Issuing shares to a select group of people like friends & family, angels or VC?
Brace up, the new Companies Act 2013, provides for lengthy compliance procedures.
Unlike before, even a private limited company has to follow the processes for private placement of securities. Securities means equity shares, preference shares and debentures, convertible instruments, redeemable instruments.
“Private Placement” means any offer of securities or invitation to subscribe securities(equity or securities that convert to equity) to a select group of persons by a company, other than by way of public offer, through issue of a private placement offer letter. (Section 42 of Companies Act 2013 and Rule 14 under Companies (Prospectus and Allotment of Securities) Rules 2014)
Issuance of ESOP, Employee stock purchase scheme, Rights Issue, issuance of sweat equity, bonus shares, securities offered through a public issue, depository receipts issued outside India, foreign securities have a different set of processes to be followed.
These guidelines are applicable if the offer is made to a person who is currently not an equity shareholder in the company.
- An offer can be made under a Private Placement Offer Letter to not more than 200 people. Not just the limitation of allotment to 200 people but even an invitation to subscribe cannot be made to more than 200 people. The 200 people limit excludes Qualified Institutional Buyers and Employees and the limit of 200 people is calculated individually for each kind of security. Obviously, there cannot be a public announcement of such offers.
- The application form has to be numbered and addressed specifically to the person to whom the offer is made along with the Offer Letter. Allotments can be made only to such persons.
- The value of the Offer per person shall not be less than INR 20,000 of ‘face value’ of securities. The payment for subscription should be through the bank account of the person subscribing to the securities and the company should keep a record of the bank account from where such payments have been received. No cash transaction is permitted. The money so received shall be kept in a separate bank account of the company and utilised only for allotment (or repayment).
- The price of the security has to be justified and the inference is that, it requires a valuation report by a Registered Valuer (can be a company secretary, chartered accountant or a cost accountant)
- The Articles of Association should provide for and shareholders of the company through special resolution approve the Offer and this resolution should be acted upon within 12 months. At any given point in time, there should be one active Offer for each kind of security.
- Allotment has to be carried out within 60 days, else from the 75th day the monies have to be repaid. Failure to repay has a liability of interest at 12%pa. If there is a Foreign Direct Investment, RBI has provided for 180 days for allotment. It is not clear which regulation over-rides wrt timeline for allotment.
- Filings: The Offer along with the names of the offerees has to be filed with the Registrar of Companies within 30 days from the date of circulation (i.e. date of the Offer letter). Again, after allotment of the securities, within 30 days, a return of allotment has to be filed with the ROC.
- Non-compliance can lead to a penalty of INR 2 crores or the amount involved in the offer, whichever is higher.
However, if you wish to issue securities to persons who are already equity holders in the company, then, another set of guidelines are applicable. That is the next post.
Author: Geetika Chandel , Associate at NovoJuris.
Disclaimer: There are many details that the Act prescribes, please speak with your attorney for advice. This is not a legal opinion and should not be construed as one.