Further Issue of shares with Rules: An Detailed Analysis  

♦ Purpose:

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:

  • Consideration of valuation report by registered valuer
  • Finalization of list of allottees, not exceeding 200 in a financial year and 50 at a time.
  • Fix and decide the day, date, time and venue for conducting Extra-ordinary general meeting(EOGM)
  • Approve the draft letter of offer in Form – PAS-4
  • Decide the offer period
  • Open a separate bank account in a scheduled bank to receive subscription money
  • Call and hold EOGM on a date decided to conduct EOGM by sending 21 clear days’ notice and approve allotment
  • Within 30 days of conducting EOGM, the company shall file Form -MGT-14 with ROC as the mandatory attachment of:

√ 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

  • Within 15 days of allotting the shares, the company shall file Form – PAS-3 to ROC along with following attachments:

√ 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: 

  • Details of Security Holder such as full name, PAN (Permanent Account Number), address, and E-mail Id;
  • Details of the class of security allotted;
  • Date of allotment of security;
  • Total number of securities held by each shareholder,
  • Nominal Value of the shares allotted;
  • Amount paid on such securities; and
  • Details about the consideration received if the company has issued shares for some consideration other than cash.

♦ Following are the brief procedure for Right Issue:

  • Check whether the right issue results in increase of authorized capital.
  • If so, call Board meeting to approve notice for calling general meeting to pass special resolutions at the general meeting to amend MOA/AOA.
  • File Form SH-7, Form MGT-14 with ROC within 30 days of passing resolution.
  • Convene the Board Meeting by sending 7 days’ notice and discuss the following agendas such as

√ fixing the right issue ratio,

√ fixing a record date,

√ offer will be open for minimum 15 days or maximum 30 days, etc.

  • File Board Resolution to ROC through Form – Mgt-14 within 30 days of passing resolution
  • Receive the subscription money from shareholders
  • Once the offer is concluded, held the board meeting again for allotment of shares and issue of share certificate to the allottees
  • Within 2 months allot share certificates duly signed and stamped
  • Within 30 days of concluding allotment, file Form – PAS-3 and Board Resolution with ROC

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:

  • PAS-3
  • GNL-2
  • MGT-14
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:

  • 12 months of Special Resolution
  • 60 days from receipt of application money
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:

  • holders of equity shares of the company in proportion,
  • to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:

(i) the offer shall be made by notice specifying:

  • number of shares offered and
  • limiting a time: Minimum – 15 days and Maximum – 30 days
  • from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

(ii) unless the articles of the company otherwise provide, the offer shall Be:

  • deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and
  • the notice referred to in sec – 62(1)(a)(i) shall contain a statement of this right;

(iii) after the expiry of the time specified in the notice or on receipt of earlier intimation from the person

  • to whom such notice is given:
  • declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;

(b) Provisions for issue of shares under ESOP scheme:

to employees under a ESOP scheme, subject to:

  • special resolution passed by company and
  • such conditions as may be prescribed; or

(c) Provisions for issue of shares on preferential basis:

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, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed.

Sec – 62(2): Modes of dispatch of notice:

The notice referred to in sec – 62(1)(a)(i) shall be dispatched through

  • registered post or
  • speed post or
  • through electronic mode or
  • courier or
  • any other mode

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

  • to the increase of the subscribed capital of a company caused by the exercise of an option
  • as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company:

Provided that the terms of issue of such debentures or loan containing such an option

  • prior approval before the issue,
  • by a special resolution passed by the company in general meeting.

Sec – 62(4): Notwithstanding anything contained in sec – 62(3),

  • where any debentures have been issued, or loan has been obtained
  • from any Government by a company, and
  • if that Government considers it necessary in the public interest so to do, it may, by order,
  • direct that such debentures or loans or any part thereof
  • shall be converted into shares in the company on such terms and conditions
  • as appear to the Government to be reasonable in the circumstances of the case

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

  • are not acceptable to the company, it may,
  • within 60 days from the date of communication of such order,
  • appeal to the Tribunal

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

  • to the financial position of the company,
  • the terms of issue of debentures or loans, as the case may be,
  • the rate of interest payable on such debentures or loans and

such other matters as it may consider necessary.

Sec – 62(6): Where the Government has, by an order made under sec – 62(4),

  • directed that any debenture or loan or any part thereof shall be converted into shares in a company and
  • where no appeal has been preferred to the Tribunal U/s. 62 (4) or
  • where such appeal has been dismissed,
  • the memorandum of such company shall,
  • where such order has the effect of increasing the authorised share capital of the company,
  • stand altered and the authorised share capital of such company shall stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into.

Notes:

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),

  • If authorized by a special resolution passed in a general meeting,
  • shares may be issued by any company 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 sec – 62(1)(a) or(b) and
  • such issue on preferential basis should also comply with conditions laid down sec – 42 of the Act:

Provided that in case of any preferential offer made by a company

  • to one or more existing members only,
  • the provisions of rule – 13(1) and 14(3) of Companies (prospectus and Allotment of Securities) Rules, 2014 shall not apply

Provided futher that the price of shares to be issued on a preferential basis

  • by a listed company
  • shall not be required to be determined by the valuation report of a registered valuer.

Explanation: For the purposes of this rule,

  • “Preferential Offer” means
  • an issue of shares or other securities, by a company
  • to any select person or group of persons on a preferential basis and
  • does not include shares or other securities offered through

√ 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

  • 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.

Rule13 (2): Where the preferential offer of shares or other securities is made by a company

  • whose share or other securities are listed on a recognized stock exchange,
  • such preferential offer shall be made in accordance with the provisions of the Act and
  • regulations made by the SEBI, and

if they are not listed:

  • the preferential offer shall be made in accordance with the provisions of the Act and rules made hereunder and
  • subject to compliance with the following requirements, namely:

(a) the issue is authorized by its articles of association;

(b) the issue has been authorized by a special resolution of the members;

(c) Omitted

(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-

Sl. No. Category Pre-issue Post-issue
No. of shares held % of share holding No. of shares held % of share holding
A Promoters’ holding
1 Indian:
Individual
Bodies corporate
Sub-total
2 Foreign promoters
Sub-total (A)
B Non-promoters’ holding
1 Institutional investors
2 Non-institution
Private corporate bodies
Directors and relatives
Indian public
others (including NRIs)
Sub-total (B)
GRAND TOTAL

(e) the allotment of securities on a preferential basis made pursuant to the

  • special resolution passed pursuant to rule – 13(2)(b)
  • shall be completed within a period of 12 months from the date of passing of the special resolution.

(f) if the allotment of securities is not completed

  • within 12 months from the date of passing of the special resolution,
  • another special resolution shall be passed for the company to complete such allotment

(g) the price of the shares or other securities to be issued on a preferential basis,

  • either for cash or for consideration other than cash,
  • shall be determined on the basis of valuation report of a registered valuer;

(h) where convertible securities are offered on a preferential basis

  • with an option to apply for and get equity shares allotted,
  • the price of the resultant shares pursuant to conversion shall be determined:

(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

  • shall not be earlier than 30 days to the date when the holder of convertible security becomes entitled to apply for shares, on the basis of valuation report of the registered valuer given
  • not earlier than 60 days of the date when the holder of convertible security becomes entitled to apply for shares:

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,

  • the valuation of such consideration shall be done by a registered valuer who shall submit a valuation report to the company giving justification for the valuation;

(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

  • takes the form of a depreciable or amortizable asset,
  • it shall be carried to the balance sheet of the company in accordance with the accounting standards; or

(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,

  • till a registered valuer is appointed in accordance with the provisions of the Act,
  • the valuation report shall be made 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 10 years.

Rule 13(3): The price of shares or other securities to be issued on preferential basis

  • shall not be less than the price determined on the basis of valuation report of a registered valuer.”

♦ The Companies (Prospectus and Allotment of Securities) Rules, 2014

Rule 12: Return of Allotment. 

Rule 12(1): Whenever a company having a share capital makes any allotment of its securities,

  • the company shall, within 30 days thereafter,
  • file with the Registrar a return of allotment in Form PAS-3,
  • along with the fee as specified in the Companies (Registration Offices and Fees) Rules, 2014.

Rule 12(2): There shall be attached to the Form PAS-3 a list of allottees:

  • stating Their Names, Address, Occupation, If Any, and
  • Number Of Securities Allotted to each of the allottees and
  • the list shall be certified by the signatory of the Form PAS-3
  • as being complete and correct as per the records of the company. 

Rule 12(3): In the case of securities (not being bonus shares) allotted as

  • fully or partly paid up for consideration other than cash,
  • 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. 

Rule 12(4): Where a contract referred to in rule – 12(3) 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), and
  • the Registrar may, as a condition of filing the particulars, require that the stamp duty payable thereon be adjudicated under section 31 of the Indian Stamp Act, 1899. 

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,

  • a copy of the resolution passed in the general meeting authorizing the issue of such shares shall be attached to the Form PAS-3.

Rule 12(7): In case the shares have been issued in pursuance of sec – 62(1)(c)

  • by a company other than a listed company
  • whose equity shares or convertible preference shares
  • are listed on any recognised stock exchange,

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. 

Informative: If you like the article kindly comment and required improvement kindly message me.

Disclaimer: The entire content of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Author assumes no responsibility thereof. The user of the information agrees that the information is not a professional advice and is subject to change without notice. In no event, we shall be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of information.

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2 Comments

  1. Itisha says:

    Sir, your article is really informative. But I would like to know whether the issue of shares for consideration other than cash includes services also. In other words, if a director of the company provides some technical services to the company can shares be allotted to him under preferential allotment scheme or is Sweat equity the only option available in such case.

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