Company Registration

Different forms of shares/securities for Private Limited Companies

This article encompasses the different forms of shares/securities for Private Limited Companies. A private limited company is defined under section 2(68), which means, any company having a minimum paid-up share capital of Rs. 1 Lakh. The Articles of Association (AOA) of the company restricts the transfer of shares to the public, except in the case of one Person Company-where the number of members is limited to two hundred.

Private limited companies is formed with a view, that it is the association of people, but that association is not public. They can have securities or shares, but it cannot be issued to the public at large. The issue of securities shall be between the members only.

Different forms of securities for Private Limited Companies

The Companies Act, 2013, defines the kind of shares/securities for private limited companies are issued.

 Under Section 23, a private company issues securities such as:

1. Issue of bonus share
2. Through private placement
3. Sweat equity shares
4. Right issue of shares
5. Issue of shares on a preferential basis

The reason for only two types of securities, being issued by private limited companies, is because of Section 73 of the Companies Act, 2013^[1].

Section 73 of the Companies Act, 2013, states that there is a complete prohibition for the private limited company on acceptance of the deposits from the public. The section further explains that no private limited company shall invite, renew or accept deposits from the public, under this Act, except in the manner provided.

In case a private company wants to issue shares, it can either do by giving shares to its existing shareholders in the form of right issue or bonus issue, or it can issue securities through private placement.

A. What is private placement by the private limited company?

The concept is popular under the private limited company. It is covered under section 42 of the Companies Act, 2013.

Section 42 of the Act, explains that an offer or invitation for subscription of securities for the purposes of private placement. According to this section, the proposal for securities is made to the selected group of persons, by a company, which is not by way of a public offer. However, the issue of securities must satisfy the requirements of section 42 of the Companies Act, 2013.

1. Who can Issue Private Placement?

It is issued to a public company or private company.

2. The maximum number of the person to whom private placement can be made?

• Maximum 50 persons or
• Such a higher number as prescribed in the financial year
• It shall not be made to more than 200 people in an aggregate in a financial year.

3. To whom private placement cannot be made?

The exceptions to the above provision are:

• Qualified Institutional Buyer.
• Employees under the stock option scheme, under section 62(1) (b) of the Companies Act, 2013.
• According to the Prospectus and Allotment of Securities Rules, 2014- which means no more than 200 persons, in the aggregate in a financial year, excluding QIB and employee under stock option plan.
• This restriction is reckoned individually, for each kind of security, that is equity share, preference share, or debenture, (that is, 200 for equity shares, 200 for preference shares, and 200 for debentures) – Rule 14(2) (b).

4. Private Placement approval

The offer has to be previously approved by the company’s shareholders, by a special resolution, for each of the offer or invitations.

5. Offer or invitation for non-convertible debentures

A private limited company shall pass a special resolution, only once in a year, for all the offers or invitations, for such debentures during that year.

6. No offer or invitation

No invitation shall be made unless any offer or invitation, made earlier have been completed or withdrawn or abandoned, by the company under section 42(3).

7. No advertisement

The foremost step to be taken is that the private limited company issuing shares through private placement shall not do any public advertisement of its issue or marketing or distribution channel or agent to inform the public at large to tell about the offer.

8. Proper Record

The company needs to maintain the complete record of the private placement offers in the form PAS-5.

B. Right Issue of Shares by the private limited company

According to the Companies Act, 2013, a private limited company can issue the shares to its existing shareholders in the form of Right Issue of shares.

The right of shares has been defined by Section 62 of the Companies Act, 2013. The section says that a company having, a share capital which proposes to increase its subscribed share capital, by the issue of further shares, it shall offer the shares to- existing shareholders, employees under the scheme of employees stock option subject to a special resolution passed by the company, to any person authorised by the resolution passed by the company.

C. Issue of shares on Preferential Basis

A company authorised by a special resolution passed in its general meeting, issue shares in any manner, by way of the preferential offer, to any person whether they are included in section 62 clause (a) and (b). They will have to follow the guidelines of Section 42 – private placement.

D. Issue of Sweat Equity Shares

According to section 54 of the Act, the private limited company can issue sweat equity shares- a class of equity shares already given to its directors or employees, after passing special resolution.

E. Issue of Bonus Shares

The Private Limited Company may issue fully paid-up bonus shares to its members, in any form:

a. In the form of free reserves
b. The securities premium account
c. The capital redemption reserve account.

Conclusion

It can be concluded that a company registration done as a private limited company, can issue shares/ securities only to its existing shareholder. They can issue securities, in the specified method, as given under the Companies Act, 2013. It is recognised that every business wants to grow. Any corporation, of any size; it requires the capital flow to grow and diversify its business. Start-ups in India have tried multiple products in the market.  NBFCs were the source funding for them, as traditional banking have never let initially to provide loans to these startups- to private limited companies. The system of the private placement is the new structure which a structured forms, to get funds.  The private placement follows all the compliance requirements. The issue of securities by the private limited companies, in companies Act, 2013 has been established in a much organised manner, and limited forms have been allowed.

Read our article:Private Limited Company Registration in India and Requirements