Private Placement of Securities

INTRODUCTION

In today’s world everyone in India needs some funds to make its business successful or at least one that business and when the company keeps on growing the Rise is for the funds also increased.[1] When the demand for the funds also increases then the company raises its funds by various methods. The funds are raised through the private placement which is one of the preferred methods by the companies.[2] The laws which are related to the private placement stated under the Companies Act, 1956 and SEBI (Securities and Exchange Board of India).

The laws with were present Under the Companies Act, 1956 related to the private placement was misused by the companies and their promoters which resulted in the compromising the interest of the shareholders. The Companies Act 2013 made brief changes about the laws related to private placement. The new law which is related to private placement has become more structured and time oriented with as compared to the law which was under the Companies Act, 1956. The definition of private placement has been defined under section 42 (ii). It states that private placement “any offer of securities or invitation to subscribe securities to select group of persons by a company (other than by way of public offer) through issue a private placement offer letter and which satisfies the condition specified in this section”.[3]

BACKGROUND

The advantage which was taken by the companies related to the private placement which was mentioned under the provisions of Companies Act, 1956 was seen in the case of Sahara group.[4] In this case unsecured optionally fully convertible debentures (OFCSs) which amounted to rupees 19,400 crores were issued by Sahara India Real Estate Corporation Limited and Sahara housing Investment Corporation Limited. This amount was raised from over 2 crore investors and when the Securities and Exchange Board of India came to know about the collection of money through issuance of unsecured optionally fund convertible debentures which was made by Sahara groups of Companies, show Cause Notice was given to them by SEBI under Section 73[5] of Companies Act, 1956.[6]

Sahara stated that these funds were collected through the private placement of OFCDs and the definition of OFCDs was not mentioned under the definition of securities as per SEBI regulations. Sahara was stated that as their company is unlisted then SEBI does not have any right to interfere.[7]

SEBI contended that since this has violated various regulations of raising capital and since offering OFCDs were made two more than 50 persons therefore is automatically becomes the public offering under the Section 67 (3) of Companies Act, 1956.[8] “The Hon’ble Supreme court also held that following situations it is generally regarded as an offer me to public offer of securities made to less than 50 persons.

  • Offer made only to the existing shareholders of the company ( right issue)
  • Offer me to a particular addressee and be accepted only person to whom it is addressed
  • Offer and invitation been made and it is the domestic concern of those making and receiving the offer”.[9]

The most famous case regarding the private placement is Sahara but there are other companies also have misuse the provisions of law related to private placement. The companies also took advantage of Ministry of Corporate Affairs and SEBI in the case of multiple private placements. “The 2013 Companies Act mandates Section 42 (4) company to comply with the provisions lay down under securities and exchange Board of India and securities contract Regulation Act”.[10]

COMPANIES ACT 2013

There were several changes which can make under the Companies Act, 2013 related to the private placement.[11] There is usage of the term securities instead of shares. There was a usage of term shares in the 1956 Companies Act restricted many companies for issuing of instruments to raise funds. The new Companies Act 2013 then started using the term securities instead of shares.[12] There was a restriction on number of person to whom private placement can be offer. There was a use of banking channels for private placements.[13]

CONCLUSION

At last, I would like to state that many steps have been taken by the government to protect the investors from the malpractices and misuses which are done by companies. As the Section 42 (10) of the Companies Act, 2013 states that ” If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or 2 crore rupees, whichever is higher, and the company shall also refund all monies 2 subscribers within a period of 30 days of the order imposing the penalty”.[14] The private placement helps in fulfilling the requirement of the funds which is required by the company.

Private placement also helps in reducing the time and reducing the cost of issuance. If the securities are issued publicly then it can be time consuming and also require certain expenses. Private placements are also negotiated between investors and issuing company and this is done privately but there are some disadvantages also of private placement as the company has to place the bonds or shares which are very risk taking factor. Hence we see that there are two sides of private placement and it has its own advantage and disadvantage.


References

[1] Yogesh Malhan, India: Private Placement Under Companies Act, 2013India: Private Placement Under Companies Act, 2013 (4ADAD), http://www.mondaq.com/india/x/305626/Securities/PRIVATE PLACEMENT UNDER COMPANIES ACT 2013 (last visited Jun 14, 2017).

[2] Private Placement, , http://www.vivro.net/blog/Private-Placement-of-Securities–An-Overview (last visited Jun 14, 2017).

[3] Bhavneet Vohra, PRIVATE PLACEMENT OF SHARES (29ADAD), http://lawfarm.in/blogs/private-placement-of-shares (last visited Jun 14, 2017).

[4] Sahara India Pariwar investor fraud case, , https://en.wikipedia.org/wiki/Sahara_India_Pariwar_investor_fraud_case (last visited Jun 14, 2017).

[5] Allotment of shares and debentures to be dealt in on stock exchange. 1

(1)Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchanges for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange.]

(1A)Where a prospectus, whether issued generally or not, state that an 3application under sub- section (1) has been] made for permission for the shares or debentures offered thereby to be dealt in one or more recognized stock exchanges, such prospectus, shall state the(………………….) 

[6] Sebi-Sahara case: How it all began, (2014), http://www.hindustantimes.com/business/sebi-sahara-case-how-it-all-began/story-u0G51dtoU5yP1nD3ZFjGuJ.html (last visited Jun 14, 2017).

[7] Sebi-Sahara case: A saga of big numbers and innocuous names, (2014), http://timesofindia.indiatimes.com/india/Sebi-Sahara-case-A-saga-of-big-numbers-and-innocuous-names/articleshow/31162104.cms (last visited Jun 14, 2017).

[8] No offer or invitation shall be treated as made to the public by virtue of sub- section (1) or sub- section (2), as the case may be, if the offer or invitation can properly be regarded, in all the circumstances-

(a) as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for sub- scription or purchase by persons other than those receiving the offer or invitation; or

(b) otherwise as being a domestic concern of the persons making and receiving the offer or invitation.

[9] Admin, Private Placement under Companies Act, 2013 (2013), http://taxguru.in/company-law/private-placement-under-companies-act-2013.html (last visited Jun 14, 2017).

[10] Id.

[11] BRIEF-India cenbank says private placement of securities of three states under UDAY scheme, , http://in.reuters.com/article/brief-india-cenbank-says-private-placeme-idINFWN1GU0CD (last visited Jun 14, 2017).

[12] Issuing securities through Private Placement under Companies Act, 2013, (2014), http://nrsadvisors.com/issuing-securities-through-private-placement-under-companies-act-2013/ (last visited Jun 14, 2017).

[13] Rishi A, The Potential for an Online Private Placement Platform in India (2017), http://indiacorplaw.blogspot.in/2017/03/the-potential-for-online-private.html (last visited Jun 15, 2017).

[14] Section 42 (10) of the Companies Act, 2013.

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