Issuance Of Securities – Practical Aspects & Nitty-Gritty

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What Not to Miss Under the Companies Act, 2013 When It Comes to The Issuance of Securities

Find out how the issuance of securities works under the Companies Act, 2013 and key aspects to keep in mind!

The issuance of securities is a vast topic that covers a lot of technical and procedural concepts. It is a branch of law and finance that has been written and rewritten about in countless books and journals. In this article, we share two ways to issue securities under the provisions of the Companies Act, 2013. We also share key pointers to bear in mind when it comes to the issuance of equity shares and preference shares for a private company according to the Companies Act, 2013.

This article also provides clarity on what not to miss for the issuance of equity shares and preference shares for a private company according to the Companies Act, 2013

Ways To Issue Security Shares Under The Companies Act, 2013

There are several ways to issue securities. However, as mentioned above, this article shares the two most used approaches for private companies under the Companies Act, 2013.

A rights issue is an approach to issue equity or preference shares to the existing shareholders of a private company. This kind of security issuance gives an imperative right to the shareholder of company, to be offered the shares at a first place, unless an approval is obtained, in case of the issuance of securities.

Private placement refers to issuing equity or preference shares by offering a company’s securities to a select group of people using a private placement offer letter.

Key Aspects To Consider For The Issuance Of Securities Under The Companies Act, 2013

Let’s get into the nitty-gritty of security issuance with these vital considerations! The following section considers some important security issuance aspects under the Companies Act, 2013, considering both ways mentioned above.

Legally speaking, a valuation of shares is carried out to determine the value of a company’s shares. The company’s management can conduct a stock valuation internally to help get clarity on the issue price and the offer. A company’s board of directors can then determine the valuation of securities.

In the private placement approach, the valuer registered with the Insolvency and Bankruptcy Board of India conducts the share valuation following the Companies Rules, 2017, as per the mandatory provisions under the Companies Act, 2013.

A board meeting is required to get the approval of all the board members before the securities have been issued through the approach of rights issue or private placement. According to Section 62 (1) of the Companies Act, 2013, the issuing rights resolution is passed in the first board meeting. Shareholders are expected to accept the offer within 15 – 30 days.

In case of the private placement, the board of directors has a mandatory meeting to approve the offer letter of the private placement, fix the next general meeting of the company and authorize the director to sign and issue the final notice to make the decisions that took place at the meeting valid.

In case of a rights issue, the company is not required to pass a special resolution for the allotment of equity shares. That said, however, according to Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014, companies must pass a special resolution to issue preference shares.

In the case of private placements, companies must pass a special resolution according to the provisions laid down in Section 62(1)(c) of the Companies Act, 2013. Furthermore, companies must also pass another special resolution pursuant to Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014.

The offer of rights issues is made by sending a letter to the current shareholders. One of the many things mentioned in this offer letter is the number of shares that are offered. It has a period that cannot be less than 15 days and cannot exceed 30 days from the date of issuance of the offer.

In the case of private placements, companies must send an offer letter to the proposed shareholders/investors using the E-Form PAS-4. Although the maximum number of days has not been defined by law, it has a period that cannot be less than 3 days. However, it is noteworthy that the shares are allotted within a period of 60 days from receiving the funds, therefore, the company may choose to set an offer period accordingly so as the allotment can be made within the prescribed timelines.

In the case of issuance of equity shares, the E-Form MGT-14 is not required under the rights issue. However, this form must be filed for the issuance of preference shares under the rights issue according to the resolution passed in a company’s general meeting according to Rule 9 of the Companies Rules, 2014.

In the case of private placements, the E-Form MGT-14 must be filed for the resolution passed in a general meeting according to Section 62(1)(c) of the Companies Act, 2013. Furthermore, companies are additionally required to file the resolution passed in their general meeting to issue preference shares according to Rule 9 of the Companies Rules, 2014.

The E-Form PAS-3 is required to be filed within 30 days from the date of the board resolution for allotment of shares.

An Escrow Account is not applicable in a rights issue. However, it is important to open a separate bank account in the case of private placements. Several Indian companies do not open an escrow account for the funds they receive from investors and continue using their company’s bank account for this purpose. Such companies can be penalized according to the provisions of Section 42 of the Companies Act, 2013. Hence,companies must open an escrow account where the funds will be blocked until shares are allotted by them.

Conclusion

These are some key aspects related to the practices of the issuance of securities under the Companies Act, 2013. In many cases, companies don’t comply with the rules and procedures properly and end up paying penalties. Additionally, flaws in such systems might also affect the due diligence when a company wants to attract investments as and when they grow. You can use this write-up as your guide to refer to when you need any clarification regarding the issuance of securities under the Companies Act, 2013.

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