Introduction
Section 58 of the Income Tax Act pertains to the concept of “Preferential Allotment” of shares by companies to specific entities or persons. This section outlines the rules and regulations governing preferential allotment of shares, including the conditions for the issuance of such shares, the price at which they can be issued, and the procedure for reporting such allotments to the authorities. In this blog, we will discuss the key aspects of Section 58 of the Income Tax Act in detail, with the following headings:
Overview of Section 58
Section 58 of the Income Tax Act defines the provisions for preferential allotment of shares by companies. According to this section, a company can issue shares to a specific group of people or entities, such as existing shareholders, promoters, employees, or other strategic investors. However, such allotment must comply with the conditions and procedures specified under this section. The primary objective of this section is to prevent any misuse of preferential allotment by companies and to ensure transparency in the issuance of shares.
Conditions for Preferential Allotment
Section 58 specifies certain conditions that must be fulfilled by a company before it can issue shares through preferential allotment. These conditions are:
a) The company must pass a resolution authorizing the preferential allotment of shares. The resolution must specify the details of the shares to be issued, such as the number of shares, the face value of each share, and the amount to be paid for each share.
b) The shares must be issued to a select group of persons or entities as specified in the resolution. The company cannot issue shares to the public through preferential allotment.
c) The allotment of shares must be made within 12 months from the date of passing of the resolution authorizing the preferential allotment. If the shares are not allotted within this period, the authorization will expire.
d) The company must file a return of allotment with the Registrar of Companies within 30 days of the allotment of shares. The return must contain the details of the allotment, such as the number of shares allotted, the names of the allottees, and the amount paid for each share.
Price of Preferential Allotment
The price at which shares can be issued through preferential allotment is specified under Section 62 of the Companies Act, 2013. According to this section, the price of shares cannot be less than the “fair market value” of the shares. The fair market value is the value that a willing buyer would pay to a willing seller in an arm’s length transaction. If the shares are listed on a recognized stock exchange, the fair market value is the average of the opening and closing prices of the shares on the date of the resolution authorizing the preferential allotment.
Procedure for Reporting Preferential Allotment
As mentioned earlier, a company must file a return of allotment with the Registrar of Companies within 30 days of the allotment of shares. The return must be filed in Form PAS-3, which contains the following information:
a) The name of the company
b) The date of the resolution authorizing the preferential allotment
c) The details of the shares allotted, such as the number of shares, the face value of each share, and the amount paid for each share
d) The names of the allottees
e) The PAN or Aadhaar number of the allottees
f) The date of allotment
Tax Implications of Preferential Allotment
Preferential allotment of shares can have tax implications for both the company and the allottees. The company must pay stamp duty on the allotment of shares, which is based on the value of the shares issued. The allottees must also pay tax on any gains they make from the sale of the shares. If the shares are held for more than 12 months, the gains will be considered long-term capital gains and will be taxed at a lower rate. However, if the shares are held for less than 12 months, the gains will be considered short-term capital gains and will be taxed at the normal tax rate applicable to the allottee.
In addition to the provisions outlined in Section 58 of the Income Tax Act, companies must also comply with the provisions of the Companies Act, 2013, which governs the issuance of shares. The Companies Act specifies additional requirements that companies must fulfill before issuing shares through preferential allotment, such as obtaining the approval of the shareholders, appointing a valuer to determine the fair market value of the shares, and ensuring that the allotment is made in compliance with the rules and regulations specified under the Act.
Preferential allotment of shares is a common practice among companies, especially those seeking to raise capital for expansion or investment. By issuing shares to a select group of investors, companies can raise capital without diluting the ownership of existing shareholders or resorting to public offerings, which can be time-consuming and expensive. However, it is important for companies to follow the rules and regulations governing preferential allotment to avoid any legal or tax implications.
Conclusion
Section 58 of the Income Tax Act is an important provision that governs the preferential allotment of shares by companies. This provision aims to ensure transparency and prevent misuse of the issuance of shares. Companies must comply with the conditions specified under this section, such as passing a resolution authorizing the allotment of shares, issuing shares to a select group of persons or entities, and reporting the allotment of shares to the Registrar of Companies. Allottees must also be aware of the tax implications of preferential allotment, including the payment of stamp duty by the company and the taxation of any gains made from the sale of shares. Overall, Section 58 plays a crucial role in regulating the issuance of shares by companies and protecting the interests of all stakeholders involved.
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Frequently Asked Questions (FAQs)
- What is Section 58 of the Income Tax Act?
Section 58 of the Income Tax Act provides guidelines for the preferential allotment of shares by companies.
2. What is preferential allotment?
Preferential allotment refers to the issuance of shares by a company to a select group of investors at a price that is lower than the market price.
3. What are the conditions for preferential allotment under Section 58?
Companies must comply with various conditions, such as passing a resolution authorizing the allotment of shares, issuing shares to a select group of persons or entities, and reporting the allotment of shares to the Registrar of Companies.
4. Who can be allotted shares through preferential allotment?
Shares can be allotted to a select group of persons or entities, such as existing shareholders, promoters, employees, or strategic investors.
5. What is the role of the Registrar of Companies in preferential allotment?
Companies must file the necessary returns with the Registrar of Companies to report the allotment of shares and ensure transparency.
6. What is the impact of preferential allotment on existing shareholders?
Preferential allotment can dilute the ownership of existing shareholders if the company issues a large number of shares.
7. What is the tax implication of preferential allotment?
Companies must pay stamp duty on the allotment of shares, and allottees must pay tax on any gains made from the sale of shares.
8. How does the Companies Act, 2013, regulate preferential allotment?
The Companies Act, 2013, specifies additional requirements that companies must fulfill before issuing shares through preferential allotment, such as obtaining shareholder approval and appointing a valuer to determine the fair market value of the shares.
9. Can companies issue shares through preferential allotment without complying with Section 58?
No, companies must comply with the conditions specified under Section 58 to issue shares through preferential allotment.
10. What is the objective of Section 58 of the Income Tax Act?
The objective of Section 58 is to ensure transparency and prevent misuse of the issuance of shares by companies.
