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:
- Chapter III i.e. Prospectus and allotment of securities;
- Chapter IV i.e. Share capital and Debentures; and
- 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;
- Listed Companies;
- 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.