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Private Placement Vs Rights Issue Under Companies Act, 2013

April 25, 2016     by Sonal Verma

Updated by Nidhi Kapoor and Pooja Dhiman as on September 25, 2020

Rights issue and private placement are the two ways to issue further shares, other than initial public offers.

When a company issues shares to a selected group of investors, instead of inviting public at large, it is called private placement of shares. It falls neither in the category of a public issue, nor a rights issue. It is a faster way of raising capital, as a company has to comply with fewer requirements. An issue of shares offered at a special price by a company to its existing shareholders in proportion to their holding of old shares is called right issue.

Cited below is a glimpse of basic differences between private placement & rights issue:-

Sr. No Basis of difference Private Placement Rights Issue
1. Meaning

It means any offer of securities or invitation to subscribe securities to a selected group of persons by a company (other than by way of public offer) through private placement offer-cum-application letter.

It means offering shares to the existing equity shareholders of the company in proportion to their existing shareholding as on the date of offer.

2. Applicable Provisions

Section 42 read with rule 14 Companies (Prospectus and allotment of securities) Rules,2014.

Section 62(1)(a) read with Rules.

3. Restriction on Number of person to whom the offer is made

An Offer or invitation to subscribe to the securities shall not be made to more than two hundred* people, in aggregate in one financial year.

*The aforesaid limit would be reckoned for each kind of security i.e. equity share, preferential share or debenture.

In case the limit is exceeded, it shall be deemed as public offer.

No such restriction in case of the right issue.

4. Separate Bank Account

Company is mandated to open a separate bank account in a scheduled bank, exclusively for the purpose of receipt of Share application money under the said offer.

No need to open a separate Bank Account in this case.

5. Valuation Report

A valuation report from registered valuer is mandatory and the offer letter shall prescribe the basis on which the price of the security has been derived.

A valuation report is not required since the Companies Act does not restrict issuance of shares at a value less than Market Value to existing shareholders.

However, the report is mandatory in case of issue of shares to existing non-resident shareholders.

6. Shareholders’ approval

Prior Shareholders’ approval is required by way of Special Resolution.

No need to take the approval of shareholders of the Company. Approval of the Board is sufficient for the right issue.

7. Offer Letter

Offer cum application letter shall require to be given in form PAS 4 and the company shall maintain the complete record of the issue in the form PAS 5.

No fixed format is be prescribed for the offer letter as per Companies Act. However, the offer letter must contain the number of securities offered and the period for which the offer shall remain open.

8. Offer Period

No specific minimum/ maximum offer period is prescribed.

Offer shall be open for subscription for a minimum period of 15 days and a maximum of up to 30 days. However, in the case of Private Company, if consent of at least 90% of members is received, the offer period can be reduced from above specified days.

Further, the offer letter must be dispatched (e-mail/ registered or speed post/courier/ by hand) to the shareholders at least 3 days before the date of opening of the issue.

9. Renounce the offer letter

No such right is available to the persons receiving the private placement offer. However, the right to accept/reject the offer letter is available to such persons.

Unless the Articles of the Company specify otherwise, the offer shall include a renunciation right i.e shareholders have right to Renounce/accept/reject the offer letter within a minimum period of 15 days subject to the maximum of 30 days.

10. Mode of receipt of Subscription Money

Subscription money shall be paid either through cheque, demand draft, or any other banking channel but not by cash.

No such specific provisions prescribed in case of right issue.

11. Utilisation of Money

The Company shall not utilise monies raised through private placement offer unless allotment is made and return of allotment is filed with the Registrar.

Further, such money shall be utilised in manner specified in the relevant section.

No such restriction in case of the right issue.

12. Refund of share application money

If the allotment is not made within a period of 60 days from the receipt of application money then, the company shall repay the application money within next 15 days.

Further, if the Company fails to repay that amount within the aforesaid period then it shall be liable to repay the amount with an interest @ 12% per annum from the expiry of 60 days.

This application money will be treated as a deposit after the expiry of 60 days.

If allotment is not made within a period of 60 days from the receipt of application money, the amount shall be treated as a deposit after the expiry of 60 days.

However, there is no provision relating payment of interest.

13. Return of allotment

A return of allotment shall be filed with the Registrar within the 15 days from the date of allotment.

A return of allotment shall be filed with the Registrar within the 30 days from the date of allotment.

14. Subsequent offer / issue of shares

No fresh offer can be made unless the previous offer stands completed i.e. either the allotment has been completed or the Company has withdrawn the offer.

Provided that subject to the maximum two hundred members, a company may, at any time, may make more than one offer of securities to such members.

There is no such provision in section 62(1)(a).

15. Public Advertisement

The Company issuing securities under private placement shall not release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.

No such restriction under the right issue since the issue involves only existing shareholders.

16. Time Involved

Since this process involves Shareholders meeting, Valuation Report, etc., it is relatively longer.

The rights issue process involves lesser approvals and documentations, hence less time consuming.

35 thoughts on “Private Placement Vs Rights Issue Under Companies Act, 2013

  1. Can closure of rights issue before 15 days u/s 62(1)(a)(i) proviso is valid in case of deemed public company or Can a company close the rights issue before 15 days upon receipt of application money ?

    1. As Per Section 62(1)(a)(i) of the Companies Act, 2013 the right issue offer is required to be open for not less than fifteen days and not exceeding 30 days. However, the exemption is provided to private companies for keeping the offer period for less than 15 days if 90% of members give their consent in writing.

      Therefore, in your case, your company being a public company cannot avail the exemption of keeping the offer period open for less than 15 days however the board may close the offer before 15 days upon receipt of application money ie after receipt of full subscription money.

  2. Company A has 2 Shareholders currently holding 10000 shares.Company want to issue further shares (90000)as Rights issue to both the existing shareholders in proportion and also to outside members who are not the shareholders of the company.Is it possible?

    1. Pursuant to Section 62(1)(a) of the Companies Act, 2013, a Company can offer shares on right basis to its existing equity shareholders only. However, unless the articles of the company otherwise provide, the rights issue offer shall be deemed to include a right which allows the existing shareholder to renounce the shares offered to him in favour of any other person(whether a shareholder of the Company or not).

  3. If we issue shares under right issue in a private company.can we accept application money in instalments ?

  4. Please provide guidance on rights issue.
    If a public company (unlisted but required to comply with listed company norms i.e stock exchange) issues rights shares, but whether company, after closure/allotment of rights issue allot unsubscribed rights to more than 200 new shareholders or below 200 new shareholders without shareholders’ approval. Also whether such allotment of unsubscribed rights is treated as Private Placement or Preferential allotment and which statutory requirements needs to be complied. Whether there is time limit within which such unsubscribed rights can be allotted to other prospective shareholders. Also whether such unsubscribed rights can be kept open and allotment to new investor at rights prices over period of 1 year.
    Can company make arrangement of issuing unsubscribed rights to selected brokers (to less than 200 brokers) and then help them or allow them dispose off their holdings immediately say within 2-10 months to small shareholders (above 200 new investors in financial year i.e say 10000 new shareholders) at substantial premium over issue price. Does this action not amount to decision detrimental to the interest of the shareholders and company and what will be your suggestions to company and also to shareholder.

  5. Company is a unlisted public limited. It has 900 share holders and now want to issue rights shares. Unsubscribed portions of any will be issued only to existing shareholders. Being it is to more than 200 persons is this due compliance of companies act and sebi compliance

    1. The limit of 200 persons is applicable in case of private placement and there is no such restriction in case of Rights Issue. Hence, there is no violation of applicable laws. Further, as the company is unlisted, SEBI regulations are not applicable.

    1. Higher the flotation cost, less would be the discount in pricing Rights issue. Higher discount (than current market price) is generally offered to lure minority/ public shareholders for subscribing to Rights Issue but if certain costs like underwriting costs (floatation costs) of Rights Issue are incurred, there shall be less flexibility in discounting otherwise the cost of raising capital would be considerably high.

  6. In case of right issue if the allotment is not made within a period of 60 days , what are the implications on a private company?

    1. The Company shall allot its securities within 60 days from the date of receipt of the application money for such securities and if the Company is not able to allot securities within that period, it shall repay the application money to the subscribers within 15 days from the date of completion of sixty days and if the Company fails to repay the application money within the aforesaid period, it shall be liable to repay the money with interest at the rate of twelve per cent per annum from the expiry of the sixtieth day.

  7. Where does the Act or Rules provide that in case of a rights issue, valuation report is mandatory if the issue is being made to existing non-resident shareholders?

    1. In case the issue is being made to non-resident shareholer, you need to comply with the FEMA requirments and according to Rbi Circular RBI/2012-13/15
      Master Circular No.15/2012-13, a valuation report certified by a professional is mandatory.

      1. i have checked the master circular it does not says that valuation is mandatory for right issue and the master circular has a sunset clause i.e. it is valid for one year from date of issue which is one year from 2013 and now we have master direction 2018 which also doesnt say valuation is mandatory for rights issue

        1. The Master Direction on FDI (updated upto March 8, 2019) states that an Indian Company can issue capital instruments to a person resident outside India subject to sectoral caps, pricing guidelines, etc. The pricing guidelines state that the price of such capital instruments should not be less than the valuation done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company (Para 8 of the Master Direction). Therefore, in order to adhere to the pricing guidelines, valuation is required to be done even in case of Rights issue, whenever capital instruments are being issued to a non-resident.

        2. Whether Valuation report is mandatory even in the case of issue of right shares to existing member who is NRI ?
          Kindly clarify…

        3. As per Foreign Exchange Management (Non-debt Instruments) Rules, 2019, an Indian Company can issue equity instruments to a person resident outside India at a price which shall not be less than, valuation done as per the internationally accepted pricing methodology on an arm’s length basis duly certified by a Chartered Accountant or a Merchant Banker registered with the Securities and Exchange Board of India or a practicing Cost Accountant, in case of an unlisted Indian Company. Therefore, in order to adhere to the pricing guidelines, valuation is required to be done even in case of Rights issue, whenever equity instruments are being issued to non-residents.

    1. No, Minimum subscription is not required in the Right Issue of a Private Company. Right issue is a right given to existing shareholders of the Company either to avail the offer and subscribe the shares in the decided proportion or to renounce the shares offered unless articles provide otherwise.

    1. No, Minimum subscription is not required in the Right Issue of a Private Company. Right issue is a right given to existing shareholders of the Company either to avail the offer and subscribe the shares in the decided proportion or to renounce the shares offered unless articles provide otherwise.

  8. Whether a company making right issue under 62(1)(a) can utilise the share application money from the existing shareholder before the allotment of share .

    1. In our opinion, a company making right issue cannot utilise the share application money before the allotment of share, because as per Explanation to Rule 2(1)(vii) of the Companies (Acceptance of Deposits) Rules, 2014, if the securities for which application money or advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a deposit.

      1. But Mr. Mayank question is whether we can use application money or not. We will use money and will also allot shares within 60 days. In this way we will not attract Deposit section.

        As in case of Rights Issue, its not specifically provided for utilization the money only after allotment is made.

        1. As no pre-conditions as to utilisation of application money are prescribed under the Companies Act, 2013 in case of the right issue under the therefore, per our understanding, you can utilise share application money before allotment. However, please note if the allotment is not made within 60 days, such amount shall be treated as deposits.

  9. My public company( unlisted) wants to issue shares to another company. Can a public company’s shareholders renounce their shares to the another private or public company?

    1. Yes, a public company’s shareholders can renounce their right shares in favor of any person and person includes a company. As per section 62 sub section 1 clause (a) sub clause (ii), unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favor of any other person.

    1. No, Company shall not receive any money after the time period of offer letter under private placement. The offer letter is approved by shareholders, thus, the company cannot do anything contradictory to the terms and conditions contained in the offer letter. If the company wants to receive money after the time period mentioned in the offer letter, it has to follow the entire procedure again starting from the passing of appropriate board resolution including obtaining the shareholders approval to the offer letter.

  10. I have a Private company .I wish to issue further share capital to existing share holders.Should Company hold Board Resolution or Special Resolution?

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