Issue of shares by Private placement (includes Preferential Issue)
May 30, 2014 by Pooja Dhiman
In UK, the concept of authorised share capital (ASC) was done away with through a notification of the Companies Act, 2006. Authorised share capital is the maximum number of shares a company can issue multiplied by its par value or the nominal value. Even in Singapore, incorporated companies are no longer required to specify its authorised capital after the amendment in 2005. In India, however, a company can issue new shares within the limit of its authorised share capital or else, it needs to increase it first.
The next step is to check that the issue of shares complies with any applicable pre-emption rights. Approval of the existing shareholders through a General meeting (discussed below) is required for issue of shares by way of private placement or preferential issue. Issue of shares to existing shareholders is termed as rights issue and procedure is simple. Issue to shareholders other than existing (and therefore not rights issue) is what we have discussed here.
Different classes of share
Please note that the shares can be issued by the company of the same class or of the different classes. Unless the articles say otherwise, all shares will rank equally. However, different classes of shares will comprise of different rights – to dividends, to a return of capital on winding up and on voting. A company may have one class of share or it may have many.
The following are the detailed procedure for the issue of shares through private placement and preferential issue along with important pointers to be kept in mind.
The board meeting is required to be conducted to propose the private placement or preferential issue offer, identify the person to whom the offer is to be made, and call the general meeting of the approval of the shareholders.
Please note that as per Section 179(3) (c) of the Companies Act, 2013, the board shall excise its power to issue such securities in the board meeting only.
The price of the securities to be issued shall be on the basis of the valuation report of a registered valuer. However, in the case of listed companies, the price of the securities shall be determined on the basis of pricing guidelines as prescribed under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Please note that a company cannot allot shares at a discount. Since shares must be offered at par or nominal value (typically Rs. 1/- or Rs. 10/- per share) this sets the minimum price per share at which shares can be issued.
The issue must be authorized by the shareholders of the company, by way of a special resolution. [Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014]
Points to be noted:
➣ Copy of special resolution shall require to be filed in form MGT-14 within 30 days of passing of such resolution.
➣ The explanatory statement is also required to be annexed along with the notice of the general meeting which shall contain various disclosures as prescribed under the Rules. Disclosures such as names of the proposed allottees, the resultant change in control, and the pre & post shareholding pattern, basis and justification of price, etc.
➣ The preferential issue must be authorized by the Articles of Association of the Company. However, if the issue is not authorized by the articles, then it must be altered accordingly.
Send offer cum application letter in form PAS-4
The company shall send the private placement offer cum application letter in the Form PAS- 4 to all the person(s) to whom the offer is made. The application form shall be serially numbered and addressed specifically to such person, either in writing or in electronic mode, within thirty days of recording the names of such persons to whom the offer is made. [Section 42(3) read with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014]
Points to be noted:
Share Application Money
Every identified person willing to subscribe to the above offer shall apply through the application issued to such person along with subscription money to be paid either by cheque or demand draft or other banking channel but not by cash.
However, in the case of a preferential issue, subscription money can be either in cash or in consideration other than cash.
Points to be noted:
➣Monies received on the application shall be kept in a separate bank account in a scheduled bank which shall not be utilized for any purpose other than-
✓for adjustment against the allotment of securities, or
✓for the repayment of monies where the company is unable to allot the securities.
➣The payment for subscription to securities shall have to be mandatorily made from the bank account of the person subscribing to such securities and the company shall keep the record of the Bank account from where such payments for subscriptions have been received.
- Allotment of securities
The allotment of the securities shall require to be made within sixty days from the date of receipt of the application money for such securities. However, if the company unable to allot such securities within 60 days, the application money shall be refunded within the next 15 days, if the company also failed to refund the said application money, the company shall be refunded such amount along with the interest of @ 12% p.a.
In case of a preferential issue, the allotment of securities made pursuant to the special resolution shall be completed within a period of twelve months from the date of passing of such special resolution. If not completed, another special resolution shall require to be pass to complete such allotment.
- Return of Allotment
A return of allotment of securities issued shall require to be filed with the Registrar within 15 days of allotment in the Form PAS-3 along with the list of allottees.
Please note that a Company shall not utilize monies raised through private placement unless allotment is made and the return of allotment is filed by the company with the Registrar.
- Share Certificates
The shares certificates shall be issued within 2 months from the date of allotment. [Section 56(4) of the Act].
- Stamp Duty
The Stamp duty is to be paid within 30 days from the date of issue of shares certificates.
Penalty prescribed here is quite hefty. If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through such offer or twenty million rupees, whichever is lower, and the company shall also refund all monies to subscribers along with interest within a period of thirty days of the order imposing the penalty pursuant to Sec 42(10) of the Act.
The procedure / documentation noted above should also be accompanied by a shareholders agreement which will contain a number of protective provisions for the new shareholder(s) investing, and shall also to govern the relationship of all parties on an ongoing basis.