Summary: Under the Companies Act 2013, companies have two main options for raising capital: public issues and private placements. Public issues are heavily regulated by SEBI and require compliance with both the Companies Act and SEBI regulations. These aim to offer securities to the public and must comply with strict disclosure and procedural requirements. In contrast, private placements are more flexible and involve the issuance of securities to a specific, pre-identified group of investors. One of the main limitations of the Companies Act is that private placements can only involve a maximum of 200 investors per financial year. If the limit is exceeded, the issue is considered a public issue, which attracts SEBI regulation. Additionally, if privately placed securities are offered to the public within six months, they are also treated as a public issue. The law specifies that any offer or invitation to subscribe for securities in a private placement cannot exceed 200 investors with certain exceptions, such as for example qualified institutional buyers or stock option plans for employees. These provisions help ensure that public investments are properly protected while providing a mechanism for businesses to raise funds through targeted investments.

The distinction between public issues and private placements is not a simple procedure but a fundamental guarantee, ensuring that public investments are protected by rigorous supervision.

The Companies Act 2013 provides two distinct routes for issuers seeking to raise equity or debt capital: public issues and private placements. Public issues are covered by Part I of Chapter III of the Companies Act, 2013, while private placements are covered by Part II of the same chapter. Public issue of securities is regulated by SEBI and issuers undertaking such issues must comply not only with the provisions of the Companies Act, 2013 but also with the regulations laid down by SEBI. The framework specified by SEBI to regulate public issue of debt securities is contained in the

NCS Regulations. Private placements, on the other hand, are subject to less stringent regulatory requirements than public offerings and are intended to be offered to a specific set of pre-identified investors. The Companies Act read with Share

Capital rules limit the issuance of securities through private placements to 200 investors in a financial year. We can therefore note that two conditions must be met for issuers to carry out a private placement of securities:

1. Securities can only be allocated to pre-identified investors;

2. The allocation of securities by private placement to more than 200 investors during a financial year is capped.

Section 42(2) of the Companies Act, 2013, read with rule 14(2) of the Share Capital Rules, states that if securities are issued to more than two hundred investors by private placement at the price ‘a single exercise, they will be deemed to be a public matter and all requirements arising therefrom, including compliance with SEBI regulations, would be attracted. It should be noted that Article 25(2)(a) of the Companies Act, 2013specifies that securities issued by private placement, if offered to the public within six months of issuance, are treated as a public issue. The onus is on the issuer to prove that the sale to the public by the initial allottee(s) or assignees did not take place with the connivance of the issuer, failing which the issuers may be held liable.

Companies Act, 2013

“25. Document containing an offer to sell securities to be deemed a prospectus.

(1) Where a company allots or agrees to allot securities of the company with a view to offering all or part of these securities for sale to the public, any document by which the offer of sale to the public is made must, for for all purposes, be deemed to be a prospectus issued by the company; and all enactments and rules of law relating to the contents of the prospectus and as to liability for misrepresentations and omissions in the prospectus, or otherwise relating to the prospectus, shall apply with the modifications specified in paragraphs (3) and (4) and shall have effect accordingly, as if the securities had been offered to the public for subscription and as if the persons accepting the offer in respect of the securities were subscribers to such securities, but without prejudice to liability, if any, of the persons by whom the offer is made regarding any misrepresentations contained in the document or otherwise with respect thereto.

(2) For the purposes of this Law, unless proven otherwise, constitutes proof that an allocation of securities or an agreement for the allocation of securities has been concluded with a view to their offering for sale to the public if it is shown –

(a) an offer to sell the securities or any of them for sale to the public has been made within six months after the grant or agreement to grant; Or

(b) that on the date on which the offer was made, the entire consideration to be received by the company in respect of the securities had not been received by it…………”

“40. Exchange Traded Securities

(1) Any company making a public offer must, before making such an offer, apply to one or more recognized stock exchanges and obtain authorization for the securities to be dealt in on such stock exchange(s).

(2) Where a prospectus states that an application under subsection (1) has been made, that prospectus must also state the name or names of the stock exchange on which the securities will be traded.

(3) All monies received on demand from the public for subscription to the securities will be kept in a separate bank account in a scheduled bank and will not be used for any purpose other than:

(a) for adjustment against allotment of securities where the securities have been authorized for trading on the exchange or exchanges specified in the prospectus; Or

(b) for repayment of sums within the time specified by the Securities and Exchange Board, received from applicants pursuant to the prospectus, where the company is, for any other reason, unable to allot securities…….

’42. Issuance of shares on the basis of a private placement. —

• • A company may, subject to the provisions of this article, carry out a private placement of securities.
  • A private placement will only be made to a selected group of persons who have been identified by the Board (hereinafter referred to as “identified persons”), the number of whom shall not exceed fifty or such greater number as may be prescribed (excluding qualified institutional investors). purchasers and employees of the company being offered securities under an employee stock option program in accordance with the provisions of clause (b) of paragraph (1) of the section 62), during a financial year subject to the conditions that may be prescribed.

Explanation I.—

If a company, whether listed or not, makes an offer for allotment or invites subscription, or allots or enters into an agreement for the allotment of securities to more than the prescribed number of persons, whether payment for the securities has been received or no or whether or not the company intends to list its securities on any recognized stock exchange in India or outside India, the same will be considered as an offer to the public and will therefore be governed by the provisions of the part I of this chapter….”

Rule 14(2) of Companies (Share Capital and Debentures) Rules, 2014 reads as below:

“(2) For the purposes of paragraph (2) of Article 42, an offer or invitation to subscribe for securities in a private placement may not be made to more than two hundred persons in total during an exercise:

Provided that any offer or invitation made to qualified institutional buyers or employees of the Company under an employee stock option program pursuant to the provisions of clause (b) of paragraph (1) of article 62 will not be taken into account when calculating the limit of two hundred people.

Explanation. –

For the purposes of this paragraph, it is hereby clarified that the aforesaid restrictions would be considered individually for each type of security, whether it is an equity share, a preference share or a debenture .