PUBLIC OFFER AND PRIVATE PLACEMENT


Any business cannot run without funds. In case of an incorporated company, initial capital always come from subscribers to the memorandum. As we have discussed in earlier post Commencement of Business, company should commence its business within 180 days by filing some documents with Registrar of Companies. This is legal requirement of Section 11, all subscribers should paid the value of shares agreed to be taken by him and company should receive that money before filing document for filing for commencement of business. But this initial capital may not be sufficient for running a business. [UPDATE: This  portion stand deleted due to the Companies (Amendment) Act, 2015.] Public funding is a fundamental proposition for legal structure called company.

ISSUE OF SECURITIES BY COMPANIES (SECTION 23):

A company can issue capital by issuing securities. The term securities here has same meaning as given in clause (h) of section 2 of the Securities Contract Regulation Act, 1956 (SCRA).

There are separate legal methods for public and private companies for issuing securities.

Issue of Securities by Private Company:

A private Company may issue its securities:

      i.        By way of right or bonus issue; or

     ii.        Through private placement.

Issue of Securities by Public Company:

A Public company may issue securities:

      i.        To public through prospectus i.e. “Public Offer”;

     ii.        Through private placement;

    iii.        Through right or bonus issue.

The term “public offer” includes “initial public offer”; or “further public offer”; or “Offer for sale of securities to the public by an existing shareholder” through issue of a prospectus.

POWER OF SECURITIES AND EXCHANGE BOARD OF INDIA (SECTION 24):

Securities and Exchange Board of India shall administer provisions under:

  1. Chapter III i.e. Prospectus and allotment of securities;
  2. Chapter IV i.e. Share capital and Debentures; and
  3. Section 127 i.e. Punishment for failure to distribute dividends;

Which are related to –

a)    Issue and transfer of securities; and

b)   Non – payment to dividend;

By:

  1. Listed Companies;
  2. Companies which intend to get their securities listed on any recognised stock exchange in India except otherwise provided by this Act.

All powers related to Chapter III, Chapter IV and Section 127, in any other case, shall be administered by the Central Government. All powers relating to all other matters relating to prospectus return of allotment, redemption of preference shares and any other matter specifically provided in this Act, shall be exercised by the Central Government, the Tribunal or the Registrar, as the case may be.

The Securities and Exchange Board shall, in respect of matters specified in sub – section (1) of Section 24 and the matters delegated to it under proviso to sub-section (1) of section 458, exercise the powers conferred upon it under sub-sections (1), (2A), (3) and (4) of section 11, Sections 11A, 11B and 11D of the Securities and Exchange Board of India Act, 1992.

OFFER OF SECURITIES FOR SALE (SECTION 25):

Where a company allots or agree to allot any securities of the company with a view to all or any of those securities being offered for sale to the public shall be treated as if the securities had been offered to the public for subscription and as if persons accepting the offer were subscribers for those securities.

Any document by which this offer for sale to the public is made shall be deemed to be a prospectus issued by the company. All enactments and rules related to prospectus and liability in respect of any mis–statements etc are applicable to such document.

If it is shown that –

      i.        An offer of the securities for sale to the public was made within six months after the allotment or agreement to allot; or

     ii.        At the date when the offer was made, the whole consideration had not been received by company for such securities;

    iii.        It will be presumed that such allotment or agreement to allot securities was made with an intention to the securities will be offered for sale to the public.

OFFER FOR SALE (SECTION 28):

Where certain members of company propose to offer whole or part of their holding of share to public, they may do so in accordance with prescribed procedure. This proposal must be in consultation with the Board of Directors and in accordance with the any law for the time being in force.

Any such offer document shall be deemed to be prospectus issued by the company and all law and related to prospectus shall apply to this document.

All these members shall collectively authorise the company to take all actions in respect of offer of sale for and on their behalf. They will reimburse the company all expenses incurred by it on that matter.

PRIVATE PLACEMENT (SECTION 42):

A company, whether private or public, may make private placement of securities through issue of a “Private Placement Offer Letter” (PPOL).

The offer of securities or invitation to subscribe securities shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed in a financial year and on such conditions as may be prescribed. For this purpose, qualified institutional buyers and employees of the company being offered securities under a scheme of employees’ stock option shall not be counted.

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 prescribed number of persons, same shall be deemed to be an offer to the public. There will be no difference on whether, the company intends to list its securities or not on any recognised stock exchange. There will also be no difference whether such stock exchange is in or outside India. There shall also be no difference company has already received any payment or not.

In my opinion, where a company has already received share application money from any number of persons, it could not allot share to more than fifty persons out of them in a financial year through private placement.

A company shall not make a fresh offer or invitation unless the allotment in respect to any earlier offer or invitation has been completed or that offer or invitation has been withdrawn or abandoned by the company.

All monies payable towards subscription of securities under private placement shall be paid through cheque or demand draft or other banking channels. Any payment in cash is clearly prohibited.

A company making private placement offer letter shall allot its securities within sixty days from the date of receipt of the application money. If company does not allot the securities with sixty days, it shall repay the application money to subscribers within fifteen days from the completion of these sixty days. Thereafter an interest at the rate twelve percent per annum shall be charged.

All money received under private placement shall be kept in a separate bank account in a scheduled bank. This money shall not be utilised for any purpose other than for –

      i.        Adjustment against allotment of securities; or

     ii.        The repayment for monies.

All private placement offers shall be made only to persons whose names are recorded by the company prior to the invitation to subscribe, and such persons shall receive the offer by name, and that a complete record of such offers shall be kept by the company and complete information about such offer shall be filed with the Registrar within a period of thirty days of circulation of relevant private placement offer letter.

The company shall not release any public advertisement, or circulate information to public at large about such offer.

Company shall file a return of allotment with the registrar.

If a company makes an offer or accepts monies in contravention, the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.

Please note: I welcome your comments and feedback. This blog post is not a professional advice. Readers may share this post on social media by using buttons given here.

Advertisements

49 responses to “PUBLIC OFFER AND PRIVATE PLACEMENT

  1. Pursuant to rule 14(2)(c) of the Companies (Prospectus and Allotment of Securities) rules,2014 value of the offer per person should not be less than Rs. 20,000 Face Value (FV). What if the value of the Offer made to a few individuals is less than Rs 20,000 of the ‘face value’ of securities?

    As per provision of Section 441 (1) of the Act, 2013,it can be compounded by NCLT/ Regional Director/ Person authorized by Central Government, but how can you make the default good? Can you modify F.V or allott more shares?

    Like

  2. Shaleen Patni

    Dear Sir,
    All your articles have been extremely helpful to me time and again. Their accuracy, depth, simple construction and coverage are excellent and worth applauding.
    I have a queries w.r.t. Private Placement and I hope you would resolve it.
    (i) Can an unlisted public limited company issue equity shares through private placement for consideration other than cash?
    (ii) Are their any rules w.r.t. pricing of the shares to be issued via private placement route? IF YES, can you please mention the relevant RULE or Provision?
    (iii) In case of issue of shares through private placement at a price below the book value, what are the consequences as per Companies Act, 2013 as well as Income tax Act?

    Thank you very much.

    Like

  3. Pingback: AishMGhrana: 2015 in review | AishMGhrana

  4. Pingback: EXEMPTION TO NIDHI COMPANIES | AishMGhrana

  5. Pingback: Amendment to Share Capital and Debentures Rules | AishMGhrana

  6. Can you please provide me the format of offer letter u/s 62(a)(i) for right issue?

    Like

  7. Dear Sir,
    a private limited co wants to allot share through private placement but due unawareness of t he act the co has received the application money in the running account of the co and has also utilized the application money before allotment of shares i.e is in the month of july, august 2014? now i need a suggestion on opening of the separate account provision as per new act what to do in this situation?

    Like

  8. Pingback: AishMGhrana: 2014 in review | AishMGhrana

  9. sir i have to make new issue of equity shares in a private limited company, but these are to be issued to a non-existing shareholder who is only a director of the company. can we do this by renouncing the rights of a existing shareholder to non-shareholder. And if yes so whats the procedure, whether it will amount to private placement?

    Like

    • Existing Shareholders has right to renounce his right in favour of any other person during “further allotment of shares”, company may simply issue share to such other person subject to all compliance related to “further allotment of share” which is right issue in present case.

      Like

  10. if a company is going for IPO as per section 23(1)(a) of the companies Act, 2013 required to pass Special resolution?

    Like

  11. What will be the format of letter of offer for private placement

    Like

  12. Richa Singhal

    hello sir,
    How to raise the capital of private company if the company neither want to opt for private placement nor the existing share holders want to take the share.i.e; they want others persons to include in the company.(withdraw there rights to take the shares.)

    Like

  13. What is the procedure for Issue of equity shares by private company and also what is the procedure for issue of preference shares by private company under companies Act,2013

    Like

  14. Dear Sir,
    If a private company issues right shares to its existing shareholders under 62(1) and they are not subscribed by them, then the company can issue the same to others. My query is, if after the refusal to subscribe by the existing shareholder, the board decides to allot them to certain number of persons at its discretion, will it tantamount to private placement and whether all the provisions applicable to private placement will have to be followed?

    Like

  15. Pingback: PRIVATE PLACEMENT | AishMGhrana

  16. Pingback: OFFER OF SALE BY MEMBER | AishMGhrana

  17. Dear sir,
    Thanks a lot for your kind reply ,

    In the initial implementation stage of the Companies act , your reply are indeed helping us to understand the co-relation of the different provisions.

    I understand that money brought in as share application money can not be utilised unless such amount is appropriated against allotment .

    Earlier my assumption was share application money shall be treated as Deposits only if shares are not allotted within 60 days of receipt . Further , Clause III of the definition, I presumed that anyways any sum received from the Foreign collaborator is exempted from the purview of the Deposits.

    However by re-reading of your post I understood that we can not appropriate the funds before allotment irrespectively whether same is brought under rights issue or private placement.

    but if we keep the amount so brought in as share application money , before allotment of shares , in Fixed deposits with the Scheduled Bank , does it amounts to utilisation of the said money??

    Further , if we need to follow the procedure under the Private Placement for rights issue also , do we need to take EGM for making rights issue as per rules of Private Placement , & do we need to file offer letter with ROC which is not required in case of Rights issue .

    Please Reply.

    Like

    • 1. Where will we classify fixed Deposits in Scheduled Bank? Is it an Investment? If it is, I am afraid.

      2. Section 42 does not include or exclude shareholders while talking about public. Section 62(1)(a) talk about right issue and clause (b) talk about Stock option leaving Private placement for Clause (c) while we read it with proviso to sub – Rule (1) of Rule 13 of the Companies (Share Capital and Debentures) Rules 2014.

      Hope, I am not forgetting something. We may discuss further.

      May I request, once all issue settled, to share flow chart and documents over e – mail for long time reference.

      Like

  18. Dear Sir,
    This has reference to my query dated 10th April,
    Plain reading of Section 23(2) states that Pvt. Company can issue Share by way of Rights, Bonus Issue or through Private Placement . Which means Private Placement is separate from rights issue

    Now , if Pvt. Co. is issuing shares to its existing shareholder it is a case of Rights Issue . Which shall be governed by provision of 62(1) (a) .

    In such case do we need to follow the provision of section 42 .

    Can application money brought in the Rights issue be utilised before allotment of Shares??

    Kindly reply

    Like

  19. Dear Sir,
    Thanks a lot for your kind reply ,

    I am confused because of the provision of section 23 (2) , which states that Private company may issue securities a) by way of rights issue Or bonus Issue b) through private placement…..

    further, can we say that it means Private Placement is separate from the Rights issue.

    While , plain reading of the section 62 (a) states that where at any time , a company having share capital proposes to increase the subscribed capital by the issue of further shares , such shares shall be offered to the persons who at the date of offer , are holders of the equity shares of the company in proportion , as nearly as circumstances admit, to the paid up share capital on those shares by sending a letter of offer subject to the condition specified .

    Can we say this is the exact procedure of the Rights Issue mentioned in the Act ?

    Like

  20. Sir,
    We are wholly owned subsidiary of foreign Public company and incorporated as a Pvt. Ltd. Co. , Now we wish to issue further capital to our parent Company, I understand it is rights issue of shares.
    However , I could not find any procedure for rights issue in the section as well as in the rules.
    Do we need to comply with the procedure regarding the offer letter, closure and related formalities ? Practically being 100% subsidiary it does not serve any purpose, can you please guide me on the same.

    Like

  21. Kanika Sharma

    Hi Sir,
    I have already discussed with you the matter of Private Placement..because i had query in that..so now new Rules have come…so could you please let me know the exact number of person to whom we can issue shares under Private Placement.because Act, 2013 says its 50 in a F.Yr and Rules says 200….so what is correct exactly????..Your Articles actually help us to understand the concepts of new Act, 2013.

    Like

    • I always welcome readers who love to ask questions and also give replies.

      Sub – section (2) of Section 42 reads; “Subject to sub-section (1), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or “such higher number as may be prescribed”.

      Clause (b) of sub -rule (2) of Rule 14 “prescribes”, “such offer or invitation shall be made to not more than two hundred persons in the aggregate in a financial year” with all its proviso and explanations.

      This limit effectively goes up to 200.

      [Note: Even if this limit is guided by maximum number of members in a private company, I personally think this much higher. Unless rules increase lot size to at least one Lakh, it may cause harm to general public in far off places.]

      Like

  22. Sir,
    What procedure wholly Owned Pvt. Co. needs to follow for issue of shares to its parent company ?

    Like

  23. Dear Sir,
    We are going to do private placement in our public unlisted company.and your article on private placement really helping me more, Thanks a lot .but now i wanted to know that how to issue preference shares for 2000 holders? I mean can we file Four Form 2 in one F.Yr within gap of 2 to 3 days because holder will be 2000.so in one Board Meeting to how many persons we can issue securities 49 or 50? and what should be the Time Gap to conduct Board Meeting in one Year? May i get the format of Private Placement Offer Letter.

    Best Regards
    Kanika Sharma

    Like

    • Dear Kanika,
      In this post, I discussed Section 42 of the Companies Act, 2013 which is not yet notified and not applicable. When this Section will notify, Form 3.4 of draft rules 3.12 in its final version shall be format of the Private Placement Offer Letter.
      I will discuss, all these once these sections and relevant rules notified by the Ministry.

      Like

  24. In case of private placement is there is any agreement between company & investor?? If yes then please provide..
    Thanks in advance….

    Like

    • Private placement of securities under the Companies Act, 2013 is permitted only through issue of a “Private Placement Offer Letter” (PPOL).
      Earlier practice of investor agreement may remain only to facilitate the process not otherwise.

      Like

  25. Pingback: AishMGhrana: Annual Report 2013 | AishMGhrana

  26. hello,

    im a newbie. My doubt is if someone bought the shares of public company in private placement.. can he sell those shares in the exchange? is it possible?

    unless the company is not listed in the BSE or NSE, he cant sell his shares(which he bought from the private placement) in the exchange. is this correct? Please enlighten me.

    Thanks,
    Pravin

    Like

    • There is not relation between purchase through Private placement and purchase form Exchange with regard to possible sale at Exchange.

      A shareholder may sale his share any time in private transaction. However, for transaction through exchange these share must be listed on the Exchange.

      Once a share, earlier offered through private placement, listed on an Exchange, these shares may be transacted through exchanges.

      Hope, It is clear to you.

      Like

  27. Pingback: TRANSFER AND TRANSMISSION OF SECURITIES (Companies Act, 2013) | AishMGhrana

  28. Dear Sir

    How a private company make a private placement ??

    Like

    • In term of Clause (b) Sub – section (2) of Section 23 Read With Section 42 of the Companies Act, 2013; A private company may make private placement. I explained private placement in this blog post.
      Private Placement was also possible earlier also, as claimed to be done by Sahara.
      How a company incorporated with only two member may raised capital form other 48 (now 198 in Act of 2013) members.

      Like

  29. Pingback: MAJOR CAUTIONS UNDER PUBLIC OFFER (COMPANIES ACT, 2013) | AishMGhrana

  30. As per new provision – “All monies payable towards subscription of securities under private placement shall be paid through cheque or demand draft or other banking channels. Any payment in cash is clearly prohibited.” What is status of the amount received by Company as loan for last few years and now converted in to share application money?

    Like

  31. Pingback: ALLOTMENT OF SECURITIES (Companies Act 2013) | AishMGhrana

  32. Pingback: VARIANTS OF PROSPECTUS (Companies Act, 2013) | AishMGhrana

  33. Pingback: PROSPECTUS (Companies Act 2013) | AishMGhrana

No professional query in comments (but in mail). Only academic discussion here. Comments moderated. Sometime, reply to your mail ID. To subscribe blog, check homepage.

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s