Increasing paid-up share capital: Through private placement

Introduction

To make sure that the bandwagon of growth keeps on running, the company has to infuse new funds, these funds can be broadly classified into two categories: debt fund and owners’ fund (Equity and Preference). Both debt and owners’ fund have their own set of advantages and disadvantages, that is to say, the increase is share capital dilute the ownership but it does not bring any kind of fixed cost to the company on the other hand debt does bring with itself advantage of leveraging but due to its fixed nature it is not suitable where the income is not regular or product is too risky.

So after evaluation, the company chooses between share capital or debt fund. In this write-up, I am taking the axiom that company’s already have authorized capital equal to more than the amount it wants to induce as a new fund and they have to increase only its paid-up capital.

Method of Bringing New Shareholders’ Fund

In this write-up, I am focusing on the methods of bringing funds into the company irrespective of their type i.e. equity or preference or non-convertible debenture. The company can bring new capital by:-

going to the public through its Initial Public offer or Further Public Offer: or

Private-Placement, or Right issue or Employee Stock Option Plan of Employee Stock Purchase Scheme or Preferential Allotment under clause © of Section 62 of Sub-Section (1); or

Bonus Issue and Sweat equity shares

I will further reduce the scope of this write-up to the concepts of private- placements and I will deal with remaining methods such as right issue, preferential issue etc. in subsequent write-ups.

What Is Share Capital And Paid-Up Share Capital

Section 2 clause (84) define share as "share" means a share in the share capital of a company and includes stock;

Section 2 clause (64) define paid-up share as "paid-up share capital" or "share capital paid-up" means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called;

This entire definition of paid-up share capital can be divided into three parts, first part, the aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued:- this is the money received due to allotment of new shares.

The Second part, amount credited as paid-up in respect of shares of the company:- This is the capitalization of the reserve, done after the issue of bonus shares.

The third part, but does not include any other amount received in respect of such shares, by whatever name called:- this is the premium amount on shares.

Private Placement

What Is Private Placement

Private Placement as per Section 42 means "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 this section. "

There are three features which distinguish the private placement from other issues.

1. Securities to be issued to the selected group of person
2. It should not be a public issue.
3. It should be issued as per the provision of this section i.e. Section 42.

Analysis of Section 42

Section 42, provides the provision regarding the private placement of shares, the private placement is an instrument in the hands of corporations to raise funds quickly without getting into a complexity involves with a public issue.

I am going to discuss Section 42 in detail so all the sentence in italics under double quotes is the part of Section 42.

“Section 42(1) A company may, subject to the provisions of this section, make a private placement of securities."

There are two important terms under sub-section (1) of Section 42, i.e. company and securities. Since word company is being used hence both private and public company can come up with the private placement.

The second word is securities, hence, the private placement is not restricted to shares but include all type of instrument that come under the definition of securities.

Securities as per Securities Contract Regulation Act, 1956, means

Section 2 (h) “securities" include:

(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

(ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities.

So any of the above securities can be issued through private placement mechanism.

“Section 42(2)  A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as "identified persons"), whose number shall not exceed fifty or such higher number as may be prescribed [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions  as may be prescribed ."

This section spells out the maximum number of the persons who can be included in the offer. The sub-section itself provides 50 persons; however, Rule 14 of The Companies (Prospectus and Allotment of Securities) Rules, 2014 provides the limit of 200. But, while the calculating number of the person we need to keep the following points into our mind.

• Board to identify the selected group of persons.
• Maximum number of persons not to exceed 200, however, while reckoning the number following shall be excluded;

• Qualified Institutional Buyer.
• Shares issued to employees under section 61(1)(C), ESOP or ESPS.
• The Limit of 200 is for each financial year i.e. aggregate will be counted not per private placement issue. For example, if the company in one issue of the private placement of equity shares offer the shares to 150 persons then in the next offer for private-placement of the equity shares it can only offer its shares to 50 more persons.

Note: As per the proviso to sub-section (5), the limit of 200 persons is across securities not per security. That is to say, if the company offer equity share to 100 persons under private placement then company can offer only to 100 more persons.

Sub-section (3) provides the provision related to offer cum application letter. Format and procedure to send it;

1. Such offer cum application letter to be sent in the Form PAS-4.
2. Such PAS-4 to be serially numbered.
3. PAS-4 to be sent to only those persons whose name was approved in the Board Meeting.
4. PAS-4 to be sent within 30 days of Board Meeting in which such name was approved.
5. PAS-4 to be sent either physically or electronically
6. PAS-4 to have name and address of the persons whose name was approved by the Board.
7. PAS-4 not confirming above requirements are invalid;
8. Only those persons whose name is there in PAS-4 is eligible to apply, if any other person applies through such form such application is not be considered.
9. The person who is being offered securities through Private Placement mechanism doesn’t have right to renounce
10. Deemed Public Issue, if such offer or allotment or agreement to allot was made to more than 200 persons, it shall be deemed public issue and all the provisions related to the public issue will be applicable.

Sub-Section (4), provides the provision related to receiving of the subscription amount. However, nothing of this subsection will apply where consideration is other than cash.

• Subscription money not to be received in cash
• Payment to be made only through banking channel i.e. through the bank account of allottees.
• Detail of all the bank account from which such money received shall be maintained by the company.
• In case of joint-holding money to be received from the Bank Account of the person whose name appears first.
• No subscription amount to be utilized before allotment and filing of return of allotment to the registrar.

Note: As per the provision of sub-section (6) - Separate Bank Account to be opened (Escrow Account) and money to be kept in such account. Amount to be utilized only for allotment of shares or for refunding such amount in case of failure to allot shares, as the case may be.

Sub-section (5) prohibits any new offer for private placement if any allotment is pending under any previous offer for private placement till such earlier private placement is completed or withdrawn. However, the company may subject to a maximum of 200 persons come up with private-placement of different security at the same time.

For example, if company came-up with the private placement of equity shares then it can’t come with a new offer for private-placement of equity shares but it can come up with the new offer for private-placement of preference shares. 

Sub-Section (6) provides about the time limit for allotment of securities after the receipt of application along with subscription amount.

• Allotment to be made within 60 days from the receipt of application along with subscription money.
• In case securities are not allotted within 60 days then the entire amount to be refunded within 15 days from the end of 60 days.
• If such amount is not refunded within 15 days then interest is payable at the rate of 12% to be calculated from the end of 60 days.

Note: As per Rule 2 of the Companies (Acceptance of Deposit) Rule, 2014, if such application money is not returned within 15 days from the end of 60 days from the receipt of application along with subscription money such money will be deemed deposit.

Sub-Section (7), prohibits any kind of public advertisement or use of any distribution network for private placement.

Sub-Section (8), provides about the return of allotment. The subsection provides that every company coming with private placement shall file the return of such allotment in e-Form PAS-3 within 15 days of allotment.

Following documents to attached with the PAS-3;

• List of allottees with following details

• Name of allottees;
• Address of allottees;
• PAN of allottees;
• No. of shares allotted;
• Class of share;
• The nominal amount of shares;
• Bank detail of allottees;
• Detail of consideration, if consideration is other than cash.

• Board Resolution for allotment of shares

Note: Company not to utilize fund without the filing of return of allotment.

Procedure For Private Placement

Any company desirous of coming up with the private placement shall before making any such offer shall get such proposal approved by its shareholders in the general meeting through a special resolution. 

For calling general meeting notice need to be sent at least 21 days clear notice along with the explanatory statement, the explanatory statement to have following details as per the sub-rule (1) of Rule 14;

1. particulars of the offer including date of passing of Board resolution;
2. kinds of securities offered and the price at which security is being offered:
3. basis or justification for the price (including premium, if any) at which the offer  or  invitation is being made;
4. name and address of valuer  who performed valuation;
5. the amount which the company intends to raise by way of such securities;
6. material terms of raising such securities, proposed schedule, purposes or objects of the offer, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects; principle terms of assets charged as securities.

In the case of Private Placement of non-convertible debenture (NCD), there is no need to pass a special resolution if the following condition is satisfied;

• The total amount of NCD along with earlier borrowing does not exceed 100 percent of paid-up share capital, free reserve and securities premium.

In case private-placement of NCD exceeds the above limit then passing of special resolution before the offer of private-placement of NCD will be sufficient for the entire year (Year here means Financial Year).

Steps Involve In The Issue Of Private Placement

1. Notice for calling Board Meeting, at least 7 days’ notice, shorter notice possible subject to compliance of condition specified under Section 173.
2. Board Meeting to approve private-placement of the offer along with the approval of other detail related to private-placement and calling of General Meeting for shareholders’ approval of private placement through Special Resolution.

However, no approval is required in case of non-convertible debenture subject to the condition of Section 180(1) (C)

1. Notice of General Meeting along with the explanatory statement, shorter notice possible subject to compliance of condition specified under section 101.
2. Calling of general meeting and passing of the special resolution.
3. Filing of e-Form MGT-14 within 30 days (For Special Resolution or Board Resolution in case NCD issued through Board Resolution, no exemption to private companies)
4. Calling of Board Meeting and Board Meeting to be held for approving the name of the persons to whom securities to be offered under private-placement.
5. Sending of a private-placement offer to identified person within 30 days of the Board Meeting in which their name was approved.
6. Receiving of application along with subscription money
7. Money to be kept in a separate bank account.
8. Securities to be allotted within 60 days of receipt of money
9. Filing of Return of allotment in PAS-3 within 15 days of allotment.
10. In case of non-allotment within 60 days, money to be refunded within 15 days from the end of 60 days.

Penalties

In case of non-compliance of filing of return of allotment in e-Form PAS-3 within 15 days of allotment, it attracts the sub-section (9) and penalties will be imposed on the following;

The company, Promoters, and Directors, each will pay the penalty of Rs. One Thousand per day till such default continues or Twenty Fife Lakh Rs. Whichever is lower.

In case the offer is made or money is accepted in contravention of any provision of this section then subsection (10) will be attracted and penalty will be imposed on company, promoters and directors, lower off;

• Amount raised through the private placement or
• Rupees Two crore

In addition to this company will also return the amount raised through private placement within 30 days of imposing penalty along with 12% percent interest.

In case of breach of subsection (2) that is private-placement offer is made to more than 200 persons in a financial year, it shall be treated as deemed public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be applicable.

Some Other Important Point

1. Register of Private Placement to be maintained in PAS-5
2. 200 person is overall limit across different type of securities.
3. Offer cum application for private placement to be issued only after filing of MGT-14.
4. If private placement is treated as a deemed public issue then it will attract all the liabilities associated with this Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992.