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A COMPLETE AND CLEAR UNDERSTANDING OF
SECTION 62 & 42 OF THE COMPANIES ACT 2013

FURTHER ISSUE OF SHARE CAPITAL Section 62 of the Companies Act 2013

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. ON RIGHT BASIS:

To the existing shareholders in proportion to the paid up share capital of the Company held by them by way of a letter of offer.

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:

  • 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.

b.  ISSUE OF SHARES UNDER THE ESOP: No such Technicality refer Act

c. TO ANYOTHER PERSON (Conditions prescribed under Rule 13 of the Share Capital & debenture Rules 2014) – Preferential offer

Rule 13: For the purposes of clause (c) of sub-section (1) of section 62, If authorized by a special resolution passed in a general meeting, shares may be issued by any company in any manner whatsoever including by way of a preferential offer, and such issue on preferential basis should also comply with conditions laid down in section 42 of the Act.

Explanation 1. the expression ‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities.

(Since these are covered specifically under different sections of the act as under:

  • Rights Issue Sec. 62(1) of Companies Act, 2013
  • Employee Stock Option - Sec. 62(1)(b)
  • Sweat Equity Shares - Sec. 54
  • Bonus Issue Sec. 63 read with Rule 14 of Companies (Share Capital and Debenture) Rules, 2014)

Explanation 2: the expression, “shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date. (that means whatever instrument convertible into equity would be covered under above)

Main highlights, if above option i.e. preferential offer is exercised

  1. Prior approval of Shareholders is required to be obtained via Special Resolution
  2. Allotment to be made within 12 months from the date of Special Resolution

Provided in the event of receipt of application money, the said allotment is required to be made within 60 days from the date of receipt.

c. Mandatory Disclosures in the Explanatory Statement to the Notice calling General Meeting:

  1. intention of the promoters, directors & KMPs
  2. Change in control, if any, consequent to the preferential offer
  3. Justification for the allotment proposed to be made for consideration other than cash
  4. Details of the proposed allottees along with post preferential shareholding
  5. Basis on which price is arrived along with the report of Registered Valuer

PLEASE NOTE THAT nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company: Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.

Further Valuation from registered valuer is required in all above cases i.e. Whether it is right issue , ESOP or Preferential Offer.

PRIVATE PLACEMENT

Chapter III: Prospectus And Allotment of Securities

Section 42: Offer or invitation for subscription of securities on private placement

Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014

Private Placement to a select group of persons by a company other than by way of  securitieshas been specifically defined to mean any offer of securities or invitation to subscribe public offer   through issue of a private placement offer letter.

Securities as defined in clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956

CONDITIONS FOR PRIVATE PLACEMENT

A private placement offer cannot be made to more than 200 people in aggregate in a financial year excluding “qualified institutional buyers” and employees of the company being offered securities under a scheme of employee’s stock option as per provisions of clause (b) of sub-section (1) of section 62.

“Qualified institutional buyer’’ means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 as amended from time to time.

If a company, whether listed or unlisted makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than 200 persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognized stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of Chapter III.

No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.

Any allottee under a private placement offer/invitation shall not transfer his/its securities to more than 20 persons during a quarter and the company shall not register any transfer which is not in conformity with this requirement.

The number of such offers or invitations shall not exceed 4 in a financial year and not more than once in a calendar quarter with a minimum gap of 60 days between any 2 such offers or invitations.

The value of such offer or invitation shall be with an investment size of not less than Rs. 50,000/- per person.

No company offering securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.

Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with.

PROCEDURE FOR PRIVATE PLACEMENT

Filing of Form MGT 14 with ROC: In compliance with the provisions of Section 117(1) of the Companies Act 2013, a copy of special resolution along with the Explanatory Statement is required to be filed within 30 days from the date of passing of the said resolution.

Preparation of a private placement offer letter in terms of Form PAS-4: In terms of Rule 14(1)(a) of the Companies (Prospectus and Allotment of Securities) Rules, 2014: A Company may make an offer or invitation to subscribe to securities through issue of a private placement offer letter in Form PAS-4.

Filing of private placement offer document in Form PAS-5 within 30 days from the date of circulation of the private placement offer: In terms of Section 42(7) read with proviso to Rule 14(3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014

Filing of Form PAS 3 with ROC within 30 days of allotment of securities: As per Section 42(9) of the Companies Act, 2013 read with Rule 14(4) of the Companies (Prospectus and Allotment of Securities) Rules, 2014

Maintenance of Register of holders of securities in compliance with the provisions of Section 88 of the Companies Act, 2013

Penal Provisions:

If a Company makes an offer or accepts monies in contravention with the provisions of Section 42, its promoters & directors shall be liable for a penalty which may extend to:

  1. The amount involved in the offer or invitation; or
  2. Rupees 2 Crores,

And

The Company shall also refund all monies to subscribers within 30 days of the order imposing the penalty.

Specific Provisions prescribed under the Act for issuance of any specified Securities

Section 55: Issue and redemption of preference shares

  • Rule 9 & 10 the Companies (Share Capital and Debentures) Rules, 2014

Section 71: Debentures

  • Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014

Interplay of Private Placement and issuance of other securities

Private Placement: Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014

Bible for all types of issues to a specific group of persons

Specific Provisions prescribed under the Act for issuance of any specified Securities

For Example, if the Company proposes to issue redeemable preference shares to a specific group of persons, then in addition to Section 42, the Company is required to comply with the provisions of Section 55 read with Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014

INDUSTRY CONCERN:

< >Company is having pending application money/unsecured loan as on 1st April, 2014 and now it would like to allot the shares against the said outstanding money/unsecured loan. The pertinent question is how to comply with the stringent stipulations of Section 42 & 62 of the Companies Act, 2013?WAY OUT: Presently, the option available with the Company is to tender the pending application money/unsecured loan in the separate bank account and then make the allotment


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Category Corporate Law, Other Articles by - CA Sumat Singhal 



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