As per section 23 of the Companies Act, 2013 (the Act) a private company may issue securities-
i. by way of rights issue or bonus issue or
ii. through private placement
In case of private company either it can issue shares to its existing shareholders by way of rights issue or by way of giving them bonus shares or it can issue securities through private placements.
PRIVATE PLACEMENT – Part II of Chapter III, 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 section 42 of the Act.
The offer of securities or invitation to subscribe securities, shall be made to not more than two hundred persons in the aggregate in a financial year (excluding 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). This restriction would be reckoned individually for each kind of security that is equity share, preference share or debenture (i.e. 200 for equity shares, 200 for preference shares and 200 for debentures) – Rule 14(2) (b).
The value of such offer or invitation per person shall be with an investment size of not less than twenty thousand rupees of face value of the securities – Rule 14(2) (c).
The provisions of clauses (b) and (c) of sub-rule (2) of Rule 14 shall not be applicable to-
- non-banking financial companies
- housing finance companies
The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the Bank account from where such payments for subscriptions have been received – Rule 14(2)(d).
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.
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 conforming to this condition shall be treated as invalid.
The offer should be previously approved by the shareholders of the company, by a Special Resolution, for each of the Offers or Invitations.
In case of offer or invitation for non-convertible debentures, it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitation for such debentures during the year.
The explanatory statement annexed to the notice for the general meeting the basis or justification for the price (including premium, if any) at which the offer or invitation is being made shall be disclosed.
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). For example of a company issuing equity shares then it cannot issue preference shares or debentures until procedure of equity shares is completed.
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).
No company offering securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer – Section 42(8).
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.
A return of allotment of securities under section 42 shall be filed with the ROC within thirty days of allotment in Form PAS-3.
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).
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—
- to its existing shareholders.
- to employees under a scheme of employees’ stock option, subject to special resolution passed by company.
- 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.
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 persons whether or not those persons include the persons referred to in clause (a) or clause (b) of sub-section (1) of section 62. 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 also mandatory.
ISSUE OF SWEAT EQUITY SHARES:
A company may issue sweat equity shares of a class of shares already issued to its directors or employees by passing a special resolution – Section 54 of the Act.
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).
ISSUE OF BONUS SHARES:
A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of—
- its free reserves;
- the securities premium account; or
- the capital redemption reserve account:
Under the 1956 Act a private limited company could issue shares by passing a board resolution but this is not the case under 2013 Act. Under 2013 Act a private limited company can issue shares only using the methods prescribed in the Act.
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