In common parlance, Capital can be defined as wealth in the form of money or other assets owned by a person or organization or available for a purpose such as starting a company or investing. As per Section 2 (84) of the Companies Act, 2013 shares mean a share in the share capital of a company and includes stock. It is clear that for carrying on the business capital is an essential item. Capital is the money of shareholders invested in the business to earn revenue and make a profit.
If a company is already in existence and wants to expand or grow its business then it will require money. Money can be brought into the business in two ways one is capital and the other is the loan. Here we will discuss the ways in which further capital could be introduced into the company.
The Companies Act, 2013 states that
A public company may issue securities to the public:-
A private company may issue securities:-
It is important to understand the difference between the word offer and Issue.
Offer means present or proffer (something) for (someone) to accept or reject as desired. (Here acceptance is required or pending)
Issue supply or distribute (something) for use or sale (Issue is the step after acceptance of the offer).
The genuine term for these words shall be a Public Offer, Private Placement Offer, and Right Offer.
The basic difference between Public Offer, Private Placement, Preferential Offer, Right offer, and Bonus Issue is as follows.
It is basically a method to raise capital from the public at large by offering a prospectus through Initial Pubic Offer or Further Public Offer. Prospectus can be offered only by a public limited company because Section 2 (68) (iii) prohibits the private limited company from inviting the public to subscribe for any securities of the company. In general, when the offer is not domestic, it is a public affair. There is no definition of the public given in the Companies Act, 2013. In popular parlance, a public means the general body of mankind, or of the nation.
Section 27 of the Companies Act, 2013 states that matters relating to the issue (offer), transfer of securities and non-payment of dividend related to listed companies and companies intended to list their securities in Stock Exchanges shall be administered by the regulations of Securities Exchange Board of India.
This can be discussed in another article in detail.
A private placement shall be made only to a selected group of persons who have been identified by the Board, whose number shall not exceed two hundred in a financial year. The number of members mentioned here shall exclude the qualified institutional buyers and employees of the company those who have been offered securities under a scheme of employee’s stock option. A company shall not make an offer or invitation to subscribe to securities through private placement unless the proposal has been previously approved by the shareholders of the company, by a special resolution for each of the offers or invitations. Private placement shall include all types of securities.
The expression ‘Preferential Offer’ means an issue of shares or other securities, by a company to any selected person or group of persons on a preferential basis by passing a special resolution. Such an offer on a preferential basis should also comply with the conditions of the private placement. The preferential placement includes equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.
Preferential Offer does not include the following
1) An offer of specified securities made through a public issue,
2) A rights issue,
3) A bonus issue,
4) An employee stock option scheme,
3) An employee stock purchase scheme,
4) Qualified institutions placement,
5) An issue of sweat equity shares,
6) Depository receipts issued in a country outside India, or
7) Foreign securities
From the above, we can say that all preferential offers are private placement but all private placements are not preferential offers.
Private Placement deals with securities but preferential offer deals with shares only. Private placement includes the issue of shares to the Qualified Institutional Buyers whereas preferential offer does not include it.
Where a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to persons who are the holders of equity shares of the company in proportion to the paid-up share capital. The right issue is a wholly separate way of further issue of capital. It is different from the public issue, private placement, and preferential offer. In case of the right issue a Board Resolution is required to issue further shares to the existing shareholders of the Company. A right of renunciation exists with the shareholders who are eligible to get the share.
A bonus issue refers to the further issue of shares to the existing shareholders of the Company in the proportion of existing share they have with them without any consideration. The bonus shares are issued by capatilizing the amount from the reserve and surplus.
The information in this post is provided for general informational purposes only, No information contained in this post should be construed as legal advice from the individual author. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances