Summary: Under the Companies Act, 2013, companies have two primary options for raising capital: public issues and private placements. Public issues are heavily regulated by SEBI and require compliance with both the Companies Act and SEBI regulations. These are aimed at offering securities to the public and must adhere to stringent disclosure and procedural requirements. On the other hand, private placements are more flexible, involving the issuance of securities to a specific, pre-identified group of investors. A key limitation under the Companies Act is that private placements can only involve up to 200 investors per financial year. If the limit is exceeded, the issuance is deemed a public issue, attracting SEBI regulations. Additionally, if securities from a private placement are offered to the public within six months, they are also treated as a public issue. The Act stipulates that any offer or invitation to subscribe to securities under private placement cannot exceed 200 investors unless certain exceptions apply, such as to qualified institutional buyers or employee stock option plans. These provisions help ensure that public investments are adequately protected while providing companies with a mechanism to raise funds through targeted placements.
The distinction between public issues and private placements is not merely procedural but a fundamental safeguard, ensuring that public investments are protected through rigorous oversight.
The Companies Act, 2013 provides two distinct avenues for issuers seeking to raise equity or debt capital – public issues and private placements. Public issues are covered under Part I of Chapter III of the Companies Act, 2013, whereas private placements are dealt with under Part II of the same Chapter. Public issue of securities is regulated by SEBI and issuers undertaking such issues need to comply with not just the provisions of the Companies Act, 2013 but also the Regulations laid down by SEBI. The framework specified by SEBI for regulating the public issue of debt securities is contained in the
NCS Regulations. Private placements, on the other hand, are subject to less stringent regulatory requirements, as compared to public issues, and are intended to be offered to a specific set of pre-identified investors. The Companies Act read with Share
Capital Rules limits the issuance of securities through private placements to 200 investors in a financial year. It can therefore be noted that two conditions need to be satisfied by issuers undertaking private placement of securities:
1. The securities can be allotted only to pre-identified investors;
2. There is a cap on allotting securities via private placement to more than 200 investors in a financial year.
Section 42(2) of the Companies Act, 2013, read with rule 14(2) of Share Capital Rules, specifies that if securities are issued to more than two hundred investors via private placement in a single financial year, it shall be deemed to be a public issue and all attendant requirements, including compliance with SEBI Regulations would get attracted. It is worthwhile to note that Section 25(2)(a) of the Companies Act, 2013, specifies that securities issued via private placement, if offered to the public within six months of the issue are treated as a public issue. The Onus is on the issuer to prove that the sale to the public by the initial allottee/s or transferees was not with the connivance of the issuer, else issuers can be held liable.
Companies Act, 2013
“25. Document containing offer of securities for sale to be deemed prospectus.
(1)Where a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company; and all enactments and rules of law as to the contents of prospectus and as to liability in respect of mis-statements, in and omissions from, prospectus, or otherwise relating to prospectus, shall apply with the modifications specified in subsections (3) and (4) and shall have effect accordingly, as if the securities had been offered to the public for subscription and as if persons accepting the offer in respect of any securities were subscribers for those securities, but without prejudice to the liability, if any, of the persons by whom the offer is made in respect of mis-statements contained in the document or otherwise in respect thereof.
(2) For the purposes of this Act, it shall, unless the contrary is proved, be evidence that an allotment of, or an agreement to allot, securities was made with a view to the securities being offered for sale to the public if it is shown —
(a) that an offer of the securities or of any of them for sale to the public was made within six months after the allotment or agreement to allot; or
(b) that at the date when the offer was made, the whole consideration to be received by the company in respect of the securities had not been received by it…………”
“40. Securities to be dealt with in stock exchanges
(1) Every company making public offer shall, before making such offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange or exchanges.
(2) Where a prospectus states that an application under sub-section (1) has been made, such prospectus shall also state the name or names of the stock exchange in which the securities shall be dealt with.
(3) All monies received on application from the public for subscription to the securities shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—
(a) for adjustment against allotment of securities where the securities have been permitted to be dealt with in the stock exchange or stock exchanges specified in the prospectus; or
(b) for the repayment of monies within the time specified by the Securities and Exchange Board, received from applicants in pursuance of the prospectus, where the company is for any other reason unable to allot securities…….”
‘42. Issue of shares on private placement basis. —
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- A company may, subject to the provisions of this section, make a private placement of securities.
- A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed fifty or such higher number as may be prescribed [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be prescribed.
Explanation I.—
If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter…..”
Rule 14(2) of Companies (Share Capital and Debentures) Rules, 2014 reads as under:
‘(2) For the purpose of sub-section (2) of section 42, an offer or invitation to subscribe securities under private placement shall not be made to persons more than two hundred in the aggregate in a financial year:
Provided that any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62 shall not be considered while calculating the limit of two hundred persons.
Explanation. –
For the purposes of this sub-rule it is hereby clarified that the restrictions aforesaid would be reckoned individually for each kind of security that is equity share, preference share or debenture.”
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