Further Issue of shares with Rules: An Detailed Analysis
An existing company can expand its business operations and raise funds through the issue of right or bonus shares to existing shareholders in proportion to the shares held by them, private placement and preferential allotment.
A company needs to check whether its authorized capital is enough to issue shares through preferential allotment. If not, then the company needs to alter the capital clause of its Memorandum/Articles of Association;
Preferential allotment involves bulk allotment of fresh issue of shares by a company to individuals, venture capitalists and companies at a pre-determined price. Usually, a company chooses to make a preferential allotment to people who want to acquire a strategic stake in the company. This includes the existing shareholders like promoters, venture capitalists, financial institutions, suppliers or buyers who want to increase their stake in the company. Therefore, preferential allotment allows the company to get equity participation of those whom it considers to be a value addition as shareholders.
Every company, whether it is a private or public, listed or unlisted and even section 8 company can opt for preferential allotment.
Note: It is relevant to note that if a company fails to comply with any of the provisions, the allotment of securities would be treated as a public offer.
♦ Following are the brief procedure for Preferential Allotment:
Convene the Board Meeting and discuss the matters, by sending 7 days’ notice such as:
√ Certified true copy of the Special resolution and Explanatory statement.
√ Form – PAS-4 for offer letter
√ Dispatch offer letter within 30 days to proposed allottees as per the list through any mode such as electronic or manual
√ Money received shall be compulsorily be deposited in a separate bank account
√ Within 60 days of receipt of money, convene another Board Meeting for the allotment of shares
√ List of allottees
√ Valuation report
√ Certified true copy of the Special resolution and Explanatory statement.
√ copy of the contract in case the company issues shares for consideration other than cash
√ Copy of record of private placement offers and acceptance in Form PAS-5
√ Company shall issue the Share Certificate to allottees within 2 months of allotment.
♦ List of Allotees includes the following details:
♦ Following are the brief procedure for Right Issue:
√ fixing the right issue ratio,
√ fixing a record date,
√ offer will be open for minimum 15 days or maximum 30 days, etc.
♦ Difference between the Right Issue and Preferential Allotment:
|Sl. No.||Particulars||Right Issue||Preferential Allotment|
|1||Section||The right issue is governed through Section 62(1)(a) of Companies Act 2013||Preferential Allotment is governed through Section 62(1)(c) of Companies Act 2013|
|2||Issue||Through this offer, the company issue the shares to existing shareholders in proportion of their holding||Company issue the shares to both existing shareholders and even outsiders|
|3||Approval requirement||Only board approval through board meeting is required||Both board resolution and special resolution is needed to approve preferential allotment|
|4||Offer period||Offer period remains open for the minimum period 15 days and maximum 30 days||No as such specific provision for offer period is specified|
|5||Format of Offer Letter||
Offer letter can be in any format
|Letter offer shall be as per the prescribed format of PAS-4 and PAS-5|
|6||e-filing form with ROC||Necessary forms to be filed are PAS-3 with ROC||Necessary forms to be filed with ROC are:
|7||Period of Allotment||Company shall allot the shares within 60 days of receipt of application money||The allotment shall be made of the earlier of these two:
|8||Separate Bank Account||No separate bank is needed for the right issue||Separate schedule bank is needed for preferential allotment|
|9||Registrered Valuer Report||No need for a valuation report||The valuation report is mandatory in case of preferential allotment|
|10||Right to renounce||Shareholders under this option have right to renounce, reject or approve the offer letter||No such right is provided to shareholders under this offer|
√ Detailed Analysis as per the provisions:
Section – 62: Further Issue of Share Capital
Sec – 62(1): 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:
(a) Provisions for Right issue:
to persons who, at the date of the offer are:
(i) the offer shall be made by notice specifying:
(ii) unless the articles of the company otherwise provide, the offer shall Be:
(iii) after the expiry of the time specified in the notice or on receipt of earlier intimation from the person
(b) Provisions for issue of shares under ESOP scheme:
to employees under a ESOP scheme, subject to:
(c) Provisions for issue of shares on preferential basis:
to any persons, if it is authorised by a special resolution,
Sec – 62(2): Modes of dispatch of notice:
The notice referred to in sec – 62(1)(a)(i) shall be dispatched through
having proof of delivery to all the existing shareholders at least 3 days before the opening of the issue.
Sec – 62(3): Nothing in this section shall apply
Provided that the terms of issue of such debentures or loan containing such an option
Sec – 62(4): Notwithstanding anything contained in sec – 62(3),
even if terms of the issue of such debentures or the raising of such loans do not include a term for providing for an option for such conversion:
Provided that where the terms and conditions of such conversion
which shall after hearing the company and the Government, may pass such order as it deems fit.
Sec – 62(5): In determining the terms and conditions of conversion sec – 62(4), the Government shall have due regard
such other matters as it may consider necessary.
Sec – 62(6): Where the Government has, by an order made under sec – 62(4),
1. In case of private company- In Sec – 62(2) and (1)(a)(i), the following proviso shall be inserted:
Provided that notwithstanding anything contained in this sub-clause and sec – 62(2) of this section, in case 90%, of the members of a private company have given their consent in writing or in electronic mode, the periods lesser than those specified in the said sub- clause or sub-section shall apply. [Inserted by notification dated 5th June, 2015]
2. In case of private company – In Sec – 62(1)(b) for the words “special resolution”, the words “ordinary resolution” shall be substituted . [Notification dated 5th June, 2015]
3. In case of Nidhi Company – Section 62 shall not apply [Notification dated 5th June, 2015]
4. In case of Specified IFSC Public Company – In sec – 62(1)(a), the following proviso shall be inserted, namely:
“Provided that notwithstanding anything contained in sub-clause (i), in case of a Specified IFSC public company, the periods lesser than those specified in the said sub-clause shall apply if 90% of the members have given their consent in writing or in electronic mode.”[Notification Date 4th January, 2017]
5. In case of Specified IFSC Public Company – In sec – 62(1)(b) for the words “special resolution” read as “ordinary resolution”. [Notification Date 4th January, 2017]
♦ The Companies (Share Capital and Debentures) Rules, 2014:
Rule13: Issue of Shares on Preferential Basis
Rule13 (1): For the purposes of sec – 62(1)(c),
Provided that in case of any preferential offer made by a company
Provided futher that the price of shares to be issued on a preferential basis
Explanation: For the purposes of this rule,
√ 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;
(ii) “shares or other securities” means
which would be convertible into or exchanged with equity shares at a later date.
Rule13 (2): Where the preferential offer of shares or other securities is made by a company
if they are not listed:
(a) the issue is authorized by its articles of association;
(b) the issue has been authorized by a special resolution of the members;
(d) The company shall make the following disclosures in the explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 of the Act:
(i) the objects of the issue;
(ii) the total number of shares or other securities to be issued;
(iii) the price or price band at/within which the allotment is proposed;
(iv) basis on which the price has been arrived at along with report of the registered valuer;
(v) relevant date with reference to which the price has been arrived at;
(vi) the class or classes of persons to whom the allotment is proposed to be made;
(vii) intention of promoters, directors or key managerial personnel to subscribe to the offer;
(viii) the proposed time within which the allotment shall be completed;
(ix) the names of the proposed allottees and the percentage of post preferential offer capital that may be held by them;
(x) the change in control, if any, in the company that would occur consequent to the preferential offer;
(xi) the number of persons to whom allotment on preferential basis have already been made during the year, in terms of number of securities as well as price;
(xii) the justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered valuer.
(xiii) The pre issue and post issue shareholding pattern of the company in the following format-
|No. of shares held||% of share holding||No. of shares held||% of share holding|
|Private corporate bodies|
|Directors and relatives|
|others (including NRIs)|
(e) the allotment of securities on a preferential basis made pursuant to the
(f) if the allotment of securities is not completed
(g) the price of the shares or other securities to be issued on a preferential basis,
(h) where convertible securities are offered on a preferential basis
(i) either upfront at the time when the offer of convertible securities is made, on the basis of valuation report of the registered valuer given at the stage of such offer, or
(ii) at the time, which
Provided that the company shall take a decision on sub-clauses (i) or (ii) at the time of offer of convertible security itself and make such disclosure under rule – 13(2)(d)(v).”
(i) where shares or other securities are to be allotted for consideration other than cash,
(j) where the preferential offer of shares is made for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company:
(i) where the non-cash consideration
(ii) where clause (i) is not applicable, it shall be expensed as provided in the accounting standards.
Explanation: For the purposes of these rules, it is hereby clarified that,
Rule 13(3): The price of shares or other securities to be issued on preferential basis
Rule 12: Return of Allotment.
Rule 12(1): Whenever a company having a share capital makes any allotment of its securities,
Rule 12(2): There shall be attached to the Form PAS-3 a list of allottees:
Rule 12(3): In the case of securities (not being bonus shares) allotted as
Rule 12(4): Where a contract referred to in rule – 12(3) is not reduced to writing,
Rule 12(5): A report of a registered valuer in respect of valuation of the consideration shall also be attached along with the contract as mentioned in rule – 12(3) and (4).
Rule 12(6): In the case of issue of bonus shares,
Rule 12(7): In case the shares have been issued in pursuance of sec – 62(1)(c)
there shall be attached to Form PAS-3, the valuation report of the registered valuer.
Explanation: Pending notification of sec – 247(1) of the Act and finalisation of qualifications and experience of valuers, valuation of stocks, shares, debentures, securities etc. shall be conducted by an independent merchant banker who is registered with the Securities and Exchange Board of India or an independent chartered accountant in practice having a minimum experience of ten years.
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