Introduction:
The term ‘Company’ fundamentally means a class of people associated together for a common purpose such as business, sports, research, activity and more. Section 2(20) of Companies Act (the ‘Act) 2013 defines a company as “ ‘Company’ means a company incorporated under this Act or under any previous company laws”[i]. Nevertheless, this definition does not put forward the true characteristic of a company. According to Lord Justice Lindley, “By company, it is meant an association of many persons who contribute money or money’s worth to common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The people who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share”.[ii] This definition gives a clear picture of what a company is. In the course of this Article, I shall aim to explain about a private company and Whether it can issue securities or not and if yes then what are the ways through which it can issue securities.
Companies are largely classified into the following categories:
- One person company
- Private limited company
- Public company
What is a Private Company?
As per section 2(68) of the Act, 2013 a private company is defined as a company where there must be some restrictions on transferability of shares if a company is limited by shares, on the right of its members to transfer their shares in the company and where the minimum number of members is two, except for one person company, and the maximum number of members is 200 and where there is a prohibition on an invitation to the public to subscribe for any securities, private placement basis may be opted for the issue of shares as per section 42 of the Act.
What is One Person Company?
As per section 2(62), “One Person Company” means a company which has only one person as a member[iii]. As per section 3 of the Act, One Person Company is a Private Company and it has only one member. Being a Private Company there is a restriction on transfer of shares and invitation to Public to subscribe for the securities is prohibited.
What is Public Company?
As per section 2(71) “Public Company” means a company which is not a private company and has a prescribed minimum paid-up capital. It is a Company where there are no restrictions on the transfer of shares and where there is no limit on the number of members but the minimum number of members is 7. Invitation in Public Company can be made to the public to subscribe for any securities of the Company and securities can be issued by way of:
- Right or bonus issue;
- Private placement;
- Prospectus to the Public.
Securities Under Companies Act 2013.
As per Section 2(81) of the Act, “securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956). As per section 2(h) of the Securities Contract (Regulation) Act, (42 of 1956) securities include shares, scrips, stocks, bonds, debentures, derivatives, units issued by collective investment scheme, Government Securities, right or interest in Securities and such other instrument as may be declared by Central Government to be securities.[iv] In simple terms Securities means traded financial instruments or those financial instruments which can be bought or sold. Anything which is Financial instrument but cannot be traded or transferred is not securities. For example, fixed deposits with banks are non-transferrable in nature and cannot be termed as securities.
Can Private Companies Issue Securities?
It is clear from above that Private companies can issue securities but their securities cannot be traded on Public exchange. It cannot issue securities through an initial public offering(IPO). However, according to section 23(2), a private company can issue securities in the following ways
- Private Placement.
- Bonus issue.
- Right issue.
Private Placement
As per Explanation II to sub-clause (2) to Section 42 of The Companies Act, 2013 “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 an issue of a private placement offer letter and which satisfies the conditions specified in this section[v]. For example, if an offer for subscription of shares is made to a small group of people or relatives etc, it shall be a private placement. The key feature under this concept is an invitation to selective people to subscribe to securities and not to the general public and that too through Private placement offer letter and not by any other mode. Another important point that is to be noted is that a private company cannot make Public offer but can make private placement and on the other hand, a Public company can make a Public offer and Private Placement as well and this is one of the key difference of Private and Public company. However, Section 42 of The Act specifies certain conditions that need to be fulfilled before the issue of such securities through Private Placement and we shall go through them one by one.
- A private placement can be made to a group of people but not exceeding 200. Section 42 (2) of The Act provides that an offer or invitation to subscribe to securities should be made to people but not exceeding fifty or any higher number that may be prescribed. But the higher number has been prescribed by our statute as 200. Rule 14 (2)(b) of the Companies (Prospectus and Allotment of Shares) Rules, 2014 the number prescribed is 200[vi].
- The Securities shall be offered through private placement offer letter which shall have names and addresses of the people to whom an offer letter is made. No right of denunciation shall be there.
- As per section Explanation I of section 42(2) of The Act, if a company, listed or unlisted, makes an offer to allot or invites subscription, or offer securities to more than the number prescribed and if the offer is not made in accordance with the provisions of section 42(2), then the offer shall be Deemed as a Public offer and in such case provisions of Public offer shall govern the offer and not Section 42.
- As per section 42(6)The securities shall be allocated to the subscriber within 60 days of receiving application money. In case the same does not take place due to any reason the application money of the applicant shall be returned within 15 days post expiry of 60 days. In case the company fails to repay the application fee then the company is liable to pay money with interest at 12% per annum.
- As per section 42(8) Advertising of such an offer is banned.
- As per section 42(3) If a particular offer or invitation has not been withdrawn or abandoned by the company then no new offer or invitation shall take place
- Section 42(10) says that in case of contraventions of any of the provisions discussed above the company shall be liable to pay a penalty which may extend to the amount raised through private placement or two crore rupees, whichever is lower.
Bonus Issue[vii]
Bonus shares are shares in addition to the existing shares given to the shareholders of the company with no extra cost but are based on the number of shares already held by the shareholder of the company. These are additional revenue of the company distributed to the shareholders, not in the form of dividends but in the form of free shares.
Section 63(1) of The Act talks about from where these bonus shares are to be given to the shareholders. According to this section issue of bonus shares shall be out of:
- Its free reserves;
- Securities premium account;
- Capital reserve redemption account.
As per section 63(2), bonus shares cannot be issued under sub-clause (1) of section 63 unless the following conditions are fulfilled :
- Articles of Association of the company authorise for the same;
- The same shall be authorised in the general meeting of the company that too on the recommendation of the Board;
- Payment of interest or principal in respect of fixed deposits or debt securities issued by the company has not been defaulted;
- Payment of statutory dues of the employees of the company has not been defaulted;
- The company fulfils the conditions as may be prescribed.
Right Issue[viii]
‘Right Issue’ means shares are offered to members of the company in proportion to their shareholdings. The rationale behind this is that there shall be equal distribution of shares and the voting rights should not get affected by the issue of new shares. According to Section 62(1) of The Act, if a company decides to increase its subscribed capital by the issue of further shares, this can be done by offering shares to the shareholders of the company in proportion to persons who are already holders of equity shares of the company (sub-section (a)) or by offering shares to the employees under the employees stock option scheme but this shall be subject to the special resolution passed by the company (sub-section (b)) or by offering shares to any person, whether or not those people are covered under sub-section (a) and (b) to section 62(1), either for cash or for a consideration other than cash, if the value of these shares is determined by the valuation report of registered valuer (sub-section (c)). As per Companies Act 1956, there was no requirement for a private company to make the right offer, though it was later observed that the matter should be authentic and motives should be honest and straightforward for it to be made.
Conclusion
To conclude, Private companies can issue securities but it has its methods of doing so. Unlike public companies, its options are limited to the private placement, bonus issue and right issue and it can never make a public offer or undertake an IPO. Generally, the high cost of undertaking an IPO, strict regulations for management and motive of private ownership are some of the reasons why some people prefer it to be a private company.
References:
[i] Companies Act 2013.
https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
[ii] https://www.lawteacher.net/free-law-essays/company-law/the-law-relating-to-companies.php#:~:text=According%20to%20Lord%20Justice%20Lindley
[iii] Companies Act 2013
https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
[iv] Securities Contracts (Regulation) Act, 1956 (42 of 1956)
https://www.sebi.gov.in/acts/contractact.pdf
[v] Section 42, Companies Act 2013.
https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
[vi] Companies (Prospectus and Allotment of Shares) Rules, 2014
https://www.mca.gov.in/Ministry/pdf/NCARules_Chapter3.pdf
[vii] Section 63, Companies Act 2013
https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
[viii] Section 62, Companies Act 2013
0 Comments