following post is contributed by Yashesh
Ashar. Yashesh is a tax and regulatory consultant and the views expressed
herein are personal]
President on 30 August 2013 seeks to create a major overhaul in the functioning
of the corporates in India. A major part of the New Cos Act is to be governed by the Rules
proposed to be framed by the Central Government. The Draft Rules under the
Companies Act, 2013 (‘Draft Rules’) have already been released by the Central
Government for public comments.
subjects private companies to a greater control and compliances and withdraws
most of the exemptions available to private companies under the Companies Act,
1956 (‘Old Cos Act’). One of the aspects which is completely overhauled and
widened under the New Cos Act is the conditions relating to issue or offer of
securities by private companies. This post seeks to
discuss various aspects of the new conditions relating to issue or offer of
securities under the New Cos Act and Draft Rules and its impact on private
not refer to the expression ‘private placement’. Instead it provided in the
negative that an offer or invitation shall not be treated as public offer, if
shares or debentures are available for subscription or purchase only to those
receiving offer or invitation and such offer and invitation is restricted to
maximum of 49 persons. Further, the Unlisted
Public Companies (Preferential Allotment) Rules, 2003 as amended by Unlisted
Public Companies (Preferential Allotment) Rules, 2011 issued by the Ministry of
Corporate Affairs (together referred to as ‘Preferential Allotment Rules’)
prescribed conditions for preferential allotment by unlisted public companies.
No such conditions were prescribed for private companies. Further, public
companies whose shares are listed on the stock exchange required to comply with
the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
Cos Act, wherein the conditions
relating to private placement were applicable only to public companies,
the New Cos Act provides various conditions for private placement of shares and
debentures which apply to both private companies and public companies. While some of the conditions
in relation to private placements by companies appear as a direct fall-out of
the recent cases and also in line with the latest amendments to Preferential
Allotment Rules, only a few appear justified for private companies and others
appear to have an unwarranted effect in curbing the flexibility available to
companies in the fund raising exercise.
Act, private placement has been defined to mean any offer of securities or
invitation to subscribe to securities to a select group of persons by a company
through issue of private placement offer letter. Non-compliance of the
conditions require compliance with the requirement as regards public offer
under the New Cos Act and ICDR Regulations.
conditions and their effect are discussed hereunder:
New Cos Act states that offer of securities or invitation to subscribe to
securities cannot be made to persons (excluding QIBs and employees subscribing
to shares under an ESOP scheme) exceeding 50 or such higher number as may be
prescribed in a financial year. Further, the Draft Rules provide that such
offer or invitation shall be made to not more than 200 persons in aggregate in
a financial year. On a harmonious reading of the provisions of the New Cos Act
and the Draft Rules, it could reasonably be interpreted that though, during a
financial year, an offer for
private placement can be made to more than 50 but not exceeding 200 persons,
aggregate of such offers of private placement during a financial year are to be
restricted to 200 persons.
may lead to availability of larger pool of capital for private companies and
therefore, many of the unlisted public companies may consider becoming private.
However, tax consequences post conversion of public company into private
company may need to be considered on a case to case basis.
private placement is required to allot its securities within 60 days from the
date of receipt of the application money. This could limit the timelines
available to consummate transactions involving subscription of securities by
non-residents. In such a case, escrow mechanism as provided for under the FDI
Policy could be explored.
Rules propose to restrict private placement to a maximum of 4 in a financial
year with not more than one in a calendar quarter and a minimum gap of 60 days
between any two private placement offers. This may create some inflexibility in
structured transactions with investments in tranches as well as back to back
investments by different investors in different instruments in a way not
possible to treat them as single offer of private placement.
shares with differential voting rights provide for the following conditions:
differential voting rights should not exceed 25% of the post issue paid-up
capital of the company.
(including private companies) is required to maintain a track record of 10%
dividends for the preceding three financial years.
not convert its existing equity share capital with voting rights into equity
shares capital carrying differential voting rights.
requirements could take away flexibility in organizing the capital as per the
agreed commercials amongst the investors, especially, at project level
investments which are proposed to be undertaken through newly set-up entities.
convertible securities specify that the price of the resultant equity shares
shall be determined beforehand on the basis of a valuation report of a
registered valuer. In the Indian
context, convertible instruments are widely used by private equity investors for
the purpose of developing ratchets to preserve the value of their initial
investments as well as participating in any potential upside in valuation after
a predetermined period. It requires to be seen whether the conversion ‘price’ for
the purpose could be formula based as in the case of FDI Policy.
securities by private companies are warranted considering some of the recent
cases, the current set of regulations seem to be too far-fetched, cumbersome
and restrictive for private companies.
should be provided with adequate flexibility to raise capital in a closely held
private company wherein considerations relating to minority investor representation
and / or protection are non-existent.
– Yashesh Ashar