What Are Shares?
Shares are the stock of a company that a company issues in order to raise capital. A shareholder may A Public Limited Company can issue either equity shares (profit/loss sharing and decision making) or preference shares (only dividends) by making a general offer to the public through an Initial Public Offering (IPO) but what about Private Limited Companies and how can they issue shares?
How To Issue Shares?
As per Section 23 of the Companies Act, 2013 a private company may issue shares by:
According to Section 42, private placement is when a company makes an offer or invitation to subscribe securities to a select group of individuals through the issue of a private placement offer letter.
- An offer of private placement can be made to a maximum of 200 individuals in a single financial year.
- The value of the investment should be at least INR 20,000 (on the face value of the securities).
- A private placement letter is sent to applicants (coded with serial numbers) electronically or in writing.
- In the case of issue of shares, a special resolution needs to be passed by the existing shareholders. (Form MGT 14)
- The value of the shares should be certified by a Chartered Accountant (CA) with at least 10 years of experience.
- The payment for securities should be made directly from the bank account for the individual subscribing.
- Securities should be allocated within 60 days of receipt of the application money. If securities are not allocated (because of oversubscription or inability to raise enough capital), then the application money should be refunded within 15 days post the expiry of 60 days. If a company still fails to do so, then the company is liable to pay a 12% interest on the application amount.
- The company must file the following with the Registrar of Companies:
- PAS-3 (The return of security allotment within 30 days of allotment)
- PAS-4 (Private placement offer letter)
- PAS-5 (Complete record of private placement)
Way of Rights Issue
As per Section 62 of the Companies Act, 2013 right shares can be offered to:
- Employees under Employee Stock Options (ESOPs) by way of passing a special resolution.
- Any person authorized by way of passing a special resolution.
- To existing shareholders based on the Articles of Association.
- Shareholders are given 15-30 days to accept right issue.
Preferential allotment is the allotment of shares to a select group of people on a preferential basis.
This does not include an offer of shares through a public issue, right issue, bonus issue, ESOP, etc.
- The issue of preferential allotment should be authorized and stated in the Articles of Association of the company.
- The issue of shares should be fully paid up at the time of allotment.
- Preferential allotment should be made within 12 months of passing the special resolution.
- The valuation of shares will be valued by a registered valuer.
Conversion of Loan or Debentures into Shares
By passing a special resolution, a company can convert its loans or debentures into shares. For shares to be convertible, a term has to be attached to the loan or debentures permitting the company to convert them into shares. (Section 62)
- Bonus issue of shares should be authorized by the Articles of Association.
- A resolution needs to be passed at a general meeting.
- All existing shares must be paid-up fully.
- The company has not defaulted in any repayments (statutory dues, debt securities or fixed deposits).
- Bonus issue can be made from Capital Redemption Reserve, free reserves and security premium accounts.
- Once a bonus issue is announced, it cannot be nullified or withdrawn.
Advantages of Issuing Shares
A company mainly issues shares to raise capital, but there are several other added advantages of issuing shares, such as:
- To attract new investors
- To enhance company revenue
- Entice employees
- Purchase/acquire other businesses
- Less Debt
- Debt reduction
- Credit Ratings
How Can We Help?
There are several added advantages to issuing shares but it needs to be done in compliance with the rules and regulations stipulated by the Companies Act. Once you decide to issue shares, the next step is deciding how to issue shares which can be a tedious affair from a legal standpoint.