Public issues and private offers as part of raising capital in accordance with the Companies Act

Abstract: Under the Companies Act 2013, companies have two main options for raising capital: public issues and private placements. Public affairs are largely regulated by SEBI and require compliance with both the Companies Act and SEBI regulations. They are intended to offer securities to the public and must meet stringent disclosure and procedural requirements. Private offers, however, are more flexible and involve the issuance of securities to a specific, pre-identified group of investors. A key restriction under the Companies Act is that only a maximum of 200 investors can participate in private placements in a financial year. If the limit is exceeded, the issue is considered a public matter, regulated by SEBI. Additionally, if the privately placed securities are offered to the public within six months, they are also treated as a public issue. The Act provides that an offer or invitation to subscribe for securities in a private placement may not exceed 200 investors unless certain exceptions apply, such as qualified institutional buyers or employee stock option plans. These rules help ensure that public investments are adequately protected while providing a mechanism for businesses to raise funds through targeted placements.

The distinction between public issuance and private issuance is not merely procedural, but is an essential safeguard to ensure that public investments are protected through rigorous supervision.

The Companies Act 2013 provides two separate options for issuers wishing to raise equity or debt capital – public issues and private placements. Public issues are regulated in Part I of Chapter III of the Companies Act, 2013, while private placements are regulated in Part II of the same Chapter. Public issue of securities is regulated by SEBI and issuers undertaking such issues have to comply not only with the provisions of the Companies Act, 2013 but also with the Regulations prescribed by SEBI. The framework laid down by SEBI for the regulation of public issue of debt securities is contained in

NCN regulations. Private placements, on the other hand, are subject to less stringent regulatory requirements compared to public issues and are intended for a specific group of pre-identified investors. Companies Act read with Share

Capital rules limit the issuance of securities through private placements to 200 investors per fiscal year. It can therefore be noted that issuers issuing securities on the private market must meet two conditions:

1. Securities may only be allocated to previously identified investors;

2. There is an upper limit on the allotment of securities through private placement to more than 200 investors in a financial year.

Article 42(1) 2 of the Companies Act 2013 read with Rule 14(2) 2 of the Share Capital Rules states that in case of issuance of securities to more than two hundred investors by way of private placement in one financial year, it will be deemed to be a public matter and all requirements relating thereto, including compliance with SEBI regulations, will be taken into account. It is worth noting that § 25 section 2 letter a) section Companies Act, 2013provides that securities issued in a private placement, if offered to the public within six months of issuance, are treated as a public issue. The burden is on the issuer to prove that the public sale by the original shareholder(s) or transferees was not made with the consent of the issuer, failing which issuers may be held liable.

Companies Act, 2013

“25. A document containing an offer to sell securities, constituting an issue prospectus.

(1) Where a company allocates or agrees to allot any securities of the company with a view to offering all or part of those securities for sale to the public, any document on the basis of which the offer to sell is made to the public shall, for example, for all purposes be deemed to be for the prospectus issued by the company; and all legislation and regulations relating to the content of the prospectus and liability for misrepresentations, omissions in the prospectus or otherwise relating to the prospectus shall apply with the amendments set out in subsections (3) and (4) and shall have effect accordingly as if the securities were offered for public subscription and as if the persons accepting the offer in respect of any securities were subscribers to those securities, subject, however, to any liability of the persons through whom the offer was made due to incorrect statements contained in the document or otherwise relating to it.

(2) For the purposes of this Act, unless otherwise proven, evidence that the allotment or agreement for the allotment of securities has been made for the purpose of offering securities to the public, if shown –

(a) the public offer for sale of the securities or any of them is made within six months of the allotment or consent to the allotment; Or

(b) that on the date of submission of the offer it had not yet received the entire remuneration that the company was to receive in respect of the securities……….”

“40. Securities traded on stock exchanges

(1) Every company making a public offering should, before making such an offer, apply to one or more recognized stock exchanges and obtain a license to deal in securities on such exchange or exchanges.

(2) If the prospectus indicates that an application has been submitted in accordance with section 1, the prospectus also includes the name or names of the stock exchange on which the securities will be traded.

(3) All monies received at the request of the public for the subscription of securities shall be kept in a separate bank account in a designated bank and shall not be used for any purpose other than:

a) to adjust the allocation of securities if trading in the securities has been admitted on the stock exchange or stock exchanges specified in the prospectus; Or

b) for the return of funds, within the deadline specified by the Securities and Exchange Board, received from applicants on the basis of the issue prospectus, if the company is unable to allocate securities for other reasons.

’42. Issuance of shares in private subscription mode. —

• • The Company may, subject to the provisions of this section, make a private offering of securities.
  • The Private Placement will be made only to a selected group of persons identified by the Board (the “Identified Persons”), which will not exceed fifty or more such persons as may be prescribed (excluding qualified institutional buyers and employees of the company to whom securities are offered under employee share option scheme in accordance with the provisions of clause (b) of sub-section (1) of section 62), during the financial year, subject to certain conditions.

Explanation I. —

Where a listed or unlisted company makes an offer for allotment or invites subscription, allocates or enters into an agreement to allot securities to more than the prescribed number of persons, whether or not payment has been received for the securities, or irrespective of whether or not the company intends to list its securities on any recognized stock exchange in or outside India, the same shall be deemed to be a public offer and shall accordingly be governed by the provisions of Part I of this Chapter…”

Rule 14(1) 2 Companies (Share Capital and Bonds) Regulations, 2014 sounds like below:

“(2) Within the meaning of section 2 art. 42, an offer or invitation to subscribe for securities as part of a private placement cannot be addressed to a total of more than two hundred persons in a financial year:

Provided that any offer or invitation made to eligible institutional buyers or employees of the company under employee share option scheme under the provisions of clause (b) of sub-section (1) of Section 62 shall not be taken into account in computing the two hundred person limit.

Explanation. –

For the purposes of this subsection, it is clarified that the above limitations will be calculated individually for each type of security, i.e. shares, preferred shares or bonds.”