Section 23 Of Companies Act 2013: Public Offer And Private Placement

Public offer and private placement as under Section 23

What is Section 23 of Companies Act 2013?

In order to understand section 23 of the companies act, 2013 we first need to understand the concept of security. Security as a word refers to an interchangeable, negotiable financial instrument having a certain pecuniary value. In a public trading organization, it is representing the position of an owner through various modes such as the exchange of stock, relationship of creditor through ownership of an entity’s bonds or even through ownership rights represented by certain options.

In accordance with Section 2(70) of Companies Act 2013 a “Prospectus” refers to any such document either described or issued as a prospectus which includes-

i. Red herring prospectus as referred to in Section 32;

ii. Shelf prospectus as referred to in Section 31 or;

iii. Any advertisement, notice, circular or any document inviting offers from the public for either purchase or subscription of a corporate’s security.

The term prospectus in simple words is a document consisting statement of property, business, undertaking for the formation of a company for which an appeal is made to the public to subscribe for shares, for more understanding it is dealt with in section 70(2) of the Companies Act, 2013.

The main issue that we will be dealing with in this article will be public offer and private placement as stated in section 23 of Companies Act 2013, a public company may provide securities to public through –

a) Prospectus also referred to as a “public offer” in accordance with the provisions of part I of chapter III on Prospectus and Allotment of securities dealing with sections 23 to section 41.

b) Private Placement in compliance with section 42 and Part II of Chapter 3.

c) Rights and bonus issues in compliance with the rules of the act or the provisions of SEBI Act,1992 in case of listed companies

Though public offer is only limited to a public company, private companies under the act may also issue securities through private placement in compliance with section 42 of the Companies Act, 2013. Further, it should be noted that a public offer includes initial or further public offer by a company to the public regarding securities or an offer by an existing shareholder dealing with sale of securities to the public through issuance of a prospectus.

A private placement is a method for a firm to generate funds by releasing a private placement offer letter for securities to a select group of investors. In general, private placements are exempt from the Securities and Exchange Commission's registration requirements and the majority of the disclosure requirements that apply to public offers. Section 42 of the Companies Act 2013 governs this method of raising security. A public offer is defined as an offer to more than 200 people in a financial year, according to section 42 of the Companies Act 2103 and rule 14(2)(b) of the Companies (Prospectus and allotment of securities) rules, 2014.

Ambiguous nature

As we know the provision states means of issuance of securities by private and public limited companies, there is confusion and ambiguity in the application of section 23 due to the presence of the word “May” with regard to the private placement. If interpreted in its literal sense, “May” would mean that private company while issuing security could also follow the procedures under Section 42 (private placement), Section 54 (issue of sweat equity shares), Section 62 (further issue of share capital), Section 71 (debentures) and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 independently, but if the same “May” is o interpreted as “Shall”, it would become a compulsory provision meaning that while issuing security, its compulsory for the company to follow rules under section 23(2). This would mean that every time any sort of security whether debenture, employee stock etc. are proposed to be issued the process of either private placement or rights issue will have to be followed unless the shares are being issued in the form of bonus shares

Amendment in Section 23

Section 23 being a relatively new section which has been introduced for the first in the 2013 version of the Companies Act has not been amended so far. Though more details abut the procedure introduced in the section has been given in other sections of the act, the M.C.A circular provides clarity with regard to the applicability of the section. The M.C.A circular clarifies that this section, as well as all other sections under Chapter III of the act, will not be applicable for issuance of foreign currency convertible bonds and foreign currency bonds by companies to persons residing outside India unless the applicable law and RBI rules/regulations explicitly state otherwise.