Issue of Shares in a Private Company

This article discusses the features of a private company as laid down under the Companies Act. This article also discusses the statutory rules and provisions of issuing shares by a private company.
Estimated Reading Time: 6 minutes

Introduction

As per Section 2(68) of the Companies Act, 2013[1], “private company” means a company having a minimum paid-up share capital as may be prescribed, and which by its articles, –

  • restricts the right to transfer its shares.
  • except in case of One Person Company, limits the number of its members to two hundred and
  • prohibits any invitation to the public to subscribe for any securities of the company; It must be noted that it is only the number of members that is limited to two hundred.

A private company may issue debentures to any number of persons, the only condition being that an invitation to the public to subscribe for debentures is prohibited. The aforesaid definition of private limited company specifies the restrictions, limitations, and prohibitions, which must be expressly provided in the articles of association of a private limited company. This article will explain how issue of shares takes place in a private company.

Privileges for Private Company

There are certain privileges and advantages to private companies related to provisions. They are: (i) Minimum number of members is two (seven in case of public companies); (ii) Prohibition of allotment of shares or debentures in certain cases unless statement in lieu of prospectus has been delivered to the Registrar of Companies does not apply; (iii) Restriction contained in Section 81 related to the rights issues of share capital does not apply.

A special resolution to issue shares to non-members is not required in case of a private company; Restriction contained in Section 149 on commencement of business by a company does not apply;  private company does not need a separate certificate of commencement of business; Provisions Section 165 relating to statutory meeting and submission of statutory report do not apply. One (if seven or fewer members are present) or two members (if more than seven members are present) present in person at a meeting of the company can demand a poll.

Issue of Shares

A private company may issue securities by way of rights issue or bonus issue in accordance with the provisions of companies act or through private placement by complying with the provisions of the act.

Rights Issue of Shares

As per section 62 of the Act, A company having a share capital proposes to increase its subscribed capital by the issue of further shares; such shares shall be offered to its existing shareholders, to employees under a scheme of employees’ stock option and to any persons, if it is authorized by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered value.

Issue of shares on preferential basis

A company may issue shares in any manner whatsoever including by way of a preferential offer, to any persons whether or not those persons include the persons referred to in clause (a) or clause (b) of sub-section (1) of section 62. Such issue on preferential basis should also comply with conditions laid down in section 42 of the Act (private placement).

Issue of sweat equity shares

According to Section 54 of companies Act, a company may issue sweat equity shares of a class of shares already issued to its directors or employees by passing a special resolution.

Conversion of loans or debentures into shares

A private company may convert loans raised by the company or debentures issued by the company into shares by passing of special resolution if there is such a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company.

Issue of Bonus Shares

A company may issue fully paid-up bonus shares to its members out of its free reserves, the securities premium account, or the capital redemption reserve account. Under 2013 Act a private limited company can issue shares only using the methods prescribed in the Act.[2]

Private Placement – Section 42 of Companies Act

“Private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company through issue of a private placement offer letter and which satisfies the conditions specified in section 42 of the Act.

The offer of securities shall be made to not more than 200 persons in the aggregate in a financial year (excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employee’s stock option as per provisions of clause (b) of sub-section (1) of section 62). This restriction would be reckoned individually for each kind of security that is equity share, preference share or debenture. The value of such offer or invitation per person shall be with an investment size of not less than twenty thousand rupees of face value of the securities. The provisions of clauses (b) and (c) of sub-rule (2) of Rule 14 shall not be applicable to Non-banking financial companies and housing finance companies.

The payment to be made for subscription to securities shall be 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. A private placement offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the names of such persons in accordance with sub-section (7) of section 42 of the Act.[3]

No person other than the person so addressed in the application form shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid. The offer should be previously approved by the shareholders of the company, by a Special Resolution, for each of the Offers or Invitations. In case of offer or invitation for non-convertible debentures, it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitation for such debentures during the year. The explanatory statement annexed to the notice for the general meeting the basis or justification for the price (including premium, if any) at which the offer or invitation is being made shall be disclosed.

No fresh offer or invitation shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or withdrawn or abandoned by the company. For example, of a company issuing equity shares then it cannot issue preference shares or debentures until procedure of equity shares is completed.

Company shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen 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 that money with interest at the rate of twelve per cent per annum from the expiry of the 60th day.

No company offering securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer. The company shall maintain a complete record of private placement offers in Form PAS-5 and also file along with private placement offer letter in Form PAS-4 with ROC within a period of thirty days of circulation of the private placement offer letter. A return of allotment of securities under section 42 shall be filed with the ROC within thirty days of allotment in Form PAS-3.

Contravention of Section 42 of the Act attracts penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.[4]

Conclusion

Raising finances in a private company is quite limited compared to public company. In above monograph, it is mentioned how private company issue shares through private placements and rights issue method.


[1] Companies Act, 2013, Section 2 (68)

[2] WWW.IIM-EDU.ORG/THINKPAPERS

[3] WWW.ICSI.EDU/PORTALS

[4] TAXGURU CORPORATE JOURNALS

Hey there!

come here often?

Login To Come In