Can A Private Company Issue Securities?
A business means an affiliation of individuals formed to accomplish a common objective and must be integrated under the law. The Companies Act, 2013, which is an Act of parliament of India, regulates companies in India. Under the Companies Act, 2013, different types of companies with different levels of responsibility for shareholders and employees can be integrated.
In this article, we will discuss if private companies can issue securities. However, let’s first understand the types of companies.
Types of Company
A business may be largely listed as follows:
- Private Business Limited
- Company of one person
- Limited Company
- Section 8 Company
How Does A Private Company Work?
A private corporation is a company whose shares are not listed on financial markets (e.g. BSE Limited, National Stock Exchange of India Limited, etc.) as opposed to public companies. Instead, the securities generated by private entities are issued, offered, held and exchanged privately by interested individuals.
A private limited corporation is established with a minimum of 2 members and may have a maximum of 200 members.
What Is The Securities under Companies Act, 2013?
Section 2(81) of the Business Act, 2013 describes securities as specified in Section 2 of the Securities Contracts Control Act, 1956. (h). According to the description, securities involve shares, notes, scripts, stocks, debits, etc. of incorporated companies/other corporate bodies, derivatives, units provided by the Pooled Investment Scheme, units/instruments issued to investors under any mutual funds, sovereign bonds, such other instruments/rights/interests therein that might have been declared by the Government to be granted by the Government.
In particular, exchangeable financial products or financial instruments that may be acquired and exchanged are generally referred to as shares. Securities might mean entitlements/rights or it may mean either a place of possession or a position of debt or both. The main feature of shares is that they must be transferable. For instance, fixed deposits with banks that are non-transferable instruments are not considered safe. Exceptionally fewer instruments, such as policies on mutual funds, which, while not transferable, are deemed to be shares, despite the fact that most of the policies on mutual funds are exchangeable on the open market.
Securities can be given in electronic or book-entry form either by means of a “certificate,” or in a “non-certified” form.
Can Private Company Issue Securities?
It is apparent from the above that private firms can offer securities and have representatives and shareholders, but they cannot sell their shares on stock markets. The public initial offer would not question private sector shares (IPO). Private corporations’ securities are typically less liquid even though it is traded by a few closely-connected owners and not authorised market participation. Furthermore, the market price of private sector stock cannot be readily measured.
Modes of Issue of Securities by Private Company
Private firms may issue securities under the Companies Act (‘Act’) in the following ways:
- [Section 42 of the Act] on Private Placement
- Via private placing, a corporation can make any bid or invitation to purchase securities to selective individuals (other than via a public offer) by offering a service agreement for private placement. For the issue of shares by Private Placement, the requirements stated in Section 42 of the Act must be fulfilled.
Such a bid or offer to purchase securities via a Private Placement offer may be made up to a total of 200 persons in total during the fiscal year (the total of 200 individuals excluded employees of the company who are offered securities under employees stock option scheme and qualified institutional buyers). The above ceiling of the total number of persons is determined separately for different forms of security, i.e. capital, preference share, debit. A minimum contribution of Rs. 20,000 of the marginal value of the securities should be made by each person.
The value of securities sold in the Private Placement mode shall be decided on the basis of the valuation report of the licenced valuer.
The letter of the private placement proposal must be preceded by an online application, which must be counted sequentially, explicitly addressed to the person to whom the proposal is made, and must be submitted either digitally or in writing throughout 30 days from the date of the registration of the name of that person as provided for in the Act.
Shareholders must seek prior permission, by means of a special resolution, for the planned sale of securities or for an invitation to subscribe to securities. However, direct consent of the Owners by means of a special resolution must be sought once a year on any new deals or invites to subscribe to non-convertible bonds within the year. New offer or invite to subscribe to private placement shares could be made only when the contract in respect of the earlier offer or invite has been terminated/offer or the invite has been revoked by the firm.
The individual to whom the bid is made should make the purchase of securities directly from their bank account by contributing to those securities, the full record of which must be maintained by the firm.
The shares shall be distributed within 60 days of receipt of the money from the application. If, owing to oversubscription of shares/inadequate subscription or any other cause, the company is not in a position to distribute the securities within the time limit of 60 days, the application cash must be refunded to the claimant within 15 days after the expiry of 60 days. In the case of a failure on the part of the business to repay the money collected from the claimant within 15 days, the business is responsible for paying interest at the rate of 12 per cent on the sum of the application.
Issue of Sweat Equity Shares [Section 54 of the Act]
By means of a special resolution, a company shall issue sweat-equity shares to its executives or employees, comparable to the class of shares now also issued by the company. The special resolution adopted by the shareholders for the issuance and allocation of sweat-equity shares shall become effective for a total term of 12 months of the date of passing, only after expiry of which new approvals will have to be carried from the shareholders.
Sweat equity shares may be sold by the corporation only after the close of a term of at least one year from the date of beginning of the operation of the company. In under a year such sweat-equity stocks cannot be filed for an aggregate value of more than 15% of the current paid-up capital stock or for shares of the issue value of the five-crores ropes, whichever one is higher. However, at that point, the proportion of the sweat-equity stock in the paid-up capital of the corporation shall not go ahead of twenty-five per cent.
Sweat equity stocks are locked in/untransferable for a term of at least 3 years from the date of allocation. Shares should be priced at a price decided by the licenced valuer at the reasonable price.
Issuance of Bonus Shares [Section 63 of the Act]
Bonus shares can be distributed by the shareholders of the company to be entirely paid-up, in any way whatsoever, by the companies –
- Free reserves (reserves generated by revaluing properties not to be considered);
- Premium securities account; or
- The reserve capital redemption account.
If the opinion of the Board of Directors approving Compensation Issue is made public, the judgment cannot be later revoked by the Board of Directors. “Regulation 14 of the Rules of the Companies (Share Capital and Duties) 2014”
Advantages of Issuing Shares
In addition to the primary goal of raising money, the company has many other advantages, such as recruiting new customers, buying/purchasing other companies, growing company sales, increasing employee interest, lower leverage & debt reduction, increasing liquidity, credit scores, etc.
In the end, a private corporation is a privately held company. Private firms will issue securities and have representatives and shareholders, however their shareholders may not be allowed to exchange their shares on a free market.
Private corporations act in the same manner as public entities, but private firms are limited to very few directly connected owners and do not have to adhere with the strict regulatory standards applied to public companies.
The increased costs of conducting an IPO, the rigid legal criteria, the intention to keep private equity, etc. are among the reasons that many smaller businesses remain private. If a limited private company needs to raise additional capital to expand, the next stage of funding mostly comes from venture capitalists who specialise and concentrate on making capital investment for high-risk, high-reward chances.
In addition, several major institutional investors do provide private businesses with funding alternatives through private placement in general. When a private corporation is able to expand rapidly, it may eventually choose to “go public,” which ensures that it releases shares with an IPO that are then publicly traded on stock exchanges.
To learn more about securities and unlisted shares, contact our experts at the Unlisted Deal.