Section 23 of Companies Act. Public Offer and Private Placement

“Section 23 of the companies Act, 2013, Public offer and private placement.— (1) A public company may issue securities— 

(a) to public through prospectus (herein referred to as “public offer”) by complying with the provisions of this Part; or

 (b) through private placement by complying with the provisions of Part II of this Chapter; or 

(c) through a rights issue or a bonus issue in accordance with the provisions of this Act and in case of a listed company or a company which intends to get its securities listed also with the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made thereunder.

 (2) A private company may issue securities— (a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or (b) through private placement by complying with the provisions of Part II of this Chapter. Explanation.—For the purposes of this Chapter, “public offer” includes initial public offer or further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus.”

An Examination of Section 23 of Companies Act, 2013

The fundamental driving force of every corporation is its capital. In the vast ocean of the Indian corporate landscape, Section 23 of the Companies Act, 2013 acts as a lighthouse, guiding public and private companies in raising the resources necessary for growth and sustenance. Section 23- Public Offer and Private Placement delves into the intricacies of this crucial provision, mapping the various routes companies can navigate to issue securities and secure their financial journey.

We will discuss Modes of Issuance under Section-23, of the Companies Act, 2013, Public companies have three options for issuing has been highlighted as under:

1. Public Offer and Private Placements

Issuing securities to the public through a prospectus compliant with the Act and SEBI regulations. This includes both initial public offerings (IPOs) and further public offerings (FPOs).

For public companies, the avenues for capital infusion are laid bare in clauses (a) and (c) of subsection (1). The traditional approach involves a “public offer,” where securities are flung wide open to the public through a meticulously crafted prospectus, inviting subscriptions under the watchful gaze of regulatory provisions.

Alternatively, Offering securities to a restricted pool of investors without a public prospectus, following relevant regulations. companies can embark on a “private placement,” a more discreet affair where securities are offered not to the masses but to a select group of investors, adhering to the regulations stipulated in Part II of the Chapter.

1.1 Rights Issue & Bonus Issue:

Issuing securities to existing shareholders in proportion to their shareholding. Listed companies require additional compliance with SEBI regulations for these issues. However, the financial tapestry woven by Section 23 is not limited to just these two options. Companies already listed on the stock exchange, or those aspiring to join the illustrious ranks, have the additional privilege of “rights issue” and “bonus issue.” These instruments allow existing shareholders to partake in the capital expansion, strengthening their stake and loyalty. Notably, for listed entities, these methods require additional compliance with the Securities and Exchange Board of India Act, 1992, ensuring transparency and investor protection.

While public companies bask in a wider array of options, private companies, though constrained, are not left entirely devoid of choices. They can resort to the same familiar “rights issue” and “bonus issue” mechanisms, reaping the benefits of internal capital growth. Additionally, the private placement remains open to them, granting them access to select investors for discrete fundraising.

2. Foreign listing Option:

Section 23 does not paint a static picture. It recognizes the ever-evolving nature of the global financial landscape by empowering “certain classes of public companies” to venture beyond national borders. Subject to prescribed conditions, these companies can seek foreign shores, listing their securities on “permitted stock exchanges” in “permissible foreign jurisdictions.” This provision opens doors to new sources of capital and expands the horizons of corporate ambitions.

3. Government Exemptions:

Furthermore, the Central Government is entrusted with the power to grant exemptions from specific provisions for designated classes of public companies. This flexibility acknowledges the diverse needs and challenges faced by different segments of the corporate world, allowing for tailored solutions within the broad framework of Section 23.

Finally, the definition of “public offer” casts a wider net, encompassing not just the initial and further offerings by the company itself, but also sales by existing shareholders through a prospectus. This inclusive definition bolsters investor participation and ensures greater market transparency.

Whether Section 23 (2) of Company Act 2013 Act is the main provision? Ambiguity in this provision, If “may” is used interpreted in permissive literal connotation. 

The interpretation of Section 23(2) of the Companies Act, 2013, which deals with modes of issuing securities by private companies, presents a crucial question: Is the use of the word “may” in the provision mandatory or permissive?

Let’s discuss on two opposing interpretations that exist. Permissive interpretation and Mandatory interpretation.

Permissive interpretation of the word of  “May” is understood literally, as granting private companies the choice to select any of the three modes (public offer, private placement, rights issue) for issuing securities, and Mandatory interpretation of “May” is read as “shall,” suggesting a requirement for private companies to follow one of the three modes under Section 23(2) whenever issuing securities, except for bonus shares.

Interpreting “May” through Legislative Intent:

If we go through the history of tracing the evolution of section  23(2) is crucial and it sheds light on the legislature’s evolving intention regarding the mandatory or permissive nature of the provision. 

Judicial precedents like the Sarla Goel and Ors. Vs. Kishan Chand2 case, where the Supreme Court established that interpreting “may” as “shall” depends on the legislature’s intent, can offer valuable insights into judicial interpretation principles. It means that a private company issuing any security is free to adopt the procedures provided 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. The ambiguity surrounding the mandatory or permissive nature of Section 23(2) in the 2013 Act persists. Subsequent amendments in 2015 and the proposed Companies Bill 2016 offer no clarification, resulting in overlapping requirements and inconsistencies with Sections 42 and 62. To ensure compliance for all issuances, the Ministry of Corporate Affairs should urgently issue guidance resolving these inconsistencies. Until then, following Section 23(2) procedures for all security issuances by private companies may be the safest approach.

Conclusion

Section 23 of the Companies Act, 2013 serves as a comprehensive charter for navigating the complexities of securities issuance. From the public offer’s grand spectacle to the private placement’s intimate gathering, from domestic shores to foreign frontiers, this provision equips companies with the tools they need to fuel their growth and navigate the dynamic currents of the financial world. As the corporate landscape continues to evolve, Section 23 stands as a beacon, guiding companies toward secure and sustainable financial horizons.

Public Offers and Private Placements require adherence to specific regulatory requirements. Further avenues, like foreign listing for certain classes of public companies, exist under the Act. Understanding these options and compliance obligations is crucial for public companies considering securities issuance.

FAQ’s

1. What is public offer and private Placement as per section 23 of the Companies Act?

Public Offer: A public offer refers to the issuance of securities (shares, debentures, etc.) to the general public through a prospectus. This process involves extensive disclosures, regulatory approvals, and marketing efforts. 

Private Placement: A private placement involves the issuance of securities to a limited group of pre-identified investors without a public prospectus. This method offers greater flexibility and confidentiality

2. Under Section 23(1)(a) of the Companies Act,2013, what are the distinct methods available for public companies to issue securities?

Public companies climb capital mountains in three ways: openly with a prospectus (public offer), selectively without (private placement), or rewarding existing climbers (rights/bonus issue). The choice depends on whom they want to invite, how much they need, and how much paperwork they crave.

3. How does Section 23(1) (c) impact the issuance of securities for listed companies?

Section 23(1)(c) expands listed companies’ securities issuance options beyond public offers by permitting rights/bonus issues and, for eligible entities, foreign listings, subject to additional regulations under the Companies Act and SEBI Act.

4. What are the requirements for private placement by a private company, as outlined by Section 23(2) (b)?

The private placement of securities by private companies, the provisions in Section 23(2)(b) allow such companies to issue securities to a select group of investors in a private manner. This involves compliance with specific rules regarding the types of investors, disclosure of limited information, and restrictions based on the size of the issuance.

5. Explain the provisions for the issuance of securities by certain public companies for listing on foreign exchanges, as per Section 23(3).
Section 23(3) of the Companies Act, 2013 in India pertains to the issuance of securities by specific classes of public companies to list on foreign exchanges. According to this provision, such companies are authorized to issue specified classes of securities to list them on permitted stock exchanges in permissible foreign jurisdictions or as may be prescribed under Indian Companies Law.

6. What discretionary powers does the Central Government hold regarding exemptions for public companies under Section 23(4)?

Under Section 23(4) of the Companies Act, 2013, the Central Government possesses the discretionary authority to grant exemptions to specific classes of public companies from provisions outlined in this Chapter, Chapter IV, section 89, section 90, or Section 127, as per Indian Companies Law.

7. How does compliance with the Securities and Exchange Board of India Act, 1992, relate to the provisions of Section 23(1)(c) for listed companies?

Compliance with the Securities and Exchange Board of India Act,1992, is mandatory for listed companies issuing securities under Section 23(1)(c) of the Companies Act, 2013. This ensures alignment with regulatory requirements governing securities markets, as per Indian Companies Law.