Private placement of shares & securities as per companies Act 2013

Author
Varun Chopra

The Company’s Act 2013 (New Act) has made some significant changes in its older version which calls for greater responsibility and transparency within the Corporate Sector. The Said act has revamped the procedure of allotment of shares and securities by Private Companies as compared to procedure laid down by its older version i.e. Companies Act 1956.

Issue of Shares by Private Placement

The Procedure for allotment of shares is governed by Section 42 of the New Act.

Section 42 allows any company, private or public, to make private placement of securities through issue of a “Private Placement Offer Letter” (PPOL). Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules 2014 is applicable in this regard in addition to Section 42.

1.  A company shall make an offer or invitation to subscribe to its shares or securities through issue of a private placement offer letter in Form PAS – 4.

2. A private placement offer letter shall be accompanied by an application form serially numbered and addressed to the person to whom the offer is made specifically and shall be sent to him within thirty days of recording the names of such persons; either in writing or electronic mode. Section 42(7)

3. Person so addressed in the application form shall only be allowed to apply through such application form and any application not adhering to this condition will be treated as invalid.

4.  A company shall not make a private placement of its securities unless –

     

4.1 The proposed offer of securities or invitation to subscribe securities has been previously approved by the shareholders of the company, by a Special Resolution, for each of the Offers or Invitations. Company can pass a special resolution only once in a year for all the offers or invitation for non- convertible debentures during the year.

Company has to File MGT-14 to registrar within 30 days of filing such resolution. The basis or justification for the price (including premium, if any) at which the offer or invitation is being made shall be disclosed in the explanatory statement annexed to the notice for the general meeting. 

4.2 The above mentioned offer or invitation shall not be made to more than 200 persons (excluding invitation made to qualified institutional buyers, or to employees of the company under a scheme of employee stock option) in the aggregate in a financial year.

• Point 4.2 would be applicable for each kind of securities separately i.e. equity shares, preference shares or debentures.
• If point 4.2 is not complied, the offer will be treated as Public Offer and provisions governing Public offer will be binding on company, irrespective of following.

Ø     whether the payment for the securities has been received or not or

Ø  whether the company intends to list its securities or not on any recognised stock exchange in or outside India

• A company cannot advertise or use the media / marketing or distribution channels or agency for the purposes of private placement of shares.
•  A  Company cannot make a fresh offer or invitation unless the allotments with respect to any offer or invitation made earlier have been completed or withdrawn or has been abandoned by the company. Section 42(3)
• The price of the security has to be justified and a valuation report by a Registered Valuer (can be a company secretary, chartered accountant or a cost accountant) is required.

4.3 The value of such offer or invitation per person shall not be less than Rs. 20000 of face value of the securities.

4.4 The payment to be made for subscription to securities shall be necessarily made through the banking Channel by the person subscribing to such securities and not by the cash; the company shall keep the record of the Bank account from where such payments for subscriptions have been received.

4.5 The money so received shall be kept in separate bank account of the company and should not be utilised for purpose other than Allotment of shares or refund of application money.

Analysis of Section 269SS or 269T- Implications of taking or repaying Loan in Cash

Finance, being backbone of any kind of business, has been important for flourishing businesses from past so many years. So it is important in our daily life too where we help our friends, pals, relatives or colleagues in times of crisis and urgency. So often loan is extended and at times it is taken too for various purposes. But few of us know that our tendency to help or seek help from others is always under the scanner of tax authorities. Tax-statute prohibits any payment or receipt of loan or deposit in cash beyond specified limit subject to some conditions. Also, it has been apparent from the judgment of different authorities that even bonafide transactions have been frequently brought under the scrutiny. Adding to grief of taxpayers, the penalty in this regard is too severe.  Below extract will give you more insight on the related sections of Income-tax Act, 1961.

1.   Applicability of Section 269SS and 269T

1.1 Acceptance of loan:

When we accept loan from any person, section 269SS of Income-tax Act, 1961 is attracted. Section 269SS deals with mode of acceptance of loan which states that no person shall after the date 30-6-1984 take or accept from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft, if any of the following amount exceeds 20000.

a)       Any amount of loan or deposit or the aggregate amount of loan or deposit;

b)      On the date of taking loan or deposit, any amount of loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid irrespective of the fact whether re-payment has fallen due or not and

c)       The amount or aggregate amount along with the amount referred to in 1 and 2.

If any of the above bifurcated amount cross specified limit, then provisions of section 269SS become applicable. The provisions of this section shall not apply to any loan or deposit taken or accepted from or any loan or deposit taken or accepted by following.

(i)      Government

(ii)     Any banking company, post office saving bank or cooperative bank

(iii)    Any corporation established by a central, state or provincial act

(iv)    Any government company

(v)     The person having agricultural income from the person also having agricultural income and none of them has any income chargeable to tax under the income tax act.

1.2 For Repayment of Loan:

Similarly when we repay loan to the person from whom it was taken then section 269T become applicable. Section 269T deals with mode of repayment of certain loans or deposits which states that:

No Branch of a banking company or a co-operative bank and no other company of co-operative society and no firm or other person shall repay any loan or deposit made with it otherwise than by an account payee cheque or account payee bank draft in the name of the person who has made the loan or deposit if any of the following amount Rs. 20000 or more.

• the amount of the loan or deposit together with the interest, if any payable thereon or
• the aggregate amount of the loans or deposits held by such person with the branch of the banking
• company or co-operative bank or as the case may be the other company or co-operative society or the
• firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest accrued on it.

2. Guiding factors to section 269SS and 269T

Now question arises that what are those guiding factors which actually invokes these provisions of section 269SS and 269T. These factors are as follows:

2.1     Loan must be taken in personal capacity

2.2   Absence of bonafide belief must be apparent from transaction in consideration

2.3 Loan acceptance or repayment amount inclusive of interest should not exceed  specified limit

2.4 Nature of transactions to decide the applicability of section 269SS and 269T

· Transaction in nature of current account

· Receipt and payment of Partners’ Capital by partnership firm

· Receipt of share application money in cash

· Trade-deposits

These factors decide the applicability of section 269SS and 269T.

Inflation Indexed Bonds- Is it really a buy for you?

Inflation! Whenever we talk about the inflation; the first question, we wary ourselves with, is that, is there any risk free instrument or avenue of beating this ever increasing inflation? What I mean from risk free is; that calculated risk which one rational individual takes, when he invests in real estate or direct equity segment etc. Till few months ago, there wasn’t any, barring conventional Fixed Deposits (FDs) or Recurring deposits (RDs) (which are technically inefficient to fight with inflation).

Finance ministry in its last finance bill promised that government will take proactive steps to control inflation. Ever since that announcement, the option of floating Inflation Indexed Bonds (IIBs) was hovering over the market. The importance of this very subject can be understood from the recent statement of RBI Governor Mr. Raghuram Rajan which is stated as below.

 “Inflation is a disease. Industrialists complain about high rates but we don’t have a choice but to keep them high.”

Before we can come down to nuances of IIBs, it is important to understand its mechanics.

The basic structure of IIBs offer benefits in two forms.

• Real coupon rate or Interest rate
• Inflation rate

 Let’s understand this with the help of an example.

Suppose if you have invested Rs, 10 Lacs in IIBs, coupon rate is 2% and inflation rate for the first year is 10%. Then, your actual payout for first year will be Rs. 20,000 (2% of 10 Lacs) and rest 10% will be paid only at the time of redemption. However, your payout in second year will be Rs. 22000 (2% of Rs. 11 Lacs, (principal adjusted by inflation rate which is 10%).   

Before launching IIBs, it was said that real coupon rate will be paid on regular basis and inflation component will be added to the principal every year and will only be paid at the time of redemption. In this scenario, you will get the inflation component of your investment at the time of redemption only. Hence, the idea was not only to secure your principal from the inflation, but to increase your annual real payout marginally.

IIBs were designed in a manner that real coupon rate over and above inflation rate was to be arrived at via competitive bidding. Hence, the interest of large investors was mainly taken care of and clearly ignoring retail investors. It was also announced that IIBs will be listed in the wholesale debt market and on stock exchanges as well.

Surprisingly, it was not launched by the RBI for controlling inflation, so what went wrong with IIBs?

Even after being so attractive apparently, IIBs didn’t get the response RBI was looking for. Now you must be thinking what could have been the reason? Well, the reason was very simple, IIBs were coupled with the Wholesale Price Index based (WPI) Inflation and not the Consumer Price Index based (CPI) Inflation. As we all know, it is the CPI inflation which is the cause of worry for the investors and not the WPI inflation. Also, WPI inflation is always lower than the CPI Inflation, at least in context of Indian economy.

Hence, seeing the cold reaction from the market RBI pulled its hand out of IIBs and started thinking of a new warrior to fight with inflation for investors. Now, if you are thinking that I am here to KISS (Keep It Simply Social), then, you are wrong. This blog is intended to bridge the gap between reality and illusion of IINSS-C and help you to decide whether you should purchase it or not.

Features of IINSS-C

After failure of IIBs, RBI launched Inflation Indexed National Saving Securities-Cumulative (IINSS-C) to attract the Retail investors. This time IINSS-C was linked to combined CPI (not only CPI); since idea was to attract the retail investors, it avoided any competitive bidding as announced earlier and it came up with a mark-up of 1.5%.

Here are some features of IINSS-C which will give you an overall idea about this product.