A Comprehensive Guide on Capital of the Company and Issue of Securities

Raising capital refers to the process by which a company secures funds to finance its operations, growth, or other business activities. This can be done through various means such as issuing shares (equity financing), borrowing through loans or bonds (debt financing), or a combination of both. Companies may raise capital through private placements, public offerings, rights issues, or other financial instruments like debentures or warrants. The choice of method depends on factors like the company’s financial strategy, market conditions, and regulatory requirements.

Table of Contents

1. Various Modes of Raising Capital
2. Issue of Shares at Premium
3. Issue of Equity Shares with Differential Rights
4. Private Placement of Securities
5. Conversion of Debentures or Loans into Shares as per Loan Agreement
6. Compulsory Conversion of Debentures and Loans Given by Central Government into Equity Shares of the Company
7. Warrants

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1. Various Modes of Raising Capital

Share capital are ‘own funds’ of the company.

Share capital can be raised by company by following means

• Private Placement – From friends and relatives of promoters & directors if authorised by special resolution – section 23(1)(b) of Companies Act, 2013 in case of public company and section 23(2)(b) in case of private company.
• Public Issue – Invite public to contribute to share capital – section 23(1)(a) of Companies Act, 2013 [sections 23 to 40 of the 2011 Act] Public Offer can be

1. 1. Initial public offer (IPO) or
   2. Further public offer of securities of company or
   3. Offer for sale of securities to the public by an existing shareholder – Explanation to section 23(2) of Companies Act, 2013 (A private company cannot make public issue).

• Rights Issue – Asking existing members to take new shares in proportion to their existing shareholding – section 23(1)(c) in respect of public company and section 23(2)(a) in respect of private company [issued as per provisions of section 62(1)(a) of Companies Act, 2013]
• Sweat Equity to employees/directors/promoters [section 54 of Companies Act, 2013]
• ESOP/ESOS to employees, on passing of special resolution [section 62(1)(b) of Companies Act, 2013]
• Issue of shares to others for consideration of cash or other than cash, if price is determined by registered valuer, and issue authorised by special resolution [section 62(1)(c) of Companies Act, 2013].
• Bonus shares [section 63 of Companies Act, 2013]
• Conversion of debentures into shares, partly or fully [proviso to section 71(1) of Companies Act, 2013]
• Conversion of loan or debentures into shares if there is such a term in loan agreement or issue of debentures and it is approved in general meeting by a special resolution [section 62(3) of Companies Act, 2013]
• Compulsory conversion of debentures or loans into equity by Central Government on terms decided by Government. Appeal can be filed against order of Government [section 62(4) of Companies Act, 2013] – This sub-section is made effective from 1-6-2016.
• Global Depository Receipt (GDR) in any foreign country [section 41 of Companies Act, 2013]

Administration Powers to SEBI in respect of public issue of shares/debentures – As per section 24(1)(a) of Companies Act, 2013 [Corresponding to section 55A of the 1956 Act], provisions in respect of (a) Public Officer (Chapter III) (b) Share capital and debentures (Chapter IV) and (c) Punishment for failure to declare dividend (Section 127 of Companies Act, 2013) will be administered by SEBI in respect of a listed public company or a public company which intends to get their securities listed in any recognised stock exchange.

Powers shall also be delegated under section 458(1) of Companies Act, 2013 to SEBI in respect of forward dealing (section 194 of Companies Act, 2013) and insider trading (section 195 of Companies Act, 2013) in case of listed companies or companies which intend to get their securities listed.

These powers will be exercised by SEBI in exercise of the powers conferred on SEBI under sections 11, 11A, 11B and 11D of Companies Act, 2013.

Rule 3(c) of Companies (Share Capital and Debentures) Rules, 2014 clarify that these rules apply to listed companies only so far as they do not conflict with any regulation in this regard framed by SEBI

In other cases, the provisions will be administered by Central Government.

Further, powers relating to other matters including matters relating to prospectus, return of allotment, issue and redemption of preference shares and issue of shares (other than shares by listed companies or companies which intend to get their securities listed) shall be exercised by Central Government/ROC as the case may be – Explanation to section 23(1) of Companies Act, 2013.

Thus, all statutory requirements regarding filing of prospectus/return of allotment etc. will have to be with ROC.

Write off of expenses of issue of shares or debentures – Expenses incurred on issue of shares or debentures or commission paid or discount allowed on shares or debentures can be written off by utilising Securities Premium Account – section 52(2)(c) of Companies Act, 2013.

1.1 Purposes for which shares can be issued by a company

Powers to issue shares is with Board of Directors. The power should be used bona fide in the interest of company.

1.2 Restrictions on buying own shares or financial aid to others

Following are the restrictions.

Restrictions on buying of own shares by the company – A company limited by shares or company limited by guarantee having share capital, cannot directly or indirectly, buy it own shares, except in case of reduction of capital – section 67(1) of Companies Act, 2013 [Corresponding to section 77(1) of the 1956 Act].

Exception is buy back under section 68 of Companies Act, 2013 [Corresponding to section 77A of the 1956 Act].

If reduction of capital by buy back is sanctioned by NCLT under a scheme, it will be allowable.

This sub-section is not applicable to a private company, if

• Another body corporate has not invested money in the private company
• If the borrowings from banks or financial institutions is less than twice its paid up capital or Rs 50 crores, whichever is less and
• The company is not in default in repayment of the borrowings at the time of transaction

Thus, a private company fulfilling aforesaid conditions can buy its own shares – MCA Notification dated 5-6-2015 issued under section 462 of Companies Act, 2013.

Relaxations are also given to Nidhi companies. They can buy back own shares in specified conditions -MCA Notification dated 5-6-2015 issued under section 462 of Companies Act, 2013.

Loan or guarantee by company to purchase its own shares – A public company cannot give, directly or indirectly, any loan, guarantee or provision of security to provide financial assistance to any one for purchase or subscription of shares in the company or in its holding company – section 67(2) of Companies Act, 2013 [Corresponding to section 77(2) of the 1956 Act].

The exemptions are as follows – section 67(3) of Companies Act, 2013 –

• Lending of money by banking company in ordinary course of its business [section 67(3)(a) of Companies Act, 2013]
• Provision by a company for purchase of fully paid shares in the company or its holding company for benefit of its employees or directors. Such purchase can be only under a scheme approved by company through special resolution. Such shares will be purchased or subscribed by trustees. The trustees will hold shares for benefit of employees. The voting rights exercised by employees through the trustees will be disclosed in the report of Board of Directors [section 67(3)(b) of Companies Act, 2013 – this is for ESOP – see discussions below]
• Loan to bona fide employees (Other than directors or key managerial personnel) to enable them to purchase or subscribe for fully paid shares of the company or its holding company, to be held by themselves by way of beneficial ownership. Such loan cannot exceed six months of salary or wages of the employee. [section 67(3)(c) of Companies Act, 2013]

These restrictions are not applicable to private companies.

If there is default, the offence is punishable with fine of minimum ` one lakh which can extend upto ` 25 lakhs – section 67(4) of Companies Act, 2013 [Corresponding to section 77(4) of the 1956 Act].

Provision of money for purchase of shares by trustees for benefit of employees – Section 67(3)(b) of Companies Act, 2013 enables company to provide money to trustees to hold shares for benefit of employees. This provision is mainly to enable company to issue ESOP through trustees. The provisions are contained in rule 16 of Companies (Share Capital and Debentures) Rules, 2014. The scheme should be approved by a special resolution after disclosing specified details. A director or KMP or promoter cannot be trustee. If voting rights are exercised by trustees and not by employees, disclosure shall be made in report of Board of Directors.

1.3 Income Tax provisions regarding expenses in issue of securities

Increase in capital results in expansion of capital base of the company. It is directly related to expansion of capital base of company and hence is a capital expenditure. – Brooke Bond India v. CIT (1997) 225 ITR 798 = 91 Taxman 26 (SC) – followed in Vareli Textile Industries v. CIT (2006) 154 Taxman 33 (Guj HC DB).

Expenditure incurred in connection with issue of shares with a view to increase the share capital is not allowable as business expenditure – CIT v. Amco Batteries (2006) 155 Taxman 167 (Kar HC DB).

In Punjab State Industrial Development Corporation Ltd. v. CIT (1997) 225 ITR 782 = 93 Taxman 5 (SC), it was held that amount paid to ROC as filing fees for enhancement of capital is a capital expenditure.

Write off of such expenditure is allowable under section 35D(2)(c)(iv) of the Income-tax Act, expenses in connection with issue of shares or debentures of company for public subscription, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus can be amortised @ 20% every year. – – However, it does not cover filing fees paid to ROC for increase in authorised capital.

Expenditure in issue of bonus shares is revenue expenditure – In CIT v. General Insurance Corporation (2006) 156 Taxman 96 (SC), it has been held that expenditure incurred in connection with bonus shares is revenue expenditure. – same view in Bombay Burmah Trading v. CIT (1984) 145 ITR 793 = 12 Taxman 178 (Bom HC).

2. Issue of Shares at Premium

Shares can be issued at premium, i.e. at price more than its nominal price e.g. if a share of nominal value of Re. 1 is offered at ` 25, the ‘premium’ charged is ` 24 per share. It is not necessary that provision must exist in Articles of Association for issue of shares at premium.

As per SEBI guidelines, issuer can issue share at any price. However, offer document should indicate justification for the price. Thus, issuer can issue share at a price that market can bear.

In case of private issue, SEBI guidelines do not apply. Share Premium to be charged can be decided by issuer himself.

Varying premium permissible – There can be no objection to charging of varying rates of premium in respect of block of shares carrying the same rights – CIT v. Standard Vacuum Oil Co. AIR 1966 SC 1393 = (1966) 1 Comp LJ 187 (SC).

This would not be permissible in public issue of securities.

2.1 Securities premium account

The extra amount received over and above nominal price of shares should be transferred to ‘Securities Premium Account’. The balance in this account is treated with the same sanctity as paid-up share capital of the company – section 52(1) of Companies Act, 2013.

The securities premium account can be used only for the following purposes, by companies which are required to follow accounting standards –

• Issuing un-issued shares of company to members as fully paid up bonus shares
• Write off commission paid or discount allowed on issue of shares or debentures of the company
• Buy-back of company’s own shares or other securities under section 68 of Companies Act, 2013 – section 52(3) of Companies Act, 2013 [Corresponding to section 78(2) of the 1956 Act].

Company can reduce any share premium account in any manner subject to provisions of law [Regulation 38 of Model Articles of company limited by shares as contained in Table F of Schedule I of Companies Act, 2013].

Securities Premium Account can be used for reduction of capital [see under reduction of capital].

The companies which are not required to follow accounting standards can use the securities premium account for two purposes in addition to aforesaid three purposes –

• Writing off preliminary expenses
• Providing for premium payable on redemption of any redeemable preference shares or debentures of the company – section 52(2) of Companies Act, 2013.

This distinction has been made as the companies which are required to follow accounting standards cannot use securities premium account for:

• Writing off preliminary expenses
• Providing for premium payable on redemption of any redeemable preference shares or debentures of the company.

Section 63(1)(ii) of Companies Act, 2013 also provides that securities premium account can be utilised to issue fully paid bonus shares.

While sanctioning a scheme or arrangement, Court has wide powers and can order its use of other purposes.

In Comat Infoscribe P Ltd. In re (2004) 53 SCL 41 (Kar HC), it was held that while sanctioning scheme of amalgamation, reduction of share premium account as reduction in capital is permissible. However, if such reduction is not for purposes as stipulated in section 78(2) of the 1956 Act [now section 52(2) of Companies Act, 2013], procedure as prescribed in section 100 of the 1956 Act (now section 66 of Companies Act, 2013) for reduction of capital is required to be followed.

In Zee Telefilms Ltd. In re (2004) 53 SCL 387 (Bom HC), Court granted permission to adjust securities premium account against losses of the company under section 100 of the 1956 Act (now section 66 of Companies Act, 2013) as such adjustment would be deemed to be reduction of capital – similar order in India Infoline Ltd. In re (2004) 53 SCL 396 (Bom HC) * Hyderabad Industries Ltd. In re (2004) 55 SCL 1 (AP HC DB) * Parrys Confectionery Ltd. In re (2004) 56 SCL 34 (Mad HC).

In DSM Anti Infectives India Ltd. In re (2010) 104 SCL 384 (P&H HC), it was held that securities premium account can be applied for purposes other than section 78(2) of the 1956 Act [corresponding to section 52 of Companies Act, 2013] while approving a scheme under section 391 of the 1956 Act [parallel section 230 of Companies Act, 2013]. In this case, utilization of securities premium towards business reconstruction reserve was allowed.

2.2 Issue of shares at discount prohibited

Issue of shares at discount is completely prohibited, except in case of sweat equity shares. Any issue of shares at discount would be void. Company and every officer who is in default is like to be punished – section 53 of Companies Act, 2013.

Penalty for issue of shares at discount – Where any company fails to comply with the provisions of this section, such company and every officer who is in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount or five lakh rupees, whichever is less, and the company shall also be liable to refund all monies received with interest at the rate of twelve per cent per annum from the date of issue of such shares to the persons to whom such shares have been issued – section 53(3) of Companies Act, 2013 amended vide the Companies (Amendment) Act, 2019 w.r.e.f. 2-11-2018.

Till 2-11-2018, there was provision for imposition of fine, which could be imposed only by Court. Alternatively, procedure for compounding of offences was required to be followed. Now, directly, penalty can be imposed by Registrar/RD after issuing SCN.

Prohibition of issue of shares at discount not applicable when debt converted into shares under debt restructuring or insolvency resolution plan– Section 53(2A) of Companies Act, 2013, inserted w.e.f. 9-2-2018 provides that company can issue shares at discount to its creditors when its debt is converted into shares in pursuance of insolvency resolution plan or debt restructuring scheme in accordance with guidelines of RBI.

2.3 Issue of shares otherwise than for cash

Often, shares are issued for other consideration e.g. intellectual property of investor (shareholder), technical know-how, machinery or goods or equipment supplied by investor.

In such case, the company can value those assets and issue shares at premium.

The valuation has to be done by registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed. The proposal has to be accepted in general meeting by special resolution [section 62(1)(c) of Companies Act, 2013. Words in italics inserted w.e.f. 9-2-2018]

If issue is for other than cash (partly or fully), copy of contract duly stamped shall be attached to return in form PAS.3. If the contract was not in writing, then complete particulars of contract duly stamped shall be attached. Registrar may require that the stamp duty paid on such document may be adjudicated under section 31 of the Indian Stamp Act [This provision has been made as people were not making written contract, to avoid payment of stamp duty] – Rule 12(3) and 12(4) of Companies (Prospectus and Allotment of Securities) Rules, 2014.

If issue is for other than cash (partly or fully), report of registered valuer shall be attached with the contract – Rule 12(5) of Companies (Prospectus and Allotment of Securities) Rules, 2014.

Till provision relating to registered valuer is not notified, valuation of shares, debentures, securities etc. shall be made by independent merchant banker registered with SEBI – Explanation to Rule 12 of Companies (Prospectus and Allotment of Securities) Rules, 2014.

Disclosure in return of allotment – If shares are issued for consideration other than cash, this fact must be mentioned in Return of Allotment.

Quantum of stamp duty payable on agreement to issue shares other than cash – An agreement to allot shares or an allotment of shares is not a transfer of property, as the company which allots shares is not in any sense owner of the share which it creates. The agreement will not be liable to duty as conveyance. It will be liable as mere ‘agreement’. – Madura Mills Co. Ltd. In re (1937) 7 Comp Cas 71 (Mad) * Bhola Ram v. The Crown (1934) 4 Comp Cas 159 (Lah) * Raj Sachdev v. Board of Revenue AIR 1959 All 595.

In Madura Mills Co. Ltd. In re (1937) 7 Comp Cas 71 (Mad), it was held that agreement to transfer property in future is not a ‘conveyance’ and is required to be stamped as if it is an ‘agreement’.

However, in Sudarshan Talkies v. Chief Controlling Revenue Authority (1978) 48 Comp Cas 591 (Del HC FB), it was held that if purchase price of immovable property was consideration of contract (which was oral but reduced in writing as required under section 75), it will require stamp duty as prescribed for a conveyance of immovable property.

Liability of sales tax if issue is other than cash – Generally, ‘barter’ is not a ‘sale’. However, in Premier Electro Mechanical Fabricators v. State of Tamilnadu – (1984) 55 STC 371 (Mad HC), machinery was transferred in consideration of allotment of shares equal to value of machinery. It was held as ‘sale’ of machinery – followed in State of Tamil Nadu v. TMT Drill (P.) Ltd. – (1991) 82 STC 59 (Mad HC DB).

Disclosure in Financial Statement – If shares are issued for consideration other than cash, the fact is required to be disclosed in Balance Sheet. The Balance Sheet must also indicate quantum of shares issued for consideration other than cash.

Shares cannot be allotted without consideration – Shares can be allotted for consideration other than cash, but shares cannot be allotted without consideration e.g. as donation to charitable institution, as shares must be issued only for a valid consideration.

3. Issue of Equity Shares with Differential Rights

A company can issue equity shares with differential rights as to dividend, voting or otherwise, only of following conditions are satisfied – Rule 4(1) of Companies (Share Capital and Debentures) Rules, 2014

• Articles of association of the company should authorize the issue of shares with differential rights.
• The issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders. In case of listed company, the resolution should be approved through postal ballot.
• The voting power in respect of shared with differential rights of the company shall not exceed 74% of total voting power including the voting power in respect of equity shared with differential rights issued at any time [amendment w.e.f. 16-8-2019 – earlier, the requirement was as follows – The shares with differential rights shall not exceed 26% of the total post-issue paid up equity share capital, including equity shares with differential rights issued at any point of time earlier].
• Omitted w.e.f. 16-8-2019 [Till 16-8-2019, the requirement was as follows – The company should be having consistent track record of distributable profits for the last three years].
• The company should not be a defaulter in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares.
• The company should not have subsisting default in the payment of

1. 1. a declared dividend to its shareholders or repayment of its matured deposits or
   2. redemption of its preference shares or debentures that have become due for redemption or
   3. payment of interest on such deposits or debentures or payment of dividend.

• The company should not have defaulted in

1. 1. payment of the dividend on preference shares or
   2. repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or
   3. interest payable thereon or
   4. dues with respect to statutory payments relating to its employees to any authority or
   5. default in crediting the amount in Investor Education and Protection Fund to the Central Government.

If company had defaulted earlier, shares with differential rights can be issued upon expiry of five years from end of financial year in which such default has occurred – proviso to rule 4(1)(g) of Companies (Share Capital and Debentures) Rules, 2014 inserted w.e.f. 19-7-2016.

• The company should not have been penalized by Court or Tribunal during the last three years of any offence under RBI Act, SEBI Act, SCRA Act, or any other special Act, under which such company is being regulated by sectoral regulators.

3.1 Explanatory statement with proposed resolution

The explanatory statement to be annexed to the notice of the general meeting in pursuance of section 102 of Companies Act, 2013 or of a postal ballot in pursuance of section 110 of 2013 Act shall contain the particulars specified in Rule 4(2) of Companies (Share Capital and Debentures) Rules, 2014.

The details include details of differential rights, reason or justification, details of shares of promoters, reservations to different class of applicants, change of control, dilution in EPS etc.

3.2 Other conditions for issue of shares with differential rights

The other conditions are as follows –

Voting by Postal ballot if members exceed 200 – In case of company having more than 200 members, the resolution to issue shares with differential rights is required to be passed through Postal ballot – Section 110(1)(a) read with Rule 22(16)(e) of Companies (Management and Administration) Rules, 2014.

Existing shares cannot be converted – Existing equity share capital cannot be converted into equity shares with differential rights – Rule 4(3) of Companies (Share Capital and Debentures) Rules, 2014.

Bonus, rights available to these shares – The holders of the equity shares with differential rights shall enjoy all other rights such as bonus shares, rights shares etc., which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued – Rule 4(5) of Companies (Share Capital and Debentures) Rules, 2014.

Register of members to indicate shares with differential rights – The Register of Members maintained under section 88 shall contain all the relevant particulars of the shares so issued along with details of the shareholders – Rule 4(6) of Companies (Share Capital and Debentures) Rules, 2014.

Shares issued under 1956 Act can continue under earlier rules – The shares with differential rights issued under the 1956 Act and Rules shall continue to be regulated under the earlier rules – Explanation to Rule 4(6) of Companies (Share Capital and Debentures) Rules, 2014.

3.3 Report of Board of Directors

The Board of Directors shall disclose in the Board’s Report for the financial year in which the issue of equity shares with differential rights was completed, the details as specified in Rule 4(4) of Companies (Share Capital and Debentures) Rules, 2014. These cover details of share allotted, details of voting rights, price at which allotted, change in control (if any), diluted EPS etc.

4. Private Placement of Securities

A public company or private company can issue shares on private placement basis – section 42(1) of Companies Act, 2013.

The entire section 42 has been completely recast vide Companies Amendment Act, 2017 w.e.f. 7-8-2018.

This section has been completely replaced by new section but there does not appear to be any radical change in the provisions. The amended provisions are as follows.

The earlier section 142 did not specifically state that private placement should be only to ‘identified persons’, though it was implied in earlier section 42(7) also. Further, more than one issue of securities can be made to each class of identified persons.

A company (private or public) can issue shares on private placement basis – section 42(1) of Companies Act, 2013.

“Private placement” means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum application which satisfies the conditions specified in section 42 of Companies Act, 2013 – Explanation I to section 42(3) of Companies Act, 2013 (as amended).

Such private placement can be made to maximum 50 ‘identified persons’ or higher number prescribed (by notification) in a financial year, excluding

• Qualified Institutional Buyer (QIB) [QIB as defined in SEBI (ICDR) Regulations]
• Employees under stock option scheme under section 62(1)(b) of Companies Act, 2013 – section 42(2) of Companies Act, 2013.

More than one issue of securities can be made to each class of identified persons as may be prescribed within limit of maximum number of identified persons- proviso to section 42(5) of Companies Act, 2013.

If offer is to more than prescribed number, it will be a deemed public offer, whether or not the company intends to list its securities on a stock exchange. In such case, all provisions relating to public offer shall have to be complied with – Explanation III to section 42(3) and section 42(11) of Companies Act, 2013 (as amended).

[The provisions are fallout of decision in Sahara India Real Estate Corpn. Ltd. v. SEBI (2012) 115 SCL 478 = 25 taxmann.com 18 (SC) = (2013) 1 SCC 1. In this case the company argued that 50 persons limit is 50 at a time (that time the word ‘in financial year’ were not there). It was also argued that company does not intend to list the shares on any stock exchange. Supreme Court observed that when listing is compulsory, you cannot ‘intend’ something which is contrary to law].

No fresh offer shall be made unless allotment made earlier has been completed or withdrawn – section 42(5) of Companies Act, 2013.

All money should be received by cheque or draft on banking channel but not by cash – section 42(4) of Companies Act, 2013.

Moneys received on application shall be kept in a separate bank account till adjusted towards allotment or refunded – proviso to section 42(6) of Companies Act, 2013.

The money shall not be utilised unless allotment is made and return of allotment is filed with Registrar.

Allotment must be made within 60 days. If not made within 60 days, amount should be refunded within 15 days. Otherwise, interest @ 12% will be payable. The money shall be kept in a separate bank account, either for allotment or for repayment – proviso to section 42(6) of Companies Act, 2013.

The offer shall be made to specific persons by name and complete information and record of such offer shall be filed with ROC within 30 days of circulation of private placement offer – section 42(7) of Companies Act, 2013.

No advertisement through media, marketing or distribution channels or agents shall be made of such offer – section 42(7) of Companies Act, 2013.

Return of allotment with complete details of security holders shall be filed with Registrar – section 42(8) of Companies Act, 2013.

Contravention can attract penalty equal to amount involved in the offer or ` two crores which is lower on promoters and directors. Further, company shall repay all moneys to subscribers – section 42(10) of Companies Act, 2013.

Provisions do not apply to preferential issue made only to members – If the preferential issue is only to one or more of existing members, following are not applicable –

• Section 42 of Companies Act, 2013 relating to private placement will not apply
• Filing of private placement offer letter in form PAS.4 with ROC is not required – first proviso to rule 13 of Companies (Share Capital and Debentures) Rules, 2014, inserted w.e.f. 18-3-2015.

Relaxations in case of Nidhi companies – Relaxations have been given from rigors of section 42 of Companies Act, 2013 in respect of private placement – MCA Notification dated 5-6-2015 issued under section 462 of Companies Act, 2013.

4.1 Procedure for issue of securities on private placement basis

The procedure is broadly as follows –

Special resolution by members or Board resolution – For purposes of section 42(2) and 42(3) of Companies Act, 2013, company shall first pass special resolution. The explanatory statement attached to notice shall contain prescribed details – Rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended on 7-8-2018.

Rule 14(1) does not apply for issue of NCD (Non-convertible debentures), where proposed amount to be raised through such offer or invitation does not exceed limit as specified in section 180(1)(c). In that case, Board resolution under section 179(3)(c) is adequate – second proviso to Rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended on 7-8-2018.

If proposed amount exceeds limit as specified in section 180(1)(c), it is sufficient if special resolution is passed once a year – third proviso to Rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended on 7-8-2018.

In case of offer and allotment of securities to QIB, it shall be sufficient if company passes previous special resolution only once a year for all allotments to such buyer during the year – fourth proviso to Rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 inserted w.e.f. 16-10-2020.

If the preferential issue is only to one or more of existing members only, rule 14(1) and proviso to rule 14(3) does not apply – first proviso to rule 13 of Companies (Share Capital and Debentures) Rules, 2014, inserted w.e.f. 18-3-2015.

In case of offer or invitation of any securities to qualified institutional buyers (QIB), it shall be sufficient if the company passes a previous special resolution only once in a year for all the allotments to such buyers during the year-fourth proviso to Rule 14(8) of Companies (Prospectus and Allotment of Securities) Rules, 2014 inserted w.e.f. 16-10-2020.

Body corporate or national of country which shares borders with India becoming member – No offer or invitation of any securities under this rule shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with the private placement offer cum application letter – fifth proviso to rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 inserted w.e.f. 5-5-2022.

Offer letter only after filing of special or Board resolution with ROC – Offer letter shall be sent only after filing of special resolution or Board resolution with ROC -Rule 14(8) of Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended on 7-8-2018.

Offer to maximum 200 persons excluding ESOP – Offer shall not be made to more than 200 persons in aggregate in a financial year. The restriction will be reckoned individually for each kind of security i.e. equity, preference and this limit does not apply to offer of ESOP as per section 62(1)(b) of Companies Act, 2013 – Rule 14(2) of Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended on 7-8-2018.

This restriction does not apply to NBFC of HFC if they are complying with RBI regulations -Rule 14(7) of Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended on 7-8-2018.

Requirements of offer cum application form – Private placement offer cum application form shall be in Form PAS.4 serially numbered and addressed specifically to person to whom offer is made. Form shall be send in writing or electronically within 30 days of recording the name of such person pursuant to section 42(3) of Companies Act, 2013. Application for securities can be made only by the person to whom it is addressed. Application by any other person shall be treated as invalid -Rule 14(3) of Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended on 7-8-2018.

Record of private placement in Form PAS-5 – The company shall maintain a complete record of private placement offers in Form PAS.5 -Rule 14(4) of Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended on 7-8-2018.

Receipt of payment through bank account of applicant only – Payment shall be made from bank account of the person subscribing for securities shall maintain record of bank account from where payment has been made. In case of joint holder, bank account should be of first named person. The provision does not apply if consideration is for other than cash -Rule 14(5) of Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended on 7-8-2018.

Return of allotment in Form PAS.3 – Return of allotment shall be filed in Form PAS-3 with list of allottees with prescribed details -Rule 14(6) of Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended on 7-8-2018.

The PAS.3 form filed by company (other than OPC and small company) shall be pre-certified by practising CA, CMA or CS. (form filed by OPC or small company is not required to be certified by practicing CA, CMA or CS) – Rule 8(12)(a) of the Companies (Registration Offices and Fees) Rules, 2014.

4.2 Some provisions not applicable to private issue of shares

Many provisions, which are applicable to company issuing shares to public, are not applicable to a private issue e.g. prospectus, dematerialization of shares, listing on stock exchange, 5% minimum subscription etc.

4.3 Debenture with option to convert into shares

Debenture with option to convert into shares, partly or fully, can be issued with approval by special resolution in general meeting – proviso to section 71(1) of Companies Act, 2013.

See discussions under ‘Debentures’.

5. Conversion of Debentures or Loans into Shares as per Loan Agreement

Sometimes, debentures are issued which provide an option to debenture holder to convert their debentures into shares, or to subscribe to certain shares.

Similarly, if loans are obtained, the terms of loans may contain a provision giving right to the lender to convert the loans into shares.

If the option is exercised and share capital is increased due to exercise of such option by debenture holders or by Institution providing loans, such increase is exempt from provisions of ‘rights issue’.

Approval in general meeting – The proposal to issue such debentures or raising such loans and the terms of such issue should be approved in general meeting of company by a special resolution, before issue of debentures or raising of loan – section 62(1)(c) of Companies Act, 2013.

6. Compulsory Conversion of Debentures and Loans Given by Central Government into Equity Shares of the Company

Central Government can compulsorily order to convert part of debentures issued to Central Government or loans given by Central Government to company, into equity shares on terms and conditions fixed by Central Government. Central Government can issue such order even if the terms of debentures or loan do not contain any such provision for option of conversion of debentures or loans into equity – section 62(4) of Companies Act, 2013 [Corresponding to section 81(4) of the 1956 Act].

This sub-section is made effective and notified on 1-6-2016.

Hence, such conversion can be done only with approval of NCLT

In determining the terms and conditions of conversion, the Government shall have due regard to the financial position of the company, the terms of issue of debentures or loans, the rate of interest payable on such debentures or loans and such other matters as it may consider necessary [section 62(5) of Companies Act, 2013]

This sub-section is effective from 1-6-2016.

These are extraordinary powers and are very rarely used. If Central Government issues such order, appeal can be filed in NCLT within 60 days, if the terms are not acceptable to company – section 62(6) of Companies Act, 2013 [Corresponding to section 81(7) of the 1956 Act].

If such an order is made by Central Government, and if appeal is not filed before NCLT or appeal is dismissed by NCLT, the authorised capital of the company as stated in memorandum of association of the company automatically stands increased equal to the amount of value of shares into which the debentures or loans have been converted – section 62(6) of Companies Act, 2013 [Corresponding to section 94A(1) of the 1956 Act].

After such conversion, if authorised capital of the company is increased Notice must be filed with ROC along with altered memorandum within 30 days – section 64(1)(b) of Companies Act, 2013

These provisions apply only when debentures are issued to Government or loan is given by Government and not when it is given by a public financial institution or PSU.

Such conversions are extremely rare – almost non-existent, though section 62(4) to 62(6) are effective and notified on 1-6-2016.

Notice to Registrar for alteration of share capital – If order is passed by Central Government to increase the authorized capital of company, notice of such increase shall be filed with Registrar in form No. SH.7 with fees – Rule 15 of Companies (Share Capital and Debentures) Rules, 2014. [Though no time limit is specified, it should be really within 30 days].

The SH.7 form filed by company (other than OPC and small company) shall be pre-certified by practising CA, CMA or CS. (form filed by OPC or small company is not required to be certified by practicing CA, CMA or CS) – Rule 8(12)(a) of the Companies (Registration Offices and Fees) Rules, 2014.

Appeal before NCLT against order of Central Government – Appeal can be filed by company against the order of compulsory conversion issued by Central Government. Appeal should be filed within 60 days. Appeal should be in form NCLT.9 as per rule 72 of NCLT Rules, 2016. Fees of Rs 5,000 are payable. NCLT can pass orders as it deems fit.

7. Warrants

In investment world, ‘warrant’ means right or privilege to buy shares. Holder of ‘warrant’ is entitled to exchange the warrant for equity shares of the company at specified prices and in pre-determined ratio within a stipulated time frame e.g. a warrant holder may be given option to purchase 10 company’s shares per warrant @ ` 25 per share during February, 2014 to March 2014. After March, 2014, the warrant expires.

A ‘warrant’ is usually offered along with debenture or bond. These act as ‘sweeteners’ to make the issue of debenture/bond attractive. If warrant can be detached from debenture/bond and sold separately, it is termed as ‘detachable warrant’. A non-detachable warrant cannot be sold separately from debentures. A warrant-holder does not get any dividend or voting rights. He is not a shareholder of company. He only has option to buy shares from company on specified terms.

SEBI Regulations in respect of warrant – Warrant can be issued with public issue or rights issue with specified securities. Tenure of warrant shall not be more than 12 months after allotment in the public or rights issue. Only one warrant can be attached to one specified security [Regulation 4(3) of ICDR Regulations inserted w.e.f. 30-1-2012].