Beyond Cheques And Wire Transfers: Structuring And Regulating Consideration Other Than Cash In Corporate Transactions

Corporate finance has historically treated equity issuance as a cash-based capital-raising exercise. However, modern transactional practice recognises that value may be contributed in multiple forms, including tangible assets, intangible assets, services, debt extinguishment, or corporate restructuring outcomes. The Companies Act, 2013 ("the Act") explicitly recognises this evolution by permitting issuance of shares for "consideration other than cash", subject to substantive and governance safeguards including valuation.¹

At a doctrinal level, non-cash consideration reflects the substitution of monetary payment with an economically equivalent value contribution, aligning corporate law with commercial reality rather than formalistic capital concepts.

1. Statutory Foundation under Indian Company Law

1. Section 62 of the Companies Act, 2013

Section 62(1)(c) empowers a company, subject to shareholder approval, to issue shares to any person, whether or not existing shareholders, either for cash or for consideration other than cash.

The legislative intent, as reflected in the Companies Act, 2013 and Parliamentary materials, is twofold:

1. to permit flexibility in capital structuring; and
2. to impose procedural and valuation discipline to prevent disguised transfers of value.²

2. Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014

Rule 13 operationalises Section 62 and applies particularly to preferential allotments.
It mandates that:

1. the price of shares issued either for cash or non-cash consideration must be determined on the basis of a valuation report by a registered valuer; and
2. such valuation must justify the basis of pricing³

Additionally, the accounting treatment of non-cash consideration depends on its nature:

1. depreciable or amortisable assets must be recognised on the balance sheet;
2. other forms must be expensed in accordance with applicable accounting standards. ⁴

This reflects the accounting and legal principle that equity issuance must correspond to a measurable asset or expense recognition.

2. Valuation as the Core Legal Constraint

Indian law treats valuation as the primary safeguard against abuse in non-cash issuance.
Irrespective of whether shares are issued at face value or premium, a valuation report from a registered valuer is mandatory in preferential allotments. ⁵

The underlying policy rationale is to prevent dilution of minority shareholders and extraction of corporate value through undervaluation.⁶

Interestingly, the law does not prohibit issuance at a higher price, indicating that valuation functions as a floor rather than a ceiling.⁷

3. Permissible Forms of Non-Cash Consideration

From a transactional perspective, non-cash consideration typically falls into the following categories:

1. Transfer of Tangible Assets

This form of non-cash consideration involves the transfer of ownership of physical assets such as land, buildings, machinery, or infrastructure to a company, where the transferor does not receive money in return. Instead, the value of the assets transferred is settled through the allotment of equity shares or other securities of the company. The transaction is structured on the basis that the tangible asset itself represents the consideration, and cash payment is entirely substituted by equity participation in the company.

In Tricolite Power Products Pvt. Ltd.,⁸ the company had allotted 11,50,000 equity shares for consideration other than cash i.e. in exchange for an industrial plot. The allotment was made prior to the scheme of amalgamation, and although initially not fully reflected in the annual returns, it was later corrected through a revised filing. The case highlights that equity can be issued in lieu of cash when a tangible asset is transferred to the company, provided the transaction is properly documented, the asset is legally vested in the company, and statutory requirements such as disclosure and stamp duty are complied with. The sanctioned Scheme of Amalgamation confirmed the transfer of assets and liabilities, including those settled through non-cash consideration, and approved the issuance of shares as valid consideration.

This illustrates the broader principle that, provided title to the asset passes to the company, valuation is documented, and corporate and stamp duty requirements are complied with, equity may be validly issued in exchange for assets as "consideration other than cash".

2. Transfer of Intangible Assets

The issuance of shares in consideration for intellectual property, technology or know how occupies a distinctive and, at times, an under examined space. Unlike conventional asset transfers, where tangible property or business undertakings are conveyed, transactions involving intellectual property and know how are inherently abstract, valuation sensitive and closely intertwined with the identity and capabilities of the contributor. Examples include intellectual property, brand value, technology, or goodwill.⁹

The critical threshold that must be adhered to is that the company must have already received the benefit of such intellectual property or know how at the time of allotment of shares. This prevents equity from being issued against speculative or future value, which could otherwise be used to justify disproportionate dilution or promoter enrichment without corresponding corporate benefit.

In practice, this structure is most frequently encountered in technology driven enterprises, research oriented businesses and early-stage ventures, where founders or promoters contribute proprietary intellectual property that forms the commercial core of the company's operations. Unlike cash contributions, which are fungible and immediately measurable, intellectual property contributions require a clear legal transfer of rights. This typically involves execution of assignment agreements, licensing arrangements or technology transfer documents that delineate ownership, scope of use, exclusivity and territorial rights. Absent such documentation, the purported consideration risks being characterised as illusory or incomplete, exposing the issuance to challenge under company law and, in certain cases, tax law.

Illustration: XYZ Private Limited proposes to acquire proprietary software and technical know-how developed by its founder, Mr. A.

Pursuant to an IP Assignment Agreement and a valuation report issued by a registered valuer, the company issues equity shares to Mr. A on a preferential basis for consideration other than cash, supported by board and shareholder approvals and documented through a Share Subscription Agreement and statutory filings under the Companies Act, 2013.

3. Services Rendered or to be Rendered

The issuance of shares in consideration for services occupies a legally sensitive and carefully regulated space under company law. While the Act permits issuance of shares for consideration other than cash, it draws a clear conceptual distinction between services already rendered and services proposed to be rendered in the future.

As a matter of principle, equity may be issued only against value that has already accrued to the company and is capable of objective assessment, and not against speculative or contingent future performance. In practice, companies may issue shares in consideration for consultancy services, managerial services, technical development work or strategic advisory services, provided such services have been completed and their commercial value can be independently quantified. This typically requires a detailed service agreement evidencing the scope of work performed, confirmation of completion or substantial completion of services, and a valuation report issued by a registered valuer determining the fair value of such services. The issuance of shares must further be approved through the prescribed corporate process, including board and shareholder approvals, and documented through appropriate allotment and subscription instruments. Where the objective is to incentivise future performance or continued engagement, the legally accepted route is through employee stock option plans, sweat equity shares or other equity linked incentive mechanisms. Attempts to bypass this framework by issuing equity against anticipated services risk being characterised as inadequately paid-up capital and may attract regulatory and tax scrutiny. Shares may be issued against consultancy, management, or development services, subject to valuation and documentation requirements.

While legally permissible, issuance of shares for services is viewed restrictively in practice and is often scrutinised to ensure that the services result in a tangible, quantifiable economic benefit to the company.

4. Debt Conversion or Waiver

In many corporate restructuring scenarios, companies can satisfy their creditors without actually paying cash, by using debt conversion or waiver as a form of non-cash consideration. Under this mechanism, a creditor's claim, whether it is the principal of a loan or accrued interest can be exchanged for equity shares, securities, land, or other assets of the company.

A practical example of this approach can be seen in Jaypee Kensington (NBCC) v. Homebuyers & Ors. (2021),¹⁰ where the Supreme Court clarified that "payment" under a resolution plan does not have to be in cash and may validly take the form of non-monetary value.

In Jaypee Kensington Boulevard Apartments Welfare Association v. NBCC (India) Ltd., the Supreme Court considered a resolution plan under which financial creditors (including homebuyers) were to receive a mix of cash, land and equity. While the Court held that dissenting financial creditors must be paid at least their liquidation value in cash in priority to assenting creditors, it accepted that, for assenting creditors, "payment" of their restructured entitlements could be implemented using non‑cash components such as land parcels and equity instruments, within the bounds of Section 30(2)(b) and Regulation 38 of the Corporate Insolvency Resolution Process Regulations.

This insolvency and bankruptcy jurisprudence underscores that, in restructuring contexts, debt satisfaction need not always be in cash so long as statutory priorities and minimum entitlements (particularly for dissenters) are observed.

4. Structures in M&A, PE, and VC Transactions

From an M&A and private equity perspective, issuance of shares for non-cash consideration is rarely a standalone mechanism. It is typically embedded within complex deal structures.

1. Share-for-Share Exchanges

Share-for-share exchanges are a hallmark of stock-based acquisitions and mergers. In these deals, the shareholders of the target company receive shares in the acquiring company rather than cash. This approach aligns interests, maintains continuity of ownership, and enables a smooth integration without straining cash reserves.

In Hindustan Lever Employees' Union vs. Hindustan Lever Ltd. & Others ¹¹, the Supreme Court of India upheld a scheme of amalgamation between Tata Oil Mills Company Ltd. (TOMCO) and Hindustan Lever Ltd. (HLL) under the Companies Act, 1956. TOMCO, which was an independent public company, was merged into HLL, a subsidiary of Unilever PLC. As per the court-approved scheme, the shareholders of TOMCO were not paid in cash but were instead allotted equity shares of HLL as consideration for the merger. The share exchange ratio was fixed at 2 equity shares of HLL for every 15 equity shares held in TOMCO, ensuring that the entire transaction was carried out through a share-for-share mechanism. Following the merger, TOMCO was fully absorbed into HLL, and the merged entity continued to operate under the name Hindustan Lever Ltd.

Illustration: Consider Company X Ltd. acquiring 100% of Company Y Ltd. The terms may stipulate that for every 1 share held in Y Ltd., shareholders receive 2 equity shares of X Ltd. Here, the transaction is fully executed through the issuance of shares no cash changes hands. Such structures are particularly common in strategic acquisitions where the acquirer wants to retain key shareholders and management from the target company, or where preserving liquidity is critical.

2. Sweat Equity

Although governed by separate statutory provisions, these instruments reflect the same conceptual logic of value contribution without cash. The statutory definition of "sweat equity shares" under Section 17(2)(vi) of the Income-tax Act, 1961 expressly includes equity shares issued for consideration other than cash in return for the provision of know-how, intellectual property rights, or other value-enhancing contributions. ¹²

In practice, this mechanism allows a company, particularly in technology and startup ecosystems, to reward key contributors.

In Future Agrovet Ltd. vs Additional Commissioner of Income Tax¹³ decided by the Income Tax Appellate Tribunal, Mumbai on 19 September 2014, Future Agrovet Ltd. issued sweat equity shares to two of its key executives, Mr. Narendra Baheti and Mr. Rajendra Baheti, in recognition of their contributions to the company. The company allotted 5,00,000 (Five Lakhs) equity shares of face value INR10/- (Indian Rupees Ten Only) each to each executive, aggregating to INR 10,00,000/- (Indian Rupees Ten Lakhs Only) shares, without any cash consideration, effectively issuing the shares free of cost. This allotment was duly authorised through resolutions passed by the Board of Directors and a special resolution approved by the shareholders, in line with the requirements of company law. Future Agrovet Ltd. sought to treat the aggregate value of these shares, amounting to INR 1,00,00,000/- (Indian Rupees One Crores Only) crore, as a business expenditure and claimed a deduction under the Income-tax Act. However, the Assessing Officer rejected this claim on the ground that the issuance of sweat equity shares without cash consideration did not amount to an expenditure incurred wholly and exclusively for business purposes.

The Tribunal upheld this view, observing that the allotment of sweat equity shares represents a capital allocation rather than a revenue expenditure. In reaching this conclusion, the Tribunal examined the statutory meaning of "sweat equity shares," noting that such shares are issued for consideration other than cash in return for value-adding contributions, as recognised under the Income-tax Act. It also took note of the fact that the company had complied with all procedural requirements under company law, including board approval, shareholder approval by special resolution, and valuation. While the ruling primarily addressed the tax treatment of the issuance, the facts of the case clearly illustrate the use of sweat equity shares as a means of compensating key contributors in lieu of cash, reaffirming that such shares constitute non-cash remuneration and a form of capital issuance, rather than an ordinary deductible business expense.

Illustration: A fast‑growing technology startup that has developed a unique software platform but is constrained by cash flow early in its journey. The company's Chief Technology Officer (CTO), having spent years architecting the core platform and securing key intellectual property, is essential to the company's future success. Rather than paying the CTO a large cash bonus which the company cannot afford, the board resolves to recognise this contribution by issuing sweat equity shares. Under the Companies Act, these are equity shares issued for consideration other than cash in return for providing know‑how, intellectual property rights, or other value additions.

5. FEMA and Cross-Border Dimensions

In cross-border transactions, issuance of shares for non-cash consideration intersects with foreign exchange law.¹⁴

For listed and unlisted companies, valuation must follow internationally accepted pricing methodologies and be certified by authorised professionals, reflecting the RBI's emphasis on fair pricing in foreign investment transactions. In cross-border mergers, valuation must comply with both corporate law and FEMA regulations, demonstrating the layered regulatory architecture governing non-cash equity issuance.

6. Conclusion: From Formal Capital to Economic Value

The issuance of shares for "consideration other than cash" represents a paradigmatic shift in corporate law from formal capital concepts to economic value recognition.

While statutory provisions under the Companies Act, 2013 provide a permissive framework, valuation discipline, governance safeguards, and regulatory oversight collectively determine the legitimacy of such transactions.

Non-cash issuance poses heightened risks of abuse because valuation involves subjective judgment.

Therefore, Indian law relies on three primary safeguards:

1. shareholder approval by special resolution¹⁵;
2. independent valuation by registered valuers;¹⁶ and
3. disclosure and accounting transparency.¹⁷

These safeguards reflect the broader corporate governance principle that equity dilution must be justified by demonstrable economic value.

For M&A, private equity, and venture capital practitioners, non-cash equity issuance is not merely a legal mechanism but a strategic tool to allocate risk, align incentives, and optimise capital structures.

In this sense, the law does not merely permit non-cash issuance; it attempts to balance commercial flexibility with systemic integrity.

Footnotes

1 Companies Act, 2013, Section 62(1)(c); Companies (Share Capital and Debentures) Rules, 2014, Rule 8(9) (allowing issue of shares for consideration other than cash)

2 Standing Committee on Finance, Thirty-Seventh Report on the Companies (Amendment) Bill, 2016

3 Valuation of Companies: A legal analysis, available at: Valuers Bill 2020,National Institute of Valuers, Ministry of Corporate Affairs, IT Act, ITAT, Commissioner of Income Tax, Central Board of Direct Taxes

4 Companies (Share Capital and Debentures) Rules, 2014, Rule 8(9) (treatment of non-cash consideration as asset or expense); Ind AS 16, Property, Plant and Equipment (recognition of depreciable assets); Ind AS 38, Intangible Assets (recognition and amortisation of intangible assets).

5 Companies (Share Capital and Debentures) Rules, 2014, Rule 13(2)(g) (price of shares or securities issued on preferential basis to be determined on basis of registered valuer's valuation report)

6 Vinod Kothari Consultants, Fair Value Discovery in Preferential Share Issues (explaining that Rule 13(3) requires that the price in a preferential allotment shall not be less than the price determined on the basis of a valuation report of a registered valuer to ensure that allotments are not made at undervalued prices), available at: https://vinodkothari.com/2021/07/a-regulatory-affair-fair-value-discovery-in-preferential-share-issues/?utm_source=chatgpt.com

7 Companies (Share Capital and Debentures) Rules, 2014, Rule 13(3) ("price shall not be less than the price determined on the basis of valuation report of a registered valuer")

8 Tricolite Power Products Private Limited, 2014 SCC OnLine Del 3584

9 Institute of Company Secretaries of India (ICSI), e‑Focus Special Edition on Non‑Cash Consideration (noting valuation and disclosure requirements when shares are issued for non‑cash consideration under Section 62 and Rule 13)

10 Jaypee Kensington Boulevard Apartments Welfare Association & Ors. v. NBCC (India) Ltd. & Ors (2021) 5 SCC 624

11 AIR 1995 SC 470 / SLP (C) No. 11006 of 1994

12 Sanjay Baweja v. Deputy Commissioner of Income Tax (TDS) Circle-77(1), Delhi & Anr. – W.P.(C) 11155/2023 (2024) 163 Taxmann 116 (Delhi HC).

13 ITA No. 2654/Mum/2012

14 The Foreign Exchange Management Act, 1999 and the Foreign Exchange Management (Non‑Debt Instruments) Rules, 2019

15 Companies Act, 2013, Section 62(1)(c)

16 Companies (Share Capital and Debentures) Rules, 2014, Rule 13

17 Ind AS 38: Intangible assets

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.