Q1. Is it possible to issue shares for consideration other than cash?

Yes — Under Section 62(1)(c) of the Companies Act, 2013, a company may issue further shares to any person(s) (not limited to existing shareholders or employees) either for cash or for consideration other than cash, provided:

• Special Resolution is passed; and

• Issue price is determined by a Registered Valuer.

True extract of Section 62(1)(c):

“Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered— (c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), 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 the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed.”

Conditions / Procedure on issue of shares for non-cash consideration:

1) Section 53 – Prohibition on Issue at a Discount

• Shares cannot be issued below face value.

• Therefore, the non-cash consideration should not be less than the issue value of the shares.

2) Articles of Association (AOA)

• Under Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, the Articles of Association should authorize the company to issue shares for consideration other than cash.

• If the Articles do not contain such an enabling provision, amendment before the issue is suggestible.

3) Approval by Special Resolution

• Shareholders’ approval via Special Resolution is mandatory.

• Explanatory Statement should justify the non-cash allotment and include/reference the valuation report.

• MGT-14 within the prescribed time should be filed.

4) Registered Valuation Report — required for two separate things:

• The price of the shares being issued; and

• The value of the non-cash consideration itself (i.e., an independent valuation justifying what the services/goods are worth).

5) Private Placement Compliance:

• Provisions of Chapter III (Prospectus and Allotment of Securities) Rules, 2014 should be complied with.

• Issuing PAS-4 (offer letter), Records of PAS-5, and filing PAS-3 after allotment, wherever applicable, should be complied with.

Q2. Can the company issue shares to the vendor and the advisor at the same valuation as that adopted during the March 2026 fund raise and record the allotment as being for consideration other than cash?

Yes. The Company can issue shares to the vendor and the advisor at the same valuation. However, it should be re-certified that there have been no material changes affecting the valuation. Further, the consideration other than cash should also be appropriately justified as per Rule 13(2)(i), Companies (Share Capital and Debentures) Rules, 2014.

For the purpose of valuation of the consideration and obtaining the Special Resolution under the Companies Act [Section 62(1)(c), Companies Act, 2013], a fresh valuation report supporting the transaction would be required [Rule 13(2)(g)/(h), Companies (Share Capital and Debentures) Rules, 2014].

Q3. Alternatively, can the company issue the shares at a different (including lower) valuation if supported by a fresh valuation report, or would it be preferable/necessary to adopt the valuation used for the last funding round?

The variation in valuation (including a lower valuation) should be appropriately justified by the Registered Valuer with reference to the current Fair Market Value (FMV).

Q4. What would be the appropriate accounting treatment in the company’s books for such an allotment?

Entry 1(a) – On receipt of Services/Goods (with GST):

Appropriate Expense/Asset Account should be debited and Vendor/Advisor Account should be credited on an accrual basis.

Expense/Asset A/c	Dr.	XXXXXX
Input GST A/c	Dr.	XXXXXX
To Vendor/Advisor A/c			XXXXXX

Entry 1(b) – On deduction of TDS (if applicable):

Vendor/Advisor A/c	Dr.	XXXXXX
To TDS Payable A/c*			XXXXXX

*Later, TDS should be remitted to the Government depending upon the arrangement reached with the vendor/advisor.

Entry 2 – On issue of Shares:

Vendor/Advisor Account should be debited and Equity Share Capital Account and Securities Premium Account should be credited.

Vendor/Advisor A/c	Dr.	XXXXX
To Share Capital A/c			XXXXX
To Securities Premium Account A/c			XXXXX

Further, TDS/GST/other applicable commercial taxes should be appropriately charged and discharged on an accrual basis, either by the Company or by the Vendor/Advisor, depending upon the arrangement/agreement between the parties.

Q5. Are there any TDS obligations on the company in relation to the issue of shares against non-cash consideration?

TDS, if applicable on the services or goods received, should be appropriately addressed irrespective of whether the transaction is in cash or kind. Since there is no cash flow available for withholding tax, the Company will need to fund the TDS in cash and either:

• Recover the TDS amount from the Advisor/Vendor; or

• Gross down the number of shares allotted to the net-of-tax value while depositing the applicable tax separately.

Accordingly, this practical aspect should be specifically addressed in the agreement.

Q6. What would be the income-tax implications for the recipients of the shares?

For the recipient, the value of shares received would be taxable as Business/Professional Income under Section 26 of the Income-tax Act, 2025, being a benefit arising from business or profession in the year of receipt. The value so taxed would also form the cost of acquisition of the shares for the purpose of computing future Long-Term Capital Gains (LTCG) or Short-Term Capital Gains (STCG).

Further, if the Fair Market Value (FMV) of the shares received exceeds the value of the consideration, the excess value may also attract the provisions of Section 92(2)(m) of the Income-tax Act, 2025, under the head Income from Other Sources (IFOS), where such shortfall exceeds ₹50,000.

Additional Point – Stamp Duty

The issuer should ensure that the applicable stamp duty on the issue of shares is duly paid in accordance with the applicable laws.

Alternative Structuring Option – Share Warrants (with Buyback/Put Option)

Under Company Law

A share warrant, in the present context, would be issued as a convertible instrument/security on a preferential basis, governed by Section 62(1)(c) of the Companies Act, 2013, read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, and processed as a private placement under Section 42 of the Act read with the Companies (Prospectus and Allotment of Securities) Rules, 2014.

The formal “share warrant” procedure under SEBI (ICDR) is meant for listed companies. For an unlisted private company, a share warrant would in substance be a contractual convertible right/option to subscribe to equity shares, processed through the Section 62(1)(c)/Rule 13 preferential allotment framework applicable to convertible securities generally.

Pricing:

Rule 13(2)(h) of the Companies (Share Capital and Debentures) Rules, 2014 governs pricing of convertible instruments. The price, or the formula for arriving at the price, of the equity shares allotted on conversion may be fixed either upfront at the time of offer/issuance, or at a later stage, provided such determination is made not earlier than thirty days prior to conversion, based on a valuation report of a registered valuer not older than sixty days as on the date of conversion. This provision is not silent on warrant pricing; it prescribes the specific window and valuation basis within which the conversion price must be fixed.

All other procedural requirements under Rule 13, being special resolution, explanatory statement disclosures under Rule 13(2)(d)(xii) (for non-cash consideration), and completion of allotment within the 12-month validity of the special resolution, apply equally to the underlying equity shares at the time of conversion.

Under Income-tax Law

A share warrant falls within the definition of “securities” under Section 2(h) of the Securities Contracts (Regulation) Act, 1956, being a right or interest in securities and a derivative deriving value from the underlying equity share. It is accordingly treated as a “security” for fair market value determination under the Income-tax Act, 2025.

A warrant is not an equity share, and this governs the applicable valuation route. Under Rule 57, unquoted equity shares are valued under the prescribed net asset value formula, whereas unquoted securities other than equity shares (the category into which a warrant falls) are valued at open market price, supported by a report from a merchant banker or accountant. The approach is thus similar to valuation of any other security, but distinct from the specific formula for equity shares.

Conclusion

Receipt of a warrant as consideration for services rendered is itself the taxable event, analogous to direct issue of equity shares, since it confers “definiteness in receipt of consideration” akin to accrual of a trade receivable or receipt of Cash. This is unlike a genuine arm’s length cash purchase of a warrant at fair value, which would not give rise to income on either side; that is not the structure under consideration.

Once such consideration is offered to tax as business income, any subsequent diminution in value is referable to the shares/warrants as a capital asset, and any loss on eventual transfer would be a capital loss, not a business loss. A contractual buy-back arrangement or put option in the shareholders’ agreement can provide a defined exit and ensure a transfer event occurs, without which no loss can be crystallised or claimed, though this does not mitigate the tax cost already incurred on receipt or alter the character of the loss.

A warrant, being an option rather than the underlying share, can genuinely be priced lower than the fair market value of the underlying equity shares, consistent with how warrants function in practice. Any such pricing must be independently justified through a proper valuation under Rule 57 (open market value, supported by a merchant banker’s or accountant’s report), rather than arbitrarily assigned.