Exploring the intricacies of issuing securities under the Companies Act, 2013 can be daunting. In this concise guide, we break down the practical aspects without drowning in technical jargon. Discover the essential pathways to issue securities and crucial considerations for private companies issuing equity and preference shares under the Act.
Rights Issue and Private Placement
In navigating the issuance of securities for private companies under the Companies Act, 2013, two predominant avenues stand out: rights issue and private placement.
Offering a pathway to issue equity or preference shares, a rights issue extends the opportunity exclusively to existing shareholders. This method allows these shareholders the privilege to purchase new shares at a predetermined future date.
Private placement involves the issuance of equity or preference shares through a targeted approach. This method circulates a company’s securities among a specific group of individuals via a private placement offer letter, bypassing public solicitation.
Critical Considerations for Securities Issuance under Companies Act, 2013
Valuation of Shares:
The process of evaluating a company’s shares holds paramount importance. Internally, the company’s management undertakes this assessment to ascertain the shares’ worth, aiding in setting issue prices and offers. Subsequently, the board of directors finalizes the valuation of securities.
Under the private placement route, a registered valuer approved by the Insolvency and Bankruptcy Board of India conducts the share valuation. This valuation strictly adheres to the guidelines outlined in the Companies Rules, 2017, mandated by the Companies Act, 2013.
Under Section 62(1) of the Companies Act, 2013, both rights issue and private placement necessitate a board meeting for approval. For rights issues, the initial board meeting is pivotal, passing the resolution to issue rights. Shareholders then have 15 to 30 days to accept the offer.
In the case of private placement, a board meeting is mandatory to authorize the offer letter, set the subsequent general meeting, and empower a director to validate the decisions made during the meeting.
For rights issues, no special resolution is mandated for equity share allotment. However, as per Rule 9 of the Companies Rules, 2014, companies require a special resolution for issuing preference shares.
In private placements, companies must adhere to Section 62(1)(c) of the Companies Act, 2013, necessitating a special resolution. Additionally, as outlined in Rule 9 of the Companies Rules, 2014, a special resolution is crucial specifically for issuing preference shares, not for equity shares.
Rights issue offers are extended via letters to existing shareholders, specifying the offered shares and a timeframe between 15 to 30 days from issuance for acceptance.
In contrast, private placements utilize E-Form PAS-4 for offer letters to potential investors, mandated to span at least 3 days. Notably, shares must be allotted within 60 days post receiving funds, though a specific maximum duration is not stipulated by law.
For rights issues, while the issuance of equity shares doesn’t demand E-Form MGT-14, it becomes essential for preference shares as per the resolution in the general meeting, per Rule 9 of the Companies Rules, 2014.
In private placements, E-Form MGT-14 is requisite for the resolution passed under Section 62(1)(c) of the Companies Act, 2013. Additionally, companies must file the general meeting resolution specifically for issuing preference shares, following Rule 9 of the Companies Rules, 2014.
E-Form PAS-3 Filing:
Within 30 days of the board resolution for share allotment, companies are mandated to file E-Form PAS-3, ensuring timely compliance.
Separate Bank Account:
While a rights issue doesn’t necessitate an Escrow Account, private placements demand a separate bank account. Non-compliance, such as not using an escrow account for investor funds, per Section 42 of the Companies Act, 2013, can lead to penalties. Companies should establish an escrow account to hold funds until share allotment.
These facets encompass critical practices within the framework of the Companies Act, 2013, governing securities issuance. Non-adherence often incurs penalties and may impact a company’s credibility for future investments. Ensuring procedural diligence is imperative. Refer to this guide for clarity on securities issuance under the Act, fostering compliant practices and bolstering investor confidence.