Public offer & Private Placement of securities under Companies Act, 2013
-By Janhavi Shah, student of 3rd year LLB at KC Law College Mumbai
The Companies Act, 2013 deals with provisions relating to public offer and private placement of securities. Chapter III of the Companies Act, 2013 lays down provisions relating to prospectus and allotment of securities and is divided into two parts. Part I deals with public offer of securities while Part II deals with private placement of securities. Section 23 of the Act contains provisions on issue of securities by a public company and a private company. A public offer can only be carried out by a public company for issue of securities through a prospectus, as per provisions laid down in Section 23 to 41 of the Act. Section 42 deals with private placement and can be used to issue securities by private companies and public companies.
Section 23 of Part I the Act lays down ways on how a public company and private company can issue securities:
On behalf of a public company:
- A public offer through a prospectus to the public; or
- A private placement to a select group of persons as per the provisions of Part II of Chapter III of the Act; or
- A rights issue or a bonus issue, however a listed company or a company which intends to get its securities listed, can comply with the provisions of Securities and Exchange Board of India Act, 1992 to follow the necessary prescribed rules.
On behalf of a private company:
- by way of rights issue or bonus issue
- through private placement as per the provisions laid down in Part II of Chapter III of the Act.
A public offer includes an initial public offer or a further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus. Initial public offer is an offer of securities by an unlisted company to the public for subscription and includes an offer for sale of securities to the public by any existing holder of such securities in an unlisted company. A further public offer refers to an offer of securities by a listed company to the public for subscription and includes an offer for sale of securities to the public by existing holders of such securities in a listed company.
The provisions relating to issue and transfer of securities and non-payment of dividends, by listed companies or companies intending to get securities listed on any recognised stock exchange in India or for public issue will comply with various rules and regulations under the SEBI (Issuance of Capital and Disclosure Requirement) Regulation, 2009 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and as per Section 24 of the Companies Act, 2013, SEBI has the power to regulate issue and transfer of securities by listed and unlisted companies. Publicly traded securities are subject to more regulations and scrutiny than private placement offere by a company. Every company making a public offer of securities shall issue such securities in dematerialised form.
A document inviting deposits from the public or an offer from the public for the subscription of shares or debentures of the company is a prospectus as per the Companies Act, 2013. Where securities are allotted or agreed to be allotted by a company for sale to the public, any document for such purpose shall be deemed to be a prospectus in this behalf. A private placement is carried out by issuing a private placement offer letter to a select group of persons. An offer made to more than two hundred persons in an aggregate financial year will constitute a public offer as per Section 42 of the Companies Act, 2013 along with Rule 14(2)(b) Companies(Prospectus & Allotment of securities) Rules, 2014. A private placement can be made to a select group of identified persons excluding qualified institutional buyers (QIBs) and securities offered to existing employees of the company under a scheme of ESOP but should not exceed fifty persons or such higher number as may be prescribed. If the securities allotted exceed the prescribed number of persons, it shall be deemed to be a public offer.
Procedure for private placement under Companies Act, 2013
A meeting of the Board of Directors need to be convened to seek approval for the following:
- A company to offer or issue securities through private placement.
- Identifying the group of persons to whom such securities can be offered to and approving the letter to be sent to such identified group of persons.
- Determining the limit on securities to be issued.
- The price of the securities through the Valuation Report.
- Offer letter to be drafted in Form PAS-4
- Notice issued for an extraordinary general meeting of shareholders in order to take the approval of the members for private placement.
- The application money received must be kept in a separate bank account with a Scheduled Bank for until the offer period as mentioned in the offer-cum-application letter for allotment of securities.
As per Section 117 & 179(3)(c) of the Companies Act, 2013 the Form MGT-14 needs to be filed with the Registrar of Companies within thirty days of passing the special resolution for issuing securities through private placement. However, a private company does not have to fill the Form MGT-14 unless the offer or invitation of securities include non-convertible debentures and the value of the proposed issue does not exceed the limit specified under Section 180 of the Companies Act, 2013.
A private placement offer and application form shall be made in Form PAS-4 and the company should maintain a complete record of such offers in Form PAS-5. The private placement offer and the application form must contain the serial number and shall be addressed to the concerned person, and sent either in writing or in electronic mode within thirty days of recording their name. Any amount paid towards subscription of such securities shall be paid either through cheque or demand draft, as cash is not a permissible mode of payment. The company will be allowed to utilize the receipts through private placement after a Return of Allotment is filed in Form PAS-3 with the Registrar of Companies. The company shall make the allotment of securities with sixty days of receipt of application money for such securities, in case of failure to do so, the company must refund the application money with fifteen days of completion of sixty days or be liable to pay an interest at the rate of twelve percent from the expiry of the sixtieth day.
A public or private company raising funds to carry on its business through either a public or private placement of securities to the public, identified group of persons, members or any other such persons as mentioned under Section 23 of the Companies Act, 2013. The procedure, criteria, and disclosure requirements are mentioned in the Act and bring more stability and security to the members participating in the subscription of such securities. In case of a public offer there are more stringent disclosure requirements, and a prospectus is considered an important document in order to provide complete information to the members of the public and investors interested in subscribing to the issue of such securities offered by the company. Section 42 of the Act that contains provisions relating to private placement of securities, has undergone various amendments in order to ensure that there is no scope for error and the company’s capital is maintained and the operation runs smoothly. Section 42 of the Act along with rules and regulations by SEBI and MCA also aids in the smooth functioning of the company and aids it to achieve its objects and goals successfully.
- Ministry of Corporate Affairs. (n.d.). Companies Act, 2013. https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
- SEBI. (n.d.). Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009. https://www.sebi.gov.in/acts/icdrreg09.pdf