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Private Placement Vs Rights Issue Under Companies Act, 2013

April 25, 2016     by Sonal Verma

Private Placement and Rights Issues are hotly debated topics for Companies. Companies get confused between the two while opting for further issue of shares.

Private Placement is dealt in Section 42 and section 62(1)(c) of Companies Act,2013 while Section 62(1)(a) deals with Rights issue. Here cited below is a glimpse of basic differences between private placement &rights issue:-

 

S. No. Basis of differences Private Placement Rights Issue

1.

Meaning It means any offer of securities or invitation to subscribe securities to a select group of person by a company other than by way of public offer It means issue of shares to existing shareholders in proportion as the circumstances permit.

2.

Separate Bank Account Share application money is received in Separate Bank Account No need for separate Bank Account in case of issue to the existing shareholders

3.

Valuation Report Valuation report is mandatory in case of Private Placement Valuation report is mandatory only in case of issue to existing non-resident shareholder

4.

Shareholders’ approval Shareholders’ approval is required by way of SR. No need to take approval of shareholders of the Company. Approval of Board is sufficient for right issue

5.

Minimum Subscription It must be of Rs. 20,000 of face value No Minimum Subscription required

6.

Renounce the offer letter No such right is available for the shareholders.However rights for accept/reject the offer letter is available to the shareholders Shareholders have rights to Renounce/accept/reject the offer letter within a minimum period of 15 days subject to the maximum of 30 days

7.

Refund of Share application money If the allotment is not made within a period of 60 days from the receipt of 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 deposit after the expiry of 60 days. If allotment is not made within a period of 60 days from the receipt of application money. However, there is no provision relating payment of interest @ 12% nor does it prescribe to repay within next 15 days (after the expiry of 60 days).This application money will be treated as deposit after the expiry of 60 days.

8.

Simultaneous issue of shares As per section 42 (3) of Companies Act, 2013 no fresh offer and allotment can be made unless allotment w.r.t any offer made earlier have been completed There is no such provision in section 62(1)(a) (Rights Issue).

9.

Timeline Since this process involves Shareholders meeting, Valuation Report, etc, it takes more time to do a Preferential Issue. Rights issue process take lesser time.

 

You may also like to read:

  1. Issue of shares by Private placement (includes Preferential Issue)

  2. Essential Conditions for Private Placement


 

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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