Acquiring Company Shares in India – Buying MSME Stake

Investors can acquire stake in a company or a MSME in India by buying equity shares to enter established business.
micro entity in India

Introduction

Investors can acquire stake in a company or a MSME in India by buying equity shares to enter established business. Indian government has announced Atmanirbhar Bharat Abhiyan Economic Package for MSMEs that makes them an attractive business vehicle for investors exploring Foreign Direct Investments in India.

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Patent Protection for MSMEs

The Micro, Small and Medium Enterprises (MSMEs) in India get special rebate in the official fee for filing patents in India. This is helpful for MSMEs to develop an innovative portfolio of products and services. Patents provide a significant advantage to MSMEs in the market as generic businesses without any patents find it tough to compete in market.

Equity Shares in India

The most favorable business structure in India is a private limited company that is limited by equity shares. Any company that is eligible as per applicable criteria can apply for MSME registration in India. Equity shares are issued in India, so a businessman or a representative can grow his business and offer the benefits of the company with its shareholders through profits and reward. An equity share, ordinarily referred to as ordinary share also represents the form of fragmentary or part possession, in which a shareholder, as a partial proprietor, embraces the maximum entrepreneurial risk associated with a business venture. The holders of such shares are individuals of the company known as the shareholders, and have voting rights.

Features of Equity Shares

For a MSME or a private limited company, the features of equity shares include various aspects, such as, they are permanent in nature, equity shareholders are the real proprietors of the company and they bear the higher risk, equity shares are transferrable, and, responsibility of the equity shares can be moved with or without consideration to other person. Also, the dividend payable to equity shareholders is an appropriation of profit. The liability of equity shareholders is restricted to the degree of their venture or investment.

Types of Equity Shares

A New Issue occurs when a company issues a planned inviting the general public to buy the shares. For the most part, if there should arise an occurrence of new issues, money is gathered by the company in more than one instalment, known as allotment and calls. The plan contains the insights about the date of payment and amount of money payable on such allotment and calls. A company can offer to the public up to its authorized capital. Right issue requires the filing of prospectus with the Registrar of Companies and with the Securities and Exchange Board of India (SEBI) through qualified registered merchant bankers.

Bonus Issue relates to bonus in the general sense, which means getting something extra notwithstanding typical. In business, bonus shares are the shares given free of expense, by a company to its current investors. As per SEBI guidelines, if a company has adequate benefits/holds in order to capitalize the benefits/saves. Bonus shares can be given only if the Article of Association of the company licenses it to do as such.

From the company’s perspective, the rewards given do not involve any outflow of cash. Thereby, it would not affect the liquidity position of the company. Whereas, Shareholders gets bonus or rewards free of cost and their stake in the company also increases.

As a disadvantage of bonus shares, the market price of shares of the company reduces when issue of bonus shares decreases. Whereas, the bonus shares reduces the earnings per shares.

Rights Issue is defined in Section 62 of the Companies Act, 2013. Rights issue includes the following issue of shares by an already existing company to its existing shareholders in fraction to their holding. Right shares can be given by the company only if the Article of Association of the company allows or gives license to.

Rights shares are overall offered to the existing shareholders at a price which is below the current market price, i.e., at a concessional rate, and they have the options either to exercise the right or sell the right to another person and it is governed by the guidelines of the SEBI and the central government.

Rights issue do not affect the controlling power of existing shareholders. Floatation costs, brokerage and commission expenditures are not acquired by the company unlike in the public affair. Shareholders get some monetary benefits as shares are issued to them at concessional rates.

However, if shareholders are unable to exercise his rights within the required time period, their wealth will decline. The company loses cash as shares are issued at concessional rate.

Sweat Issue is another type, wherein the objective of sweat issue to recollect the intellectual property and overall knowledge of the company. Sweat issue can be made if it is sanctioned in a general meeting by a special resolution. It is also administered by Issue of Sweet Equity Regulations, 2002, of the SEBI.

Sweat issue cannot be transferred within 3 years from the date of their allotment. It does not involve floatation costs and brokerage. However, as sweat equity shares are delivered at concessional rates, the company loses monetarily.

Stocks and Equity

Stocks and equity are same, as both speak to the possession in a company and are exchanged on the stock exchanges. Equity by definition implies responsibility of assets for after the obligation is satisfied. Stock for the most part alludes to exchanged value. Stock is the type of equity that speaks to value investment. At the point when you purchase a stock, one anticipates returns as profit. Equity can likewise stocks or shares. In stock market parlance, equity and stocks are frequently used interchangeably.

Acquisition of Equity Shares in India

Here are some of the most important factors to be aware of:

Exercised shares: In an acquisition, the exercised shares get paid out, either in cash or transformed into common shares of the acquiring company.

Vested options: Any vested shares that cash out net of the strike price, could mean the gain is small if the acquirement price is close to the exercise price in the grant.

Unvested options: Companies have shares which are keen to creating new option grants for employees at acquired companies. They can be converted to cash and can be paid out over time and unvested options could get annulled also.

Closing: In order to get new cash or options, a deal needs to be publicized initially and then the transaction has to close. A supervisory body has to approve the transaction.

Vesting: Share vesting means an employee (or founder) can be rewarded for their effort by gaining company shares over time.

Acceleration: The word “stock acceleration” mentions the manifestation of an event, after which certain stock (or stock options) that is subject to vesting schedules will become partly or completely vested (or available).

Escrow: A share of the cash or stock that one gets for their mutual shares and vested options may be held momentarily in a separate account once a transaction closes, only to cover any outstanding issues.

Holdback: This occurs when part of the vested value is held back, though this is usually just for founders or executives. Holdbacks often have their own vesting agendas and specific terms.

Triggers: If one is a senior employee, executive, or founder, they may receive different terms and possible deal-closing bonuses.

Single trigger: This generally refers to all the stock vests upon “change of control” (basically an acquisition or IPO) at the company.

Double trigger: This would mean all the stock vests after change of control and upon termination from the new company.

Retention: Before deals close, companies naturally go through a list of all employees and determine who they will be able to retain. Some administrative job purposes can be duplicative of the acquiring company’s operations and capacity.

Acquisition Scenarios

Acquired for cash: An acquiring company purchases the acquired for cash and pays out money to each security holder based upon an agreed upon assessment.

Acquired for stock: The stock of an acquired company is efficiently operated in for stock in the acquiring company at an agreed upon ratio.

Acquired for both stock and cash: A portion of equity stakes are cashed out and the remainder turns into stocks or options.

Acquired for lower than previous valuation: This might only happen when an acquired company has a lot of outstanding debt and/ or fails to live up to its assessment.

Conclusion

It’s important to be aware of the equity implications of any potential exit, and the best time for insight often comes when one joins a company:

Liquidation Preference: When considering an offer from a company, it is important to ask about liquidation preferences, meaning, how much the member of the company would get.

Exercising early and tax benefits: There can be tax benefits to exercising early. Exercising early can set you up for more favourable tax treatment, depending on the type of stock and when it was issued.

If the acquiring company is public: Public companies have different restrictions than private companies, like trading windows and regulations that may result in not being able to sell right away.

Our team of advanced patent attorneys assists clients with patent searches, drafting patent applications, and patent (intellectual property) agreements, including licensing and non-disclosure agreements.

Advocate Rahul Dev is a Patent Attorney & International Business Lawyer practicing Technology, Intellectual Property & Corporate Laws. He is reachable at rd (at) patentbusinesslawyer (dot) com & @rdpatentlawyer on Twitter.

Quoted in and contributed to 50+ national & international publications (Bloomberg, FirstPost, SwissInfo, Outlook Money, Yahoo News, Times of India, Economic Times, Business Standard, Quartz, Global Legal Post, International Bar Association, LawAsia, BioSpectrum Asia, Digital News Asia, e27, Leaders Speak, Entrepreneur India, VCCircle, AutoTech).

Regularly invited to speak at international & national platforms (conferences, TV channels, seminars, corporate trainings, government workshops) on technology, patents, business strategy, legal developments, leadership & management.

Working closely with patent attorneys along with international law firms with significant experience with lawyers in Asia Pacific providing services to clients in US and Europe. Flagship services include international patent and trademark filingspatent services in India and global patent consulting services.

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