Offering of Securities: Public or Private?

Today’s Economic Times carries a newsreport about a company that has 2.6 million shareholders, but nevertheless continues to be unlisted. If true, this oddity of circumstances calls into question section 67 of the Companies Act. That section provides any offer of shares or debentures made to 50 persons or more will be considered a public offering, which will require listing of the securities on a recognized stock exchange. The only way a company can stay out of the purview of this provision is if it makes distinct offerings, with each such offering being made to less than 50 persons. In a company with millions of shareholders, it is unlikely that such an approach is practicable, given the enormous number of separate offerings the company would have to make to invoke the private placement provision. The only other possibility is where the company is a non-banking finance company, as the 50-offeree restriction does not apply so long as the offer is made in accordance with guidelines prescribed by SEBI for the purpose in consultation with the RBI.

In order to prevent abuse of section 67, it may be necessary to consider the inclusion of an absolute limit on number of shareholders in order that a company may continue to be unlisted. This would be in addition to the limit on number of offerees per securities offering. The overall limit on number of shareholders would be akin to requirements in the US where a company with 500 shareholders becomes subject to reporting obligations, which would lead to companies to list anyway. Google went down the path of listing for this reason, and Facebook is expected to follow soon. Such a limit on number of shareholders would be clearer to companies to follow and easier for regulators to implement that the current provisions of section 67 which continue to reveal uncertainties and loopholes.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • QUERY : In addition to your analysis of applicability of section 67, could you consider whether the number of "2.6 million" shareholders could have been achieved by way of transfer of shares in a public company where there is no restriction (unlike that of private company). If transfers are permitted, then clearly the company could not be said to be in breach of section 67 – as the same is inapplicable?

  • Dear Umakanth,

    Your observation regarding the non-applicability of the 50 offeree requirement in case of NBFCs is rather interesting and a revelation to me. Could you please elaborate on your observation and let us know the relevant provisions of the SEBI and RBI regulations.


  • The NBFC/PFI(public financial institutions) provision is contained in the second proviso to Section 67(3) of the Companies Act. The inapplicability to NBFCs/PFIs is only with respect to the 50-person rule, the qualitative test in Section 67(3) to determine whether an offering is a public offering applies to them.

  • Dear Sir,

    Can anyone please enlighten me where does the Section 67 of the Companies Act, 1956 places such restriction.
    Which specific Rules or Regulation of Circular is being referred.

    A kind help will be appreciated as it will help me in better understanding of the Act itself which never fails to surprise me.

    Thanks & Regards


  • It is necessary to note that SEBI ICDR Regulations does not make any specific exception to NBFCs and the Regulations are applicable to listed Companies or companies intended to be listed or those Companies that fall within the purview of proviso to Section 67(3). One may read Sub Section 3A to state that Sub Section 3 is not applicable to NBFCs and hence restrictions of 50 persons is not applicable to NBFCs. However if Sub section 3A is read positively it does not exclude the provisions of the First Proviso, it in fact mandates SEBI and RBI to frame the regulations. The sub section though starts with a non-obstante clause, it does not use the words to state that First proviso is not applicable or words which are expressly excluding in nature. Therefore it can only be said that greater powers were given to SEBI in consultation with RBI to frame regulations for NBFCs/PFIs.This is also supported by the fact that Sub section 4 starts with the words 'without prejudice to the generality of sub section 3' which further brings to light the fact that sub section 3 is generally applicable to all companies and Section 3A is inserted to empower SEBI to frame guidelines in consultation with RBI as raising of funds by NBFCs is within purview of RBI.

  • @ Sunita Narahari. Even if it is a secondary market transaction, where an existing shareholder makes an offer to sell to other shareholders, that too would be considered as a public offering. What is relevant is whether there was an "offer" or not: either a primary offer by the company or a secondary offer by an existing shareholder. Furthermore, section 64 of the Companies Act dealing with offer for sale would also be relevant.

  • I don't see what purpose is served by making it mandatory for a company to get itself listed if the number of shareholders exceed a particular quantity. If a company has never made an offer to the "public" (as is understood under the two sub-clauses of 67(3)), additional regulatory supervision through stock exchanges is not required since the interest of the general investing public, who are not insiders, is not involved. It must be noted that compliance with listing agreement is a costly exercise. Also general investors may not even be interested in such listed securities leading to such securities remaining infrequently traded, and hence compulsory delisting of such securities by the stock exchanges.

    The impugned company is an extreme example, and in all likelihood may have violated 67(3) or 64. Further, I am not sure if companies find it difficult to follow section 67(3). They know whether they are offering it to the public or not. The U.K. companies act, despite having undergone so many substitutions, still retains the same meaning to offer to the public.

  • Section 67(3) gives exemption to NBFC and PFI's from the 50 persons rule.

    Assumed that exemption from the 50 persons rule is granted to NBFC, is it necessary that still section 73 is applicable which inter alia reads as under :
    “73. Allotment of shares and debentures to be dealt in on stock
    (1) Every company intending to offer shares or debentures to the
    public for subscription by the issue of a prospectus shall,
    before such issue, make an application to one or more recognised
    stock exchange for permission for the shares or debentures
    intending to be so offered to be dealt with in the stock exchange
    or each such stock exchange.” (Emphasis supplied)

    its different case as the companies in the above discussion were not NBFC but suppose they were NBFC , then what would have been the position?

    Being exemted from 67(3) still section 73 is applicable ?

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