The much-awaited Companies Bill, 2013 got the President’s assent on 29 August 2013. The new Companies Act, 2013 (“Act”) seeks to consolidate and amend the law relating to the companies and intends to improve corporate governance, raise levels of transparency and to further strengthen regulations for corporates. The Act has made significant changes to the provisions of law and has introduced several new concepts. This article deals with the changes made to provisions relating to private placement of securities, which has been an important route of fund-raising for companies. The tightening of private placement norms is done in the backdrop of the recent dispute between the securities market regulator SEBI and Sahara Group where the Supreme Court had ordered the Sahara Group companies to refund the amounts collected from investors. The intent behind the changes is to make the practice more transparent and to prevent misuse of the provisions.
2. Background of the SEBI-Sahara dispute
The Sahara case was an instance where a large amount of money was raised from the pubic circumventing the rules. The companies Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited issued unsecured optionally fully-convertible debentures (“OFCDs”) amounting to about Rs 20,000 crores to more than 2 crore investors. SEBI came to know of this allocation through another company of the Sahara Group during its filing for an initial public offer. It was claimed by the SEBI that issuance of the OFCD’s was in violation of sections 56 and 73 of the Companies Act, 1956 (“1956 Act”) and various other clauses of the SEBI (Disclosure and Investor Protection) Guidelines, 2000and also various provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. It was argued by the Sahara Group that OFCDs were ‘hybrid’ securities and, thus, would not come under the Securities and Exchange Board of India Act, 1992 (“SEBI Act”), or the Securities Contract Regulation Act, 1956 (“SCRA”), but would be governed by the Central Government under section 55A(c) of the 1956 Act.The Supreme Court held that the SEBI had jurisdiction over hybrids like OFCDs, since ‘securities’ had been specifically dealt with under section 55A of the 1956 Act.The Court upheld the proceedings of the SEBI and Sahara was ordered to refund the amount to investors with interest.
3. Private placement provisions under Companies Act, 1956
As per the proviso to section 67(3) of the 1956 Act, when a company makes an offer or invitation to subscribe for shares or debentures to 50 or more persons, such offers is treated as made to public.
Where an invitation in made by the management of a company to selected persons for subscription or purchase by less than fifty persons receiving the offer or invitation, the shares or debentures and such invitation or offer is not calculated directly or indirectly to be availed of by other persons, such invitation or offer shall not be treated as an offer or invitation to the public.
4. Position under Companies Act, 2013
4.1 Definition of private placement
Part II of Chapter III of the Act deals exclusively with private placements.
Private placement has been defined in explanation II(ii) to section 42 of the Act.
“private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section
It is to be noted that the provisions for private placement apply to issue of “securities” and not “shares”. The new provisions cover a whole host of instruments such as shares, bonds, debentures and other marketable securities.
Section 42(4) provides that any offer or invitation not in compliance with the provisions of the section shall be treated as a public offer and all provisions of the Act, SCRA and SEBI Act shall be required to be complied with in such a case.
4.2 Offer can be made only to 200 persons in a financial year [Section 42(2) and rule 3.12(2)]
Unlike the 1956 Act, under which the number of members in a private company is restricted to 50, private companies under the Act can havemembers up to 200.
As per rule 3.12(2)(b)theDraft Companies Rules, 2013 (“Rules”), an offer or invitation for private placement shall be made to not more than two hundred persons in the aggregate in a financial year, excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of section 62(1)(b) of the Act.
4.3 Other conditions for private placement
4.3.1 Section 42(5) of the Act states that all monies payable towards subscription of securities by private placement shall be paid through cheque or demand draft or other banking channels but not by cash.
4.3.2 All securities under private placement are to be allotted within a period of 60 days from the receipt of application money. If not the securities are not allotted within the specified period, the application money is to be refunded within a period of 15 days from completion of 60 days’ time. [Section 42(6)]
4.3.3 The entire amount raised by the issue of offer or invitation will have to be parked in a separate bank account and cannot be used until allotted. [Proviso to section 42(6)]
4.3.4 The particulars of every private offer shall be filed with the Registrar within 30 days of circulation of offer letter. [Section 42(7)]
4.3.5 The companies offering or inviting subscriptions under private placement cannot advertise or utilize any marketing media. [Section 42(8)]
4.4 Compliance required under the Rules
Part II of Rules deals with private placement. Rule 3.12 prescribes certain additional requirements to be complied with in case of private placement:
4.4.1 A private placement offer letter shall be accompanied by an application form addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the names of such persons in accordance with section 42(7) of the Act. No person other than the person so addressed in the application form shall be allowed to apply through such application form and any application not so received shall be treated as invalid.
4.4.2 The proposed offer of securities or invitation to subscribe securities must be approved by the shareholders of the company, by way of a special resolution, for each of the offers/ invitations.
4.4.3 The offer or invitation shall be made to not more than two hundred persons in the aggregate in a financial year, excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62 of the Act.
4.4.4 The number of such offers or invitations shall not exceed four in a financial year and not more than once in a calendar quarter with a minimum gap of sixty days between any two such offers or invitations.
4.4.5 The value of such offer or invitation shall be with an investment size of not less than fifty thousand rupees per person.
4.4.6 The payment to be made on subscription of securities shall be made from the bank account of the person subscribing to such securities. However, monies payable on subscription to securities to be held by joint holders shall be paid from the bank account of the person whose name appears first in the application.
4.5 Penalty for non-compliance
Section 42(10) of the Act prescribes the penalty for contravention of section 42. If a company makes an offer or accepts monies in contravention of the section, 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. Also, the company is required to refund all monies to subscribers within a period of thirty days of the order imposing the penalty.
5. Position of unlisted public companies
5.1 In December2011, the Ministry of Corporate Affairs had issued Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011 (“2011 Rules”) and made the preferential allotment rules as applicable to public companies more stringent. Some of the provisions of 2011 Rules are listed below:
5.1.1 The offer for preferential allotment cannot be made to more than 49 persons.
5.1.2 Any offer or invitation not in compliance with provisions of section 81(1A)read with section 67(3) of the 1956 Act would be treated as public offer and provisions of the SCRA and SEBI Act will need to be complied with.
5.1.3 The money payable on subscription should be paid only by way of cheque or DD or other banking channels but not by cash.
5.1.4 Allotment of securities should be completed within 60 days from the receipt of application money. If not so allotted, the company should repay application money within 15 days thereafter, failing which it should be repaid along with an interest at the rate of 12% per annum.
5.1.5 The application money should be kept in a separate bank account and should not be utilized prior to allotment.
5.1.6 Company offering securities cannot release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about the offer.
The private placement provisions as contained in the Act have incorporated the provisions of the 2011 Rules. While the 2011 Rules were applicable to public companies only, the provisions of the Act on private placement will apply to all companies. Once the Act comes into force it is to be seen whether the 2011 Rules will be repealed or the public companies will be required to comply with both the Act as well as the 2011 Rules.
6. Preferential allotment provisions
Rule 4.11(1) of the Rules provides for issue of shares on preferential basis under section 62(1)(c) of the Act. Explanation (i) to Rule 4.11(1) provides the definition of preferential offer.
‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities.
In terms of Rule 4.11(1), an issue of shares on preferential basis should also comply with conditions laid down in section 42 of the Act.
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 deal with preferential issue of securities by a listed company. Regulation 2(z) defines “preferential issue” as an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis and does not include an offer of specified securities made through a public issue, rights issue, bonus issue, employee stock option scheme, employee stock purchase scheme or qualified institutions placement or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities.
The government has asked SEBI to set up a committee to look into compatibility of market watchdog’s regulations for private placement of securities with the proposed measures in this regard in the new Companies Bill.
As the requirements for raising funds under the private placement have been made more stringent, the new law will significantly increase the compliance burden on private companies looking to raise funds through private placement. While the new provisions seem to be introduced as a response to the Sahara case, it needs to be noted that the fund-raising done by the Sahara companies was in contravention of the existing provisions of law and did not amount to private placement.
Also, since no specific exemption has been provided for private companies or small companies, the new law will reduce flexibility available to private companies and family run companies for raising funds.
Ramaiya, A.; ‘Guide to the Companies Act’, Part 1, 17thed., LexisNexis ButterworthsWadhwa, Nagpur, 2010, p. 1000
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