Tyke’s CSOPs: Bridging Startups with Investors or Crossing Regulatory Boundaries?

20 October 2023

What is Tyke?
Founded in 2021, Tyke claims to be a private investment gateway that enables private capital transactions in a seamless manner. With a ticket size as low as INR 5,000, Tyke enables individuals to become angel investors and invest in startups. This opens up the angel investing market to a large community of investors, which was earlier restricted to a small circle of HNIs.

This also allows startups to raise capital from a larger pool of investors.

For the above services, as per their website, Tyke charges a standard listing fee from the startup and a success fee on the total amount raised via a successful campaign. Further, it also charges a 2% convenience fee on the subscription amount. It does not charge anything from the investors.

In a short span of two years, Tyke has impressively mobilized over INR 100 crore via 200+ campaigns. The rising public fascination with platforms like Shark Tank further fuels this enthusiasm towards the startup ecosystem.

Startups can launch various campaigns on Tykeinvest, ranging from CCD and CCPS to CSOP, NCD, and Invoice Discounting campaigns.

While CCDs and CCPS offer investors a seat at the startup's cap table, Tyke accentuates that their Community Stock Option Plan (CSOP) doesn't influence the company's cap table. They describe CSOP as a contractual agreement executed between a subscriber (investor) and the startup which entitles the subscriber to community benefits and the potential to be granted Stock Appreciation Rights.

Recent MCA order in the case of SustVest which raised funds on Tyke

Gurugram-based 'Solargridx Ventures Private Limited' (“the Company”), in its bid to attract investments, used the CSOP campaign on the Tyke platform under the brand name ‘SustVest’. It managed to raise around ~INR 52 lakhs from more than 500 investors through this campaign. 

The Company issued 6,186 CSOPs to 565 subscribers. The Company issued the CSOPs for a subscription fee of INR 1,000 inclusive of applicable taxes and GST. Invoices were issued to the subscribers for such fee. The Company treated the revenue received from CSOPs of INR 52.42 lakhs under the head of “other income” and paid 18% GST on the same as was filled in the GSTR3B return for the month of March 2022.

However, the MCA issued an order against the Company on September 22, 2023, imposing a total penalty of INR 10 lakhs on the Company and the 3 directors for breach of section 42 of the Companies Act, 2013 (“CA 2013”). The MCA has also asked the Company to refund the total money received of ~INR 52 lakhs along with interest of ~INR 7 lakhs to the investors.

The crux here was: Do CSOPs issued by the Company classify as “securities”? If so, this would necessitate the Company's compliance with section 42 of the CA 2013, which pertains to the 'Issue of shares on a Private Placement basis'.

Key Matters of Contention

1. Whether CSOPs can be regarded as a “security” 

The first and key matter of contention is whether the CSOPs issued should be classified as “securities” or not. If yes, the MCA has alleged that the Company has not complied with the provisions of section 42 of the CA 2013 dealing with 'Issue of shares on a Private Placement basis'. Section 42 of the CA 2013 is reproduced in Annexure 1.

Before discussing the arguments on this matter by both parties, it is imperative to understand the term “security”.

The term “security” is defined in section 2(81) of the CA 2013 where it directs us to section 2(h) of the Securities Contracts (Regulation) Act, 1956. Reading these two laws in conjunction, broadly, "securities" includes derivatives which, in turn, includes: 

(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security

(B) a contract which derives its value from the prices, or index of prices, of underlying securities

An extract of the relevant sections from the CA 2013, and the Securities Contracts (Regulation) Act, 1956 are reproduced in Annexure 1.

Company’s contention 

The Company submitted that CSOPs are merely an agreement by the company to engage its Subscribers / Evangelists through a closed community with a view to grow the customer base and business. The company aims to leverage the network effect created through this community to achieve its objectives, including increased sales, improved brand identity, better adaptation to new trends, and reliable user feedback.

The Company partnered with Tyke, a technology-based community platform, to conduct an online pitching session to introduce itself to Tyke members and educate them about its achievements and growth prospects. After the pitching session, the Company created a closed group for subscribers to access the community benefits and perform the role of evangelizers on behalf of the Company. Thus, according to the Company, it can be seen that it has neither released any public advertisements nor utilized any media, marketing or distribution channels or agents to inform the public at large about such an issue of securities.

Further, the amounts received from the subscribers are in the nature of 'membership fees’ and invoices have been raised by the Company. Such amounts are shown under the head "other income“ and offered to tax as such. Further, GST has also been paid on such income.

The Company submitted that CSOP does not derive its value from any underlying variable like share price/ stock index. To qualify as “rights or interest in securities” there has to be an underlying security that is absent in the present facts.

MCA’s contention 

The MCA pointed out that the CSOP holders were ostensibly promised that they would be rewarded based on future valuation of the Company. Further, the financial statements unequivocally declare that CSOP holders would be able to unlock value based on future valuation.

The CSOP agreement submitted by the Company had the following key clauses:

•The payout amount to the CSOP holders means settlement paid by the Company by way of cash, by way of equity securities, or partly cash and partly equity securities. 

•The total amount to be paid to a CSOP Holder for the CSOP, upon the occurrence of a Payment Event, shall be equal to the number of CSOPs multiplied by the Ratio of the Fair Market Value of an Equity Security determined in the Liquidity Event or at the time of exercise of the CSOPs by the CSOP Holders as may be intimated by the Company

•Each CSOP is equal to the proportionate amount of Equity Securities as on the pre-money valuation of the Company of INR 4,10,00,000.

•Any restructuring undertaken by the Company will adjust the payout of the CSOP holders 

Thus, according to MCA, the value of the CSOPs is linked to the equity securities at inception stage, capital restructuring stage and payout stage. CSOPs also have other trappings of securities like transferability, maintenance of a register, etc as per the agreement.

The MCA, also reached out to the subscribers to give their comments/views along with documents supplied to them by the Company for cross verification. Reply from one the subscribers, enclosing a copy of the email received from Tyke clearly suggested that the said subscriber had got an "invite to invest" in the subject company through the Tyke platform. 

In light of the above, as per the MCA, CSOP is clearly a 'derivative' as it derives its value from equity shares and thus should be treated as a “security” requiring the Company to comply with the provisions of section 42 of the CA 2013.

Our thoughts

The issue isn’t simply about labelling the CSOPs but understanding their inherent nature. If an instrument behaves like a security and is perceived as such by its holders, then it should be treated accordingly, irrespective of its nomenclature.

In this case, given the evidence at hand, it seems that the regulators' view holds substantial merit. The CSOPs, by their very structure and intent, appear to have characteristics inherent to securities. 

2. Applicability of IndAS 

Company / Tyke’s contention

The Company submitted a legal opinion which was obtained by TYKE from one of the law firms which stated that the companies whose financials have been prepared in accordance with the provisions prescribed under 'IndAS' can issue CSOP and the same will not fall under the definition of securities. 

Our thoughts 

The Company is following the Indian GAAP and not IndAS, therefore the legal opinion does not apply to the Company. 

Further, most Indian startups who raise money from platforms like Tyke are operating at a scale where they are not mandated to follow IndAS provisions. Refer Annexure 2 for details on applicability of IndAS

3. Applicability of SEBI guidelines

Tyke’s contention

In a recent article, Karan Mehra, Tyke’s CEO, says, “Understanding the legal landscape surrounding an instrument such as CSOP and SARs is imperative. In its interactions, SEBI has clarified that cash-settled SARs, like those under the CSOP agreement, fall outside the purview of specific SEBI regulations, being governed instead by the contractual terms and the Indian Contract Act '1872. Furthermore, they do not qualify as derivatives per the Securities Contract Regulation Act 1956. Similarly, from an accounting standpoint, SARs are meticulously governed by established standards, specifically Ind AS 102 and the Guidance Note on Accounting for Share-Based Payments issued by ICAI. This ensures transparency and adherence to best practices in financial reporting."

In this article, the Tyke team reckons that CSOP is not merely an investment tool but a bridge connecting startups with evangelists who believe in their vision and mission. As stated in the legal opinion from Shardul Amarchand Mangaldas & Co., "CSOP is a contractual agreement where startups onboard persons to evangelize its brand, becoming a part of its community, and contributing to its growth and mission." 

They also added that CSOP "is not classified as a security, and it operates under the purview of the Contract Act", thus remaining outside the SEBI purview. The legal opinion also elaborated by saying, “SEBI has clarified that SEBI (Share Based Employee Benefits) Regulations, 2014 would be inapplicable to any cash-settled option which is issued at a pre-determined grant price. This clarification enables listed companies to offer options at a pre-determined grant price without having to comply with any SEBI regulations." On the other hand, the SAR is designed to allow stakeholders to benefit from appreciating a company's stock value without the direct ownership or the associated complexities. In essence, it's a way to reward those who believe in a company's potential and future growth. 

Our thoughts 

However, while one can draw an analogy, the aforementioned SEBI rules / guidelines do not apply to the Company, being an unlisted one. Further, as mentioned above, most Indian startups who raise money from platforms like Tyke are not listed and thus outside the purview of SEBI guidelines.

4. Income neutral treatment in the books of accounts

Company’s contention

In its submissions, the Company has claimed that the money raised from Tyke of INR 52.42 lakh has been offered to tax as CSOP Subscription Income in its profit and loss account. Further, GST has been paid on such income by the Company.

However, the Company has also booked an expense as “CSOP Expenditure” and has created a provision for “CSOP Liability” of the same amount.

Extracts of the financial statements of the Company for FY 21-22 are reproduced in Annexure 3

Our thoughts 

The CSOP subscription income and CSOP expenditure offset each other, resulting in an income-tax neutral impact on the Profit and Loss. 

However, there was an outflow of GST to the extent of 18% by the Company.

5. Tyke remains out of regulatory purview

What's interesting is that Tyke, the platform facilitating these investments, hasn't faced any penalties or regulatory actions. 

This brings up questions about who is responsible for such new investment models and how intermediaries like Tyke fit into the regulatory landscape.


While platforms like Tyke are revolutionizing the investment landscape by educating startups and investors about the nuances of modern investments, it's vital to tread with caution. By democratizing access to early-stage investments and pioneering novel financing structures, these platforms have broadened opportunities for many. However, startups and investors must approach these opportunities with a comprehensive grasp of the associated regulatory framework to avoid potential pitfalls. This ensures that the evolution of investment strategies remains both innovative and compliant.

While platforms like Tyke are revolutionizing the investment landscape by educating startups and investors about the nuances of modern investments, it's vital to tread with caution. By democratizing access to early-stage investments and pioneering novel financing structures, these platforms have broadened opportunities for many. However, startups and investors must approach these opportunities with a comprehensive grasp of the associated regulatory framework to avoid potential pitfalls. This ensures that the evolution of investment strategies remains both innovative and compliant.

As the startup ecosystem continues to evolve, startups and investors must remain vigilant and proactive in addressing emerging regulatory issues especially while raising funds.

Timeline Of Events

  • Aug 2020 – Solargridx Ventures Private Limited was incorporated
  • Feb 2022 – Solargridx granted 6,186 CSOPs to 565 subscribers, raising INR 52.42 lakhs 
  • March 02, 2022 – Company received the total subscription amount from Tyke
  • April 20, 2023 – MCA issued a Show Cause Notice (SCN) to the Company requesting reply why MCA should not impose penalty and take actions for violation of section 42 of the CA 2013
  • May 12, 2023 – The Company filed its 1st response to SCN and submitted a copy of an unsigned CSOP agreement (1st version of agreement). In the reply, the Company stated CSOPs were issued with intent to build brand loyalist and increase sales of its solar projects business, subscribers would receive community benefits, engaged with a closed community on Tyke platform and link shared with them separately, build goodwill. Company also submitted in the reply that no public advertisements or marketing or distribution channels were used to inform the public at large. 
  • May 17, 2023 – 1st hearing before Adjudicating Officer (AO) attended by one of the Directors - and two Practicing Company Secretaries. Despite auditor’s (Nischal Agrawal) presence being requested by AO, he remained absent citing medical reasons but he filed a separate response via email in which he conveyed that the CSOP transaction was novel and thus he disclosed the transaction under "Emphasis of Matter" based on management's representation. 

Further, at the hearing the AO had directed the Company to provide following additional information: 

i) list of subscribers to the CSOP;

ii) copy of 5 signed CSOP agreements with subscribers

iii) Basis for treating amount received from subscribers as ‘Other Income’ and accounting standard applied, and opinion from Tyke’s legal team.

iv) Clarification on CSOP settlement and payment & exit to subscribers;

v) whether CSOP is in form of SARs and how Company’s CSOPs are different from other CSOPs on the Tyke platform

vi) Details of events and banking transaction modes, and payment made to Tyke.

  • May 29, 2023 – The Company filed its 2nd response to SCN, as per requirements of AO directed during the hearing providing following details:

i) Copies of 5 agreements submitted and clarification given that contractual business relation entered into with 565 subscribers on Tyke platform, and all agreements had similar contents (2nd version of agreement, materially different from 1st version submitted as draft).

ii) Subscription money received was for ancillary activity and not main business and intention of CSOP is to collaborate with subscribers for future growth and brand loyalty, hence treated as ‘other income’.

iii) One-pager unsigned legal opinion of Tyke’s team which did not clearly indicate the specific accounting standard and thus the accounting treatment was not properly explained

iv) Company denied the CSOPs were in the nature of SARs.

v) Company provided timelines and details of payment received for subscription fees from Subscribers, through Tyke platform.
The Company had in its 2nd Response to SCN also categorically mentioned that all 565 agreements were signed.

  • July 07, 2023 - Email sent to Company seeking clarifications regarding inconsistencies in agreement copies submitted on 12 May 2023 and 29 May 2023, and regarding SARs

Because the Company had submitted different versions of the Agreement, and different facts with no clarity, the AO even had to invite some of the subscribers to provide their views and documents regarding the offer from the Company.

  • July 25, 2023 – The Company clarified that initially on 12 May 2023, draft versions were submitted, and later on 29 May 2023 signed versions of the agreements were submitted as per direction of the AO. 

Stance regarding SAR’s remained the same, that the CSOPs were not in the form of SARs, however, the Company submitted that not all agreements were signed with all subscribers.

At this point it is also important to note that the Company informed the AO that out of total 565 agreements, 114 agreements were still unsigned and had to be finalised (i.e. pending since February 2022).

  • July 31, 2023 – Another reply sent by company via email, with a copy of digitally signed agreement with one of the subscribers (3rd version of agreement which matched with agreement copy received form one of the subscribers directly. It is pertinent to note that the 3rd version was, once again materially different from earlier two versions). 
  • August 21, 2023 – 2nd hearing before AO, wherein following submissions were made:

a. Company was a zero-revenue company in FY 2021-22

b. Company has duly paid GST

c. The CSOP agreement was entered into with subscribers to grow customer base and rewards would be in the form of discount/ concessions on the products of the Company amount received was treated as subscription / membership fees.
d. CSOP was not a Derivative, and relied on a couple of judgments in support

e. Director being unaware of communication sent to subscribers by TYKE on behalf of the Company, regarding SARs and addendum to primary agreement

Additionally, Auditor submitted that he had received Management Representation Letter from  the company wherein it was mentioned that management was yet to finalize the contracts and thus sample invoices.

  • September 22, 2023 – Order passed by AO, imposing total penalty of INR 10,00,000/- on the Company and on the 3 directors for breach of various provisions of section 42 of CA 2013 and asked Company to refund the total money received - INR 61,86,000/- along with interest of INR 7,17,576/- to subscribers respectively

Note: Text marked in bold depicts discrepancies identified by MCA

Annexure 1 - Extract from CA 2013 and Securities Contracts (Regulation) Act, 1956

Extract from CA 2013:

Section 2: Definitions

“(81) "securities" means the securities as defined in clause (h) of section 286-87 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);”

Section 42: Issue of shares on private placement basis

42. (1) A company may, subject to the provisions of this section, make a private placement of securities.

(2) A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as "identified persons"), whose number shall not exceed fifty or such higher number as may be prescribed6 [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be prescribed6.

(3) A company making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed:

Provided that the private placement offer and application shall not carry any right of renunciation.

Explanation I.—"Private placement" means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in this section.

Explanation II.—"Qualified institutional buyer"7 means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended from time to time, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).

Explanation III.—If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed6 number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter.

(4) Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person alongwith subscription money paid either by cheque or demand draft or other banking channel and not by cash:Provided that a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub-section (8).

(5) No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company:

Provided that, subject to the maximum number of identified persons under sub-section (2), a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.

(6) A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent per annum from the expiry of the sixtieth day:

Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities

(7) No company issuing securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.

(8) A company making any allotment of securities under this section, shall file with the Registrar a return of allotment within fifteen days from the date of the allotment in such manner as may be prescribed8, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed8.

(9) If a company defaults in filing the return of allotment within the period prescribed under sub-section (8), the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.

(10) Subject to sub-section (11), if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing the penalty.

(11) Notwithstanding anything contained in sub-section (9) and sub-section (10), any private placement issue not made in compliance of the provisions of sub-section (2) shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be applicable.

Extract from Securities Contracts (Regulation) Act, 1956 

“(ac) “derivative” includes— 

(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; 

(B) a contract which derives its value from the prices, or index of prices, of underlying securities;”

“(h) “securities” include— 

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; 

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

(ii) Government securities; 

(iia) such other instruments as may be declared by the Central Government to be securities; and 

(iii) rights or interest in securities;”

Annexure 2 - Applicability of IndAS

There are mainly four phases of applicability of IndAS. These phases are applicable on the basis of the net worth and the listing status of the company. These phases are divided by the MCA (Ministry of Corporate Affairs). 

Phase I  Mandatory applicability to all companies from April 01, 2016, provided:   •It is a listed or unlisted company •Its Net worth is greater than or equal to INR 500 crore in previous three Financial Years
Phase II Mandatory applicability to all companies from April 01, 2017, provided: •It is a listed company or is in the process of being listed (as on 31 March 2016) •Its Net worth is greater than or equal to INR 250 crore but less than INR 500 crore in any of the previous four Financial Years 
Phase III Mandatory applicability to all Banks, NBFCs (including core investment companies, stock brokers, venture capitalists, etc) and Insurance companies from April 01, 2018, whose: •Net worth is more than or equal to INR 500 crore with effect from April 01, 2018 in previous three financial years
Phase IV All NBFCs whose Net worth is more than or equal to INR 250 crore but less than INR 500 crore shall have IndAS mandatorily applicable to them with effect from April 01, 2019.


1. If IndAS becomes applicable to any company, then it shall automatically be made applicable to all the subsidiaries, holding companies, associated companies, and joint ventures of that company, irrespective of individual qualification of such companies. 

2. Companies can voluntarily choose to incorporate IndAS in their reports for accounting periods beginning on or after April 01, 2015.

3. Once a company has started reporting as per the IndAS, it cannot change to reporting as per previous laws.

Annexure 3 - Extract of financial statements of the Company

Extract of Auditors Report:

Long Term Provisions

Other Income

Annexure 3 - Extract of financial statements of the Company

Other Expenses:

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The information provided herein is sourced from information available in the public domain and is solely for informational and educational purposes. It does not constitute advice or a legal opinion, and is not intended to cause harm. The views expressed are personal opinions of the author, relying on information available in the public domain. While diligence has been applied, the possibility of alternative perspectives on the subject matter cannot be ruled out. By accessing and using this information, you acknowledge and agree that the Author / Treelife Consulting is neither responsible nor liable for the authenticity, accuracy, completeness, errors, or any omissions in this piece of information or for any actions taken in reliance thereon.

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