Procedure of Issuing Shares under Companies Act 2013 (For Private Limited)

Procedure of Issuing Share Capital under Companies Act 2013 (For Private Limited)

Under the Companies Act 2013, A Company can raise funds to increase its Share Capital in the following ways:

1.      Private Placement / Preferential  Allotment

2.      Right Issue

3.      Public Issue

APPLICABILITY
From 1st April 2014

A. PRIVATE PLACEMENT

1.      As per Section. 42, of the Companies Act 2013 and Rule 14 under Companies (Prospectus and Allotment of Securities) Rules 2014), A private company has to follow the procedures for private placement of securities.

2.      A Private Placement is issuing shares to a selected group of people, including or not the existing shareholders, like friends, family members, Angel investors, Venture Capitalists etc.

3.      Securities means - equity shares, preference shares and debentures, convertible instruments, and also redeemable instruments.

4.      “Private Placement” means any offer of securities or invitation to subscribe securities (equity or securities that convert to equity) to a select group of persons by a company, other than by way of public offer, through issue of a private placement offer letter. 

B. RIGHTS’ ISSUE

A rights issue is directly offered to all existing shareholders of the Company in proportion to their current holding. The company also set a time limit for the shareholder to buy the shares. Companies pursue Rights Issue as an avenue to raise funds for various reasons, ranging from expansion or acquisitions to paying down debts.

Section 62 of Companies Act, 2013 contains provisions on “further issue of capital”, and enacts the principle of pre-emptive rights of shareholders of a company to subscribe to new shares of the company.

Provisions of Section 62 of Companies Act, 2013 are mandatory for all Private companies, public companies, and listed as well as unlisted companies.

PREFERENTIAL ALLOTMENT :

Sec 62 (1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered:

(a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—

(i)         the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

(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 favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;

(iii)       after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;

PROCEDURE FOR ALLOTMENT OF SHARES ON RIGHT ISSUE BASIS:

Issue notice in writing to every Director at least seven days’ before convening the Board meeting. [Sec 173 (3)]

Convene a Board Meeting

Pass a Board resolution for approving “Letter of offer”. The offer letter shall include right of renunciation also.

Dispatch Letter of offer to all existing shareholders through registered post or speed post or through electronic mode at least three days before the opening of the issue.

Receive acceptance, renunciations, rejection of rights from shareholders.

Issue notice in writing to every Director at least seven days’ before convening the Board meeting. [Sec 173 (3)]

Convene a Board Meeting

Pass Board resolution for approving allotment and issue of shares.

File with Registrar a return of allotment in E-Form PAS-3 within 30 days of allotment of shares.

File E-form MGT 14 within 30 days of Issue of securities.

OTHER INFORMATION:

There is no prescribed format for “Letter of offer” to be issued, in case of right issue of securities. Format of “Letter of offer” prescribed in Companies Act, 2013 is Pursuant to section 42 and rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 and not for Section 62.

Letter of offer shall specify the number of shares offered and other information and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

Attach with E-Form PAS-3 (i) Board Resolution for allotment and issue of share. (ii) Letter of offer (iii) List of Allottees

List of Allottees attached with E-Form PAS-3 shall state the names, address, occupation, if any, of the shareholder and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the Form PAS-3 as being complete and correct as per the records of the company.

OFFER LETTER

1.       An offer can be made under a Private Placement Offer Letter to not more than 200 people

2.      Notice of issue should be dispatched at least 3 days before opening of offer.

3.      Offer should remain open at least for 15 days and not more than 30 days.

4.      Addressed to specific person in writing or in electronic mode.

5.       Special Resolution – basis or justification of pricing (including premium) to be made in the explanatory statement. Purpose and object of offer Time schedule for which offer is valid. Price of offer and its justification the securities allotted has to be fully paid-up (i.e. it cannot be partly-paid).

6.      .In case the existing shareholders do not accept the offer; the directors should dispose such shares in a manner “non-disadvantageous” to the company.

7.      The 200 people limit excludes Qualified Institutional Buyers and Employees.

8.      The value of the Offer per person shall not be less than Rs 20,000 of the ‘face value’ of securities.  

9.      The payment for subscription should be through the bank account of the person subscribing to the securities and the company should keep a record of the bank account from where such payments have been received.

10.   No cash transaction is permitted.

11.   The money so received shall be kept in a separate bank account of the company and utilised only for allotment, prior to the allotment of shares, the share application money cannot be used for any other purposes.

12.  The Company should maintain record of such Bank A/C

13.   Maintain complete record in PAS-5 and PAS-4 to be filed with ROC

PENALTY

1.      Non-compliance can lead to a penalty of Rs 2 crores or the amount involved in the offer, whichever is higher.

2.      Refunding the share application money

3.      It means, Make Allotment of shares within 60 days of receipt of Money from the persons to whom right was given.  Else from the 75th day, the share application monies have to be repaid. In the event of failure to repay, interest at 12% pa has to be paid.

PROCEDURES TO BE FOLLOWED BY THE COMPANY GOING IN FOR PRIVATE PLACEMENT

1.      Check Provision in Article regarding Private Placement. If not there, amend the Articles.

2.      The Articles of Association should provide for and shareholders of the company through special resolution approve the Offer and this resolution should be acted upon within 12 months. At any given point in time, there should be only one active offer for each kind of security.

3.      Call Board Meeting to consider the following :        

a)      To Prepare Offer Letter

b)      Make Proposal for Private Placement

c)      Prepare list of persons to whom option will be given

d)     Call Extra Ordinary General Meeting (EGM)

Call Extra Ordinary Meeting to consider the following:

1.      Pass Special Resolution, which will be valid for 12 months

2.      If Private Placement is not completed in 12 Month, pass another Special Resolution

3.      Approve Draft Offer Letter by Special Resolution

4.      File MGT-14 with ROC with Attachments, viz. Notice of EGM – CTC of SR – Minutes

5.      Issue offer letter in PAS-4 within 30 days of record of name of persons:

6.      Application form serially numbered

7.      Address to the persons to whom the offer is made

8.      Prepare complete record of Private Placement in PAS-5

9.      File PAS-4 + PAS-5 with ROC within 30 days of issue of offer letter in GNL-2

10.  Called Board Meeting for allotment of shares

11.  File PAS-3 with Roc within 30 days if Allotment is made, along with prescribed attachments

12.  The price of the security has to be justified through a    valuation report by a Registered Valuer who can be a company secretary, chartered accountant or a cost accountant.

13.  File Form MGT-14 along with Resolution pass in Board meeting for allotment of shares.

Issue Share Certificates within 60 days of the allotmen