The Companies Act, 2013, was approved by the President on August 29, 2013, and it was published in the Indian Gazette on August 30, 2013. New ideas supporting improved transparency, accountability, board governance, business facilitation, and other topics were introduced by the Companies Act of 2013. Included in this are things like associate companies, one-person businesses, special courts, secretarial standards, independent directors, small businesses, women directors, dormant businesses, resident directors, secretarial audits, class actions, registered valuers, rotating auditors, vigil mechanisms, corporate social responsibility, and E-voting, among others. The Companies Act of 2013 incorporates Orders, Rules, Notifications, and Circulars, making it a whole ecosystem rather than a solitary piece of legislation. Each part of the Act, along with any applicable rules, notifications, and circulars, should be read.
Without financing, no enterprise is able to operate. There are two ways for Private Companies to raise money by issuing securities: either through the public offering of securities or by means of a private placement. Regulations for private placements are less scrutinized than those for publicly listed shares. Each provides funding, but the requirements for issuance, continuing financial reporting, and investor accessibility vary depending on the form of issue. Public offerings or private placement of securities are the two ways that Companies can obtain money, as stated in Section 23 of Companies Act of 2013. Every choice has unique characteristics that have an impact on the cost of funding and/or the timeframe of a bond offering.
Important terms used in Section 23 of Companies Act, 2013
Meaning of Public Offer
A company makes either a portion or all of its securities available for purchase on the open market in a public offering. As long as they may be purchased and traded on the open market, everything that falls under the category of “securities” is acceptable.
Meaning of Private Placement
Securities issued for sale solely to qualified buyers, such as investment banks, pension funds, or mutual funds, are known as private placement offers. These options might potentially be used by certain wealthy people to buy the shares. Companies that use private placements often want to raise a smaller amount of money from a narrower pool of investors.
What do you mean by Securities?
The Companies Act, 2013 defines ‘securities’ in Section 2 (81) as same as the securities defined under Section 2 (h) of Securities Contracts (Regulation) Act, 1956 (SCRA). The Sections included the below mentioned in the meaning of the securities:
- Shares, bonds, scrip, stocks, debenture stock, debentures etc which are of any incorporated body or another body corporate or are in incorporated body or another body corporate.
- Government Securities
- Derivatives
- Units which are issued by any Collective Investment Scheme to the investors
- Any other instruments or units which are issued under any Mutual Fund schemes to the investors
- Other Instruments
For those who are unfamiliar, securities are monetary-valued financial assets that investors use to invest in businesses, while businesses use them to raise finance. The term “securities” refers to tradable financial instruments that may be traded and have a specific monetary value. The ownership of listed companies through its shares is represented by this. Bonds of the legal entity depict creditor connections with corporations, governmental entities, or voluntary ownership.
Meaning of Prospectus
When securities are issued for the investment to the public, a corporation is required to provide investors with a prospectus as a key disclosure document. These official documents give potential investors comprehensive information on the public offers of stocks, mutual funds, bond sand other types of investments. The many forms of prospectuses include shelf prospectuses, red herring prospectuses, deemed prospectuses, and abridged prospectuses.
Historical Background of Section 23 of Companies Act, 2013
There were no clauses in the Companies Bill of 2009 that were equivalent to Section 23 found in the 2013 Act. This clause was initially inserted as part of the Companies Bill, 2011 (the “2011 Bill”). Public corporations may issue securities via a public offering, a rights offer, a private placement or bonus issue, according to Clause 23 of the 2011 Bill. The 2013 Act does not modify this statement in any way. However, the 2011 Bill’s language marginally changed how private Companies might issue securities. A private company may only issue securities through a private placement by adhering to the rules of Part II of this Chapter, according to the language in Clause 23(2) of the 2011 Bill.
This provision implied, as the sentence itself indicated, that a private company could only issue securities through a private placement. But this created a lot of confusion because the 2011 Bill’s Clause 62 and 63 (now Section 62 and 63 under the 2013 Act) also offered the chance to collect money through a rights issue or bonus issue.
In order to bring about the essential clarity, it was suggested in the Standing Committee upon Finance’s 57th report on the 2011 Bill (the “57th Report”) that Clause 23 (2) be changed to be in accordance with Clauses 62 and 63 of the 2011 Bill in order to permit the issue of shares by means of bonus issue and rights issue as well. To clear up any ambiguity in how Section 23 should be interpreted when coupled alongside Sections 62 and 63, the 57th Report advised that the term “only” be changed to the word “also.” Clause 23 (2) was changed by the 2012 Companies Bill (the “2012 Bill”).
Clause 23 (2) was changed by the 2012 Companies Bill (the “2012 Bill”). The first suggestion was approved by the legislature, and the addition of the terms bonus issue and rights issue as additional permissible nodes of issuances was made. However, the legislature did not just add the word “also”; it also removed the word “only.”
Section 23 of the Companies Act, 2013
We must first grasp the idea of security in order to comprehend Section 23 of the 2013 Companies Act. A financial instrument that is interchangeable and negotiable and has a specific monetary value is referred to as a security. In a publicly traded company, the position of an owner is reflected in a variety of ways, such as through stock exchanges, creditor relationships based on ownership of an entity’s bonds, or even through ownership interests represented by specific options.
The offering to the public or a private placement are the two ways that Companies can obtain money, as stated in Section 23 of Companies Act of 2013. Every choice has unique characteristics that have an impact on funding costs as well as the timeframe of a bond issue. A company, whether public or private, can raise money by issuing “securities.” The Act’s Section 23 states as follows:
Sub-Section (1) of Section 23 of Companies Act, 2013 lists out the modes by which a public company may issue securities, while sub-Section (2) of Section 23 of Companies Act, 2013 lists out the modes by which a private company may issue securities. Sub-clause (b) of sub-Section (1) of Section 23 of Companies Act permits a public company to issue securities by way of private placement. In case the shares of the company are listed, such a public listed company can make a private placement, referred to as preferential allotment under Chapter V of the SEBI (CDR) Regulations, 2018.
The private Companies can issues securities by bonds or rights issue, or through private placement which is in compliance with all the rules and regulation. Sub-Section (3) of Section 23 of Companies Act states that the public Companies can issues securities, with the aim of listing in the stock exchanges which are permitted by the foreign jurisdictions. Section 23 (4) states that the central government has the power to exempt a single or more classes of the public Companies mentioned in the Sub-Section (3). Any of the decision taken under this Section to exempt by the government will be notified and laid down in both of the houses of the parliament.
Amendments of Section 23 of Companies Act, 2013
Companies (Amendment) Act, 2020
After the Sub-Section (2) of the Section two other sub clauses were inserted in the Act; which were:
“(3) Such class of public Companies may issue such class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions or such other jurisdictions, as may be prescribed.
(4) The Central Government may, by notification, exempt any class or classes of public Companies referred to in sub-Section (3) from any of the provisions of this Chapter, Chapter IV, Section 89, Section 90 or Section 127 and a copy of every such notification shall, as soon as may be after it is issued, be laid before both Houses of Parliament.”.
Difference between Public Offer and Private Placement
| Public Offer | Private Placement |
| In public offer the securities are sold only to the public. | In the private placement the company offers securities to sell only to a few of the investors |
| In public offer there is flotation cost | While in the private placement there are no flotation costs. |
| Public offers are given mostly by the large scale Companies | The acquisition of funds through private placement is mostly seen in medium and small sized Companies. |
Benefits of Public Offer and Private Placement
Benefits of Private Placement:
- In a private placement, shares are allocated to certain business groups; as a result, the whole process is private; in a public offering, many disclosures are required.
- When compared to the stock market, the private placement market is more secure. The market for private placements is less erratic.
- Modest amounts of funding can be raised using private placement, while large amounts of capital require a public offering.
- A company that wants to obtain funding through a new issue by opting for a public offering of shares must go through several time-consuming procedures. Contrarily, after a few months, it gets simpler to obtain money through a private placement.
- To offer shares publicly, a company must pay for the preparation and printing of the prospectus, application forms, transportation, as well as advertising in various media. In the event that the public placement option is chosen, none of these costs will be necessary.
Benefits of Public Offer:
- Investors can trade a company’s shares on the open market once it goes public. This enables investors to cash in on their gains without having to wait for the buyback of their shares. The availability of a company’s shares for purchase or sale at any moment boosts investors’ liquidity.
- When a business becomes public, investors can trade shares on an exchange. Due to the fact that no single investor ends up owning the majority of the company’s outstanding shares, there is a larger diversity of investors as a result. As a result, having shares in publicly listed companies allows investment portfolios to diversify.
- Raising capital for the company is one justification for going public. According to SEBI regulations, a company can utilize an IPO to rise up to 20% of its capital through the market. Any company trying to grow and achieve great things would benefit from this.
- Credibility and trust are the foundations of brands. You increase customer trust in your brand by attempting to make a good or service visible to everyone. Better sales and more profits result from this.
Conclusion
In conclusion, it is very essential to understand the difference between the public and private placement of securities. Both of them have their own set of merits and demerits. The Section 23 of Companies Act gives states the 2 options on how the companies can issues securities. Both the methods of issuing the securities have to strictly follow all the rules and regulations applicable to them by the Companies Act, 2013.
Frequently Asked Questions
The methods, by which public and private firms in India can issue securities, including through public offers and private placements, are outlined in Section 23 of Companies Act, 2013.
Large corporations frequently use public offers, which entail selling securities to the general public and paying flotation fees. Private placements, which provide securities to a small number of investors and have no flotation charges, are more typical among medium-sized and smaller businesses.
Private placement offers are securities made available for purchase only by approved buyers, such as investment banks, pension funds, or mutual funds. Some affluent individuals might use these choices to purchase the shares. Private placements are frequently used by businesses looking to raise a smaller sum of money from a smaller group of investors.
A public offering is putting a company’s securities up for sale on the open market so that anybody can freely buy and sell them.
Public companies can trade in open markets and transfer the shares, while a private company cannot transfer shares by listing them in a stock exchange.
Among other financial products issued by corporations and collective investment schemes, “securities” also refers to shares, bonds, debentures, government securities, derivatives, and other financial instruments.
Because of their increased privacy, security, lower capitalrequirements, and easier processes, private placements frequently enable businesses to acquire finance more quickly and with lessout-of-pocket expense.
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