Desi Kanoon- Your Daily Dose of Law: Allotment of Shares: An Analysis in Light of Companies Act, 2013

INTRODUCTION

The offers for shares of a company are made on application forms supplied by the company. When such application is accepted, it amounts to allotment.[1] What is termed as ‘allotment’ is neither more nor less than the acceptance by the company of the offer to take shares.[2] “Broadly speaking, it is an appropriation by the directors... of shares to a particular person.”[3] It is merely an appropriation out of the previously unappropriated capital of the company.[4] However, re-issue of forfeited shares does not amount to allotment of shares.[5]

The Companies Act, 2013 ('Act, 2013') which got the consent of the President on 29 August, 2013 has rolled out noteworthy improvements in the procurements identifying with private arrangement of securities, which was an imperative course for raising the capital required by the companies. The Draft Rules under the Act, 2013 ('Draft Rules') have additionally been discharged by the Central Government for public remarks. Keeping in mind the end goal to guarantee more noteworthy control and consistence over the privately owned businesses, the Act, 2013 has withdrawn the vast majority of the exemptions as accessible under the Companies Act, 1956 ('Act, 1956'). The Act, 1956 did not characterize the term 'private placement', rather certain offers of shares or debentures/invitation to subscribe for shares or debentures to any segment of general society were not viewed as public issues under Section 67(3) the Act, 1956 i.e where shares or debentures are accessible for subscription or purchase only to those receiving the offer/invitation.

Be that as it may, according to the stipulation to Section 67(3) of the Act, 1956, when an organization made an offer or invitation to subscribe for shares or debentures to 50 or more persons, such offers was dealt with as made to the public. Under the Act, 1956 the conditions identifying with private placement were appropriate just to public companies. Whereas the Act, 2013 gives different conditions to private placement of shares and debentures which apply to both privately owned businesses and public companies.

In the present assignment the author shall focus his discussion on the provision of allotment of shares in light of the recently enacted Companies Act, 2013, and the changes (i.e. regarding private placement) that have been incorporated in it differently from the 1956 act.

CONTEXTUAL FRAMEWORK

The conditions forced in connection to private placements by companies appear to have been issued after the decision of the Hon’ble Supreme Court of India on account of Sahara Group wherein the organizations Sahara India Real Estate Corporation Limited ('SIRECL') and Sahara Housing Investment Corporation Limited ('SHICL') issued unsecured optionally fully-convertible debentures ("OFCDs") adding up to about Rs 24,000 crores to more than 2 crore investors. At the point when Securities Exchange Board of India ('SEBI'), had came to know of the substantial scale gathering of cash from people in general by Sahara through issuance of OFCDs, it issued a show cause notice to SIRECL and SHICL inter alia expressing that the issuance of OFCDs are public issue and in this way liable to be recorded u/s 73 of Act, 1956 and likewise regulated to refund the cash gained through issuance of the OFCDs, since they had abused different clauses of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 and additionally different provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.[6]

The Supreme Court held that OFCDs issued by Sahara Group were public issue of debentures, hence securities and once the number 49 is crossed, the proviso to Section 67(3) becomes effective and it is an issue to the public, which attracts Section 73(1) of Act, 1956 and application for listing becomes mandatory which falls under the administration of SEBI u/s 55A(1) (b) of the Act, 1956. The Court upheld the proceedings of the SEBI and Sahara Group was ordered to refund the amount to investors along with interest.[7]

THE PROVISION/s UNDER 2013 ACT

Section 42 of the Act, 2013 defines 'private placement' which can be said to be in consonance with the interpretation of the Supreme Court in the SEBI-Sahara case[8] as "any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section including the condition that he offer or invitation is made to not more than 50 or such higher number of persons as may be prescribed (excluding QIB's and employees offered securities under ESOP) in a financial year".

It is likewise to be noted that the procurements for private placement applies to the issue of "securities" and not "shares". Therefore the new procurements have extended the extension and spread to an entire host of instruments, for example, shares, bonds, debentures and other marketable securities and so on. The Act, 2013 under section 42(4) orders an organization to consent to the provisions of SEBI Act & SCRA, if any offer or invitation is not in consistence with the provisions of the section and such offer or invitation should be dealt with as a public offer.

The section stipulates that all monies payable towards subscription of securities by private placement might be paid through check or interest draft or other keeping money channels yet not with money furthermore all the securities under private placement are to be allotted inside a time of 60 days from the receipt of use cash. In the event that the company is not ready to assign the securities inside the indicated period, the application cash is to be discounted inside a time of 15 days from fulfilment of 60 days time. The cash raised by the issue of offer or invitation should be in a separate bank account and can't be utilized until allotted. Each company making any allocation under the said section might submit with the Registrar the particulars of each private offer inside 30 days of dissemination of offer letter.

Under section 29 of the 2013 Act,

Every company making public offer; and
Such other class or classes of companies as may be prescribed

shall issue the securities only in the dematerialised form. When any company issue its securities in dematerialised form, provisions of the Depositories Act, 1996 and regulations made under that Act shall be applicable. There is no bar for any other company to issue its securities in any form. Any other company may convert its securities into dematerialised form.

Per section 39 of the 2013 Act, after public offer, any allotment shall be made only if the amount stated in the prospectus as minimum amount. The sum payable on application for the amount so stated as minimum amount has been paid to and received by the company by cheque or other instrument.[9] The amount payable on application on every security shall not be less than five percent of the nominal amount of security or such other percentage or amount as may be specified.

If the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days from the date of issue of the prospectus, all amount received shall be returned within prescribed time and in prescribed manner. The company shall file with the Registrar of Companies a “Return of Allotment” in prescribed manner.[10]

Finally, section 40 of the 2013 Act declares that every company making public offer shall make an application to at least one stock exchange before making the public offer. This is duty of company to obtain permission of stock exchange or stock exchanges for the dealing of securities there. Prospectus for the public offer shall also state the name or names of the stock exchange in which application for dealing of the securities has been made.[11]

Penalty for Violation

As per Section 42(10) of the Act, 2013, if a company makes an offer or acknowledges monies in contradiction of the section 42 of the Act, 2013, the company, its promoters and directors might be at risk for a punishment which may reach out to the sum included in the offer or invitation or two crore rupees, whichever is higher. The company is additionally needed to refund all monies to subscribers inside a time of thirty days of the order imposing the punishment.

Therefore, not at all like the 1956 Companies Act, wherein the conditions identifying with private placement were relevant just to public companies, the 2013 Companies Act gives different conditions to private placement of shares and debentures which apply to both private companies and public companies. While a percentage of the conditions in connection to private placements by companies show up as an immediate drop out of the recent string of cases, furthermore in accordance with the most recent corrections to Preferential Allotment Rules, just a few seem justified for private companies and others seem to have an unjustifiable impact in controlling the adaptability accessible to companies in the fund raising activity.[12]

CONCLUSION

Since the necessities for raising the capital by method for private placement have been made more stringent, it will fundamentally expand the burden to comply on private companies looking to raise finance through private placement. It is additionally to be noted that as no particular exclusion has been accommodated for private companies or little companies, it will prompt diminished adaptability accessible to private organizations and the companies operated by closely held individuals for the raising of finance. Nonetheless, the better administration of all companies is expected which will prompt the transparency in the businesses of the Company and responsibility of the directors.

While a few conditions to control offer of securities by private companies are justified considering a portion of the recent cases, the current set of regulations appear to be too outlandish, bulky and prohibitive for private companies.

With satisfactory administrative oversight, investors ought to be furnished with sufficient adaptability to bring capital up in a closely held private company wherein contemplations identifying with minority investor representation and/ or safety are non-existent.