Advisory Shares by Private Limited Company in India

Advisory Shares Overview 

Advisory shares in India let companies bring in top advisors without upfront costs. This blog explains what advisory shares are, how they work in India, their legal context, and the benefits they offer.

What Are Advisory Shares?

• Advisory shares are given to advisors instead of cash payments for their services.
• They can be either equity shares or more commonly, Compulsorily Convertible Preference Shares (CCPS).
• CCPS usually don’t have voting rights or other perks that equity shareholders enjoy.
• The Companies Act, 2013 doesn’t specifically mention advisory shares, so they follow corporate law principles and company-advisor agreements.

Benefits of Advisory Shares

1. Cost-Effective Compensation: Startups can save cash by compensating advisors with shares.
2. Attract and Retain Experts: Shares can attract skilled professionals whose advice helps a company grow.
3. Align Interests: Tying advisor rewards to company success encourages them to work harder for the company.

How to Issue Advisory Shares

1. Valuation: Make sure the share value matches the Fair Market Value (FMV) at the time of issue to be fair to other shareholders and comply with tax rules.
2. Issuance Process:
   • Private Placement: Issue advisory shares through private placement with a detailed offer letter and board approval.
   • Tranche-Based Issuance: Issue shares in stages based on milestones or completed work.

Example 

Company X offers an advisor shares worth Rs 20 lakhs for consulting work, split into three tranches. If one share is worth Rs 1,000, they will issue 2,000 shares.

• First Tranche: After the first phase of work, the advisor invoices for Rs 500,000. Company X issues 500 CCPS via private placement.
• Subsequent Tranches: The advisor receives more shares as they meet agreed milestones.

Steps to Implement an Advisory Shares Program

1. Create a Detailed Plan: Include share count, vesting schedule, issuance terms, and rights.
2. Board Approval: Get the board to approve the plan and offer letter.
3. Private Placement Offer Letter: Give the advisor an offer letter explaining the share terms.
4. Regulatory Filing: File the details with authorities like SEBI or the Ministry of Corporate Affairs.
5. Issue the Shares: Once approvals are in, issue the shares as agreed.

Conclusion 

Advisory shares are a smart way for startups to get expert advice while saving cash. Understanding the legal aspects, benefits, and best practices will help companies make the most of this strategy.

For further understanding and detailed guidance on advisory shares in India, you might find the following external links useful:

1. Ministry of Corporate Affairs, Government of India:

   • This official site provides comprehensive details on corporate laws and regulations which govern advisory shares and other related corporate instruments in India.
   • Ministry of Corporate Affairs

2. Securities and Exchange Board of India (SEBI):

   • SEBI oversees and regulates securities and commodity markets in India. Their guidelines on share-based employee benefits can offer insights relevant to advisory shares.
   • Securities and Exchange Board of India