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Tejas Chokshi | Answer |Ask -Follow

Tax Expert - Answered on May 19, 2023

CA Tejas Chokshi has over 20 years of experience in financial planning, income tax planning, strategic and risk advisory, banking and financial products and accounting and auditing.
He is an information system auditor, a forensic auditor and concurrent bank auditor.
Chokshi, who has a master’s degree in management, audit and accounting from Gujarat University, has completed his CA from the Institute of Chartered Accountants of India.... more

Question by Sudipto on May 19, 2023Hindi

I am an Executive Director on Board of my company and hold 8% stock earned as ESOPs during my tenure here. Ours is a Private Limited company, with 90% of stocks held among the promoters and investors. I am now touching 62 years age and thinking of retiring from the routine active full time executive role and doing my own consultation businesses. In that case I must move out of the executive role of the company. The challenge now is how to monetize my stocks, while an IPO in the next 2-3 years time horizon is often discussed internally. The present book value of the company stocks as per the last year's balance sheet is 40 Cr (approx), while a merchant bank valuation carried out 2 years back showed it at 100 cr. Accordingly, I think I should expect at least 8 cr. while shelling out my stocks. We being a Pvt Ltd company, one is not permitted to sell his stocks to any outside entity. At the same time, i am sure that the company promoters and/or investors would nor be keen to buy it from me at the present Fair Market Value, which should now be at least 100 cr, if not more. Under this situation, what's the best I can do or expect, within my rights as per the prevailing laws under Company's Act?

Ans: Dear Sir,
In my opinion, before you retire, you may explore the opportunity by discussing with your company to issue bonus shares to all existing shareholders. As per the companies act, bonus shares issuaance by the private limited company is allowed if certain conditions are met. This will benefit you by you getting additional shares without paying anything, althought these bonus shares cannot be sold by you for next 1 year.

Coming to what you have mentioned, there are number of options available but best option in my opinion is to locate a buyer of your shares, who may be willing to enter the company as shareholder with other conditions attached if any.

Generally, you have the following options as well,

Sale to Existing Shareholders: Since you mentioned that the promoters and investors hold 90% of the stocks, one option is to approach them and negotiate a sale of your shares. While they may not be willing to buy your stocks at the present Fair Market Value, you can try to negotiate a mutually acceptable price based on the book value or the previous merchant bank valuation. It would be beneficial to engage in open and transparent discussions with the other shareholders to explore this possibility. It is better, if you hire an expert to negotiate on your behalf.

Buyback by the Company: Another option is to explore the possibility of a stock buyback by the company itself. A stock buyback involves the company repurchasing its own shares from existing shareholders. This can be a favorable option if the company has sufficient funds or can arrange financing for the buyback. It would be subject to the approval of the company's board and compliance with relevant laws and regulations.

Employee Stock Ownership Plan (ESOP) Secondary Market: Some private companies have established secondary markets for their employee stock options. These markets allow employees to sell their shares to other employees or external buyers who are interested in acquiring company stocks. You can inquire if your company has such a secondary market or explore the possibility of establishing one. It's worth noting that the availability and regulations around ESOP secondary markets may vary depending on your jurisdiction.

Wait for an IPO: You mentioned that an IPO is being discussed internally within the next 2-3 years. If the company eventually goes public, you would have the opportunity to sell your shares on the open market. Going public can provide liquidity for shareholders, including employees, and potentially allow you to sell your shares at a higher valuation. However, the timing and success of an IPO cannot be guaranteed, so you need to assess the feasibility and risks associated with this option.

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