[Opinion] Preferential Offer & Private Placement of Shares & Securities

Gaurav Pingle – [2023] 149 taxmann.com 255 (Article)

Introduction: Since 2014, the majority of amendments have been introduced to the Companies Act, 2013 (‘the Act’) with the objective of ease of doing business, eliminating conflicting provisions, etc. In spite of all efforts, ‘preferential offer’ and ‘private placement’ remains highly debated and controversial matter. The Act provides for several provisions for the issue of shares and securities, which ultimately helps the companies in raising capital from existing shareholders, promoters and external investors. In the Act and Rules, there is a reference of ‘preferential offer’ and ‘private placement’ as well. The question before professionals is whether a particular offer and issue of securities is a ‘preferential offer’ or ‘private placement’ or both.

Basic provisions: Chapter III of the Act, 2013 relates to ‘Prospectus and Allotment of Securities’. Part I relates to ‘Public Offer’ (sections 23 to 41, both inclusive) and Part II relates to ‘Private Placement’ (section 42). Section 23 provides for the ways in which a private company and a public company can issue securities and raise funds. According to the provisions, a public company may issue securities: (a) To the public through a prospectus (‘public offer’), (b) through private placement; or (c) Through rights issue or bonus issue. A private company may issue securities: (a) By way of rights issue or bonus issue; or (b) Through private placement. Interesting to note that there is no reference to ‘preferential offer’ under section 23 of the Companies Act. Section 62 of the Companies Act provides for ‘further issue of share capital’, which includes rights issue and section 63 of the Act provides for ‘issue of bonus shares’.

For the purpose of this article, the author has referred to the following relevant provisions:

(1) Section 42 of the Act read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014,

(2) Section 62 of the Act read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.

Meaning of ‘Private Placement’: ‘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 the Act.

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