CA Pratik Anand, ACA
Issue of shares under the Companies Act’2013 by Private Limited Companies
1) Methods of issue of shares:
A) Private Placement (Section 42 of the Companies Act’2013, Rule 14)
B) Preferential allotment/Preferential offer
C) Right Issue
D) Conversion of Loan/Debentures into shares.
E) Bonus issue
A) Private Placement (Section 42 of the Companies Act’2013, Rule 14)
1) “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 section 42.
Conditions under section 42 are:
Private Placement should be done through offer letter (PAS-4).
2) A private placement offer letter shall be accompanied by an application form serially numbered and 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 sub-section (7) of section 42 of the Act.
3) The offer shall not be less than Rs. 20,000/- per subscriber of face value of shares.
4) Subscriber should have a separate bank account from where the subscription should be made.
5) The Private Placement offer should be made only after passing a special resolution by the shareholders.
6) The price of the private placement should be determined:
a) The explanatory statement annexed to the notice for the general meeting should define the basis or justification for the price (including premium, if any) at which the offer or invitation is being made shall be disclosed.
7) No fresh offer or invitation shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or withdrawn or abandoned by the company – Section 42(3).
8) Company shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent per annum from the expiry of the sixtieth day – Section 42(6).
9) The company shall maintain a complete record of private placement offers in Form PAS-5 and also file alongwith private placement offer letter in Form PAS-4 with ROC within a period of thirty days of circulation of the private placement offer letter. (Date written in the private placement offer letter is the date of circulation of offer letter)
10) A return of allotment of securities under section 42 shall be filed with the ROC within thirty days of allotment in Form PAS-3. (Like Form-2 of the Old Act)
11) Contravention of Section 42 of the Act attracts 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 Section 42(10).
B) ISSUE OF SHARES ON PREFERENTIAL BASIS:
A company may, if authorized by a special resolution passed in a general meeting, issue shares in any manner whatsoever including by way of a preferential offer, to any person(s) whether or not those persons include the persons referred to in clause (a) or clause (b) of sub-section (1) of section 62 (i.e existing shareholders or employees of the Company). Such issue on preferential basis should also comply with conditions laid down in section 42 of the Act (private placement). A valuation report of registered valuer determining the price of shares is also mandatory.
1) Preferential issue means offer of shares by a Company to a select person or a group of persons on a preferential basis but does not include offer of shares through right issue, public issue, ESOP, bonus issue etc.
2) The issue of shares on preferential basis should be authorised by the articles of association of the company.
3) The issue should be made fully paid up at the time of allotment only.
4) The explanatory statement should disclose the necessary facts about the allotment.
5) Preferential allotment should be made/complete within 12 months of special resolution.
6) Valuation to be determined by registered valuer.
C) RIGHTS ISSUE OF SHARES:
As per section 62 of the Act Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered—
1) to its existing shareholders (OR needs to be passed, if provision there in the AOA)
2) to employees under a scheme of employees’ stock option, subject to special resolution passed by company.
3) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer.
4) Letter of offer for right issue of shares needs to be made and given to existing shareholders for making Right Issue of shares.
5) Shareholders will be given 15-30 days for accepting the right issue of shares from the date of offer letter.
D) CONVERSION OF LOANS OR DEBENTURES INTO SHARES:
A private company may convert loans raised by the company or debentures issued by the company into shares by passing of special resolution if there is such a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company – Section 62(3).
E) Bonus issue:
Conditions
1) Must be authorised by the articles otherwise the articles need to be amended.
2) Resolution in the general meeting needs to be passed.
3) The Company has not defaulted in repayment of the statutory dues, Fixed deposits or debt securities.
4) All shares must be made fully paid up before making bonus issues.
5) Bonus issue can be made out of:
→Free reserves
→Securities premium Account
→Capital Redemption Reserve
Note: Once a Bonus issue is announced, it cannot be withdrawn.
Hope you find the above information in order.
(The author is a CA in practice at Delhi and can be contacted at: E-mail: capratikanand@gmail.com, Mobile: +91-9953199493)
Read Other Articles of CA Pratik Anand
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Issue of Shares by Private Limited Companies: Companies Act, 2013
Private Placement under the Companies Act, 2013
Author Bio
Dear Sir
I m highly impressed by reading your above article. I am having one query regarding right issue. Kindly respond to my query. My query is that whether wholly own subsidiary private limited company can accept money of right issue in installment or nay payment option can be given to holding comapny.
I have a query as follwong
Can a newly incorporated Company allot the shares on preferential basis in the 1st month of incorporation itself?
Act does not sopecify anything for the same … Please reply on urgent basis.
respected sir, i have a query regarding issue of shares by altering face value of shares. can a company having authorised capital of rs. 20000 shares of rs.10 each issue more shares of 20000 of rs.5 each after altering face value to 5 each.
for eg.today my company has share of 20000* 10= 200000
but i want it to be altered for 20000*5=100000
and i want to issue 20000*5=100000
theres no alteration in total amount of authorised capital..theres only chane in no. of shares and face value…can it be done???pls reply..thank u in advance
thanks for the in information, can a company issue shares at facevalue against the unsecured loan which is taken at 0 percent
Dear Sir,
thanks for such a valuable knowledge.
i have one quiry, with reference to Section 42(6) interest should be charge on which basis.?
wether daily, weekly or monthly?
Dear and Respected Sir,
Can you guide if any books and records to be maintained for issuing of shares by a private Ltd Company? if so can you send me specimen to my e-mail ID?
Sorry for the in-convenience.
Thanking U,
Best Regards
MRN Purushothaman
This is very useful articles which gives full explantions.
thanks & regards.
D.MOHANKUMAR
9841033099
CHENNAI-34
Dear Sir,
My query is can an existing loan standing in the books of the Company be converted into Preference Shares, can it be treated as allotment of securities for consideration other than cash under Companies Act, 2013?
Brief Facts;
One of our Public Company and a Private Company which is a Subsidiary of a Public Company is having outstanding Loan standing in the their books since 2012 and the company has paid interest on regular interval on the same. Presently, due to financial crunch, the Company is unable to pay the interest on the outstanding Loan, hence the Company with due consent of the Lender has decided to allot the Preference shares against the outstanding Loan in compliance with the preferential allotment guidelines as prescribed in the Companies Act, 2013 read along with relevant Rules framed thereunder. Can it be treated as allotment of securities for consideration other than cash but the contract containing the terms for conversion of the Loan into security is not executed earlier.
Understanding as per Bare Reading of the Law with the Rule:
As per the bare reading of the Companies Act, 2013 along with the relevant Rules framed thereunder, “securities can be allotted for consideration other than cash, if there shall be attached to the Form PAS-3 a copy of the contract, duly stamped, pursuant to which the securities have been allotted together with any contract of sale if relating to a property or an asset, or a contract for services or other consideration.
However, where a contract referred above is not reduced to writing, the company shall furnish along with the Form PAS-3 complete particulars of the contract stamped with the same stamp duty as would have been payable if the contract had been reduced to writing and those particulars shall be deemed to be an instrument within the meaning of the Indian Stamp Act, 1899 (2 of 1899).”
My Query:
In light of the above facts & provisions, can we allot the preference shares to the Lenders vide executing an Agreement in current date with the Lender for converting the Loan into Preference Shares on preferential basis?
Can the aforesaid allotment would be in due compliance of the law????
Kindly give your valuable advice/suggestions. Your prompt response in the instant matter is highly solicited.
Sir,
I want to know that a private company can issue shares by the way of right issue more then one time in a same year?
Dear Anand,
Thanks for sharing such a helpful article.
I want to ask one query, if a private limited company wants to issue shares to its existing shareholder, (application money already credited in a account), whether it will come under preferential issue or right issue. Do we need to comply with the provisions of Sec. 42 in that case ?
Regards
Surbhi Singhvi
Subscriber should have a separate bank account from where the subscription should be made.
Please check this condition ?
Dear Anand,
Thanks for posting an useful article.
Ganesh,
Coimbatore
very useful article
are any ROC filing required uder Option D which is loans and debentures conversation into shares of the company
dear Mr. Anand,
what is the meaning of the condition 4 of section 42 that Subscriber should have a separate bank account from where the subscription should be made ?
regards
anant