India: Capital Raise Made Easy…?

The Companies Act, 2013, ('New Act') attempts to consolidate all the methods available to a company to raise capital. Chapter III and Chapter IV of the New Act sets out all the methods by which any company, whether private or public, could raise capital.

Chapter III is divided into 2 distinct parts. Part I deals with capital raise by a public company, whether listed or unlisted, and also expands the rights available to the Securities and Exchange Board of India ('SEBI'). Part II codifies the methodology of Private Placement dealt by Section 67 of the Companies Act, 1956 ('Old Act'). Section 67 came to be part of the public discourse owing to the pronouncements in the now infamous Sahara Judgement.1

A public company can raise capital by issuing securities to the public through issue of prospectus or by way of Private Placement to select individuals. As always, a public company can also issue securities by way of rights issue or bonus issue to the existing shareholders of the Company. Here, a public offer includes an initial public offer as well as further issue of shares or an offer for sale made to the public. A private company can raise capital by way of (a) Private Placement; (b) through rights issue; or, (c) preferential allotment.

Private Placement

The Fifty Seventh Report of the Standing Committee on Finance notes that the provisions of the Private Placement were introduced to prevent misuse of existing provisions on the matter, to protect the interest of the investors and to synchronize the provisions with SEBI regulations / norms. We see that Painstaking efforts have been made to address the issues that arose in the Sahara case. Unlike Section 67 of the Old Act which referred to 'shares and debentures', the New Act refers to securities which is wider in scope. This is intended to ensure that even issue of hybrid instruments, as in the case of Sahara, would be within the ambit of Private Placement.

A company can offer securities by way of a private invitation to not more than 200 persons in a financial year. The said limit does not include qualified institutional buyers and employees of the company who are offered securities under an ESOP scheme. Other conditions including the form and manner of Private Placement are governed by the rules. If an offer is made to more than the prescribed number of persons, regardless of the fact that the company has not received the consideration or that it does not intend to list the securities on a stock exchange, such issuance will be deemed to be a public issue.

Though this provides the companies with a viable alternate method of raising capital, the condition which requires the minimum offer to be at least INR 20,000 of the face value of the securities will prevent this from being a truly viable option for the small investors.

It has been contended that any issue of capital has to be by way of Section 62 and that provisions relating to Private Placement are not a code by themselves. Hence, any issuance by way of Private Placement has to be supported by necessary actions under Section 62. This argument is advanced on the basis that the entire requirements relating to preferential allotment of shares under Section 62 (1) (c) and under Rule 13 of the Companies (Share Capital and Debenture) Rules 2014 ("Rules") is rendered entirely redundant and would never need to be complied with under any scenario whatsoever if Private Placement is treated as a code in itself. It is argued that this would defeat the entire purpose of the specific requirements relating to preferential allotment of shares, and in fact would render the sub-section and rules thereunder redundant or otiose. Further the fact that Chapter IV, which is titled 'Share Capital and Debentures', deals with further issuance of shares by any company could be a valid argument to state that any issuance of shares by a company should be duly authorized under the provisions of Chapter IV.

On the other hand, given the fact that the process under Section 42 binds any issuance under Section 62 and there is no corresponding requirement for such compliance in case of issuance under Section 42, it is hard to dismiss Section 42 as being only ancillary to Section 62. Section 42 (9) of the Act authorises filing of return of allotment of shares issued through a Private Placement process, which by itself lends credence to the argument that Section 42 is a complete code in itself and need not turn to Section 62 for the purposes of issuance. Further provisions of Section 23 provide modes by which public and private companies may issue shares. It provides three modes for a public company for issue of shares; (i) to public through a prospectus, (ii) through a private placement and (iii) and by way of a rights issue or bonus issue. The same modes are also available to a private company except that the issue of shares to public through a prospectus is not permitted. This again seems to indicate that the Companies Act recognizes private placement as a separate and independent mode of issuance particularly since Section 23 states that private placement issue should be in compliance with Part II of the Companies Act (i.e. Section 42) and does not make any reference to Section 62.

Rights issue

The New Act extends the right of pre-emption to the shareholders of a private company as well which until now was available only to the shareholders of a public company. Under Section 62 of the New Act, a company limited by shares, if it intends to issue additional securities, is bound to offer such securities to the existing shareholders of the company. Equity shareholders will be entitled to participate pro rata their equity shareholding in the paid up capital of the company. Such company can also offer new shares to its employees by way of employee stock option if such offer is approved by way of a special resolution.

The New Act does away with the exemption available to private companies under Section 81 (3) of the Old Act. Henceforth any offer to a third party by a private company will have to be authorised by the shareholders by way of a special resolution as well as a valuation report. Under the Old Act, provisions pertaining to rights issue were applicable upon earlier of expiry of 2 years from the formation of a company or at any time after the expiry of 1 year from the allotment of shares in that company made for the first time after its formation. This exemption is no longer available and the companies are bound to offer additional shares to its existing equity shareholders no matter the time of issue.

The New Act also specifies the minimum and the maximum duration for which the offer should be kept open thus providing much needed clarity in this regard. The New Act also clarifies that the board will be entitled to dispose of the shares at its will if the offer is declined by the equity shareholders within the offer period without waiting out the expiry of the offer period. However, such disposal should not be disadvantageous to the interests of the shareholders and the Company. This should be construed in light of the duty that was imposed under the Old Act which asked of boards to dispose of shares "in such manner as they think most beneficial to the company." The New Act imposes a higher duty of care on the board in exercise of its discretionary powers when compared to the duty imposed under the Old Act.

As the exemption available to private companies stands repealed, any company which wishes to make a rights issue of shares will be bound to offer it to the equity shareholders of the company. Hence preference shareholders will not be entitled to participate in such issuance in exercise of their rights of pre-emption which are routinely included in shareholders agreements. It needs to be seen how the contractual rights of preference shareholders under suchshareholders agreements will be reconciled with the provisions of the New Act.

Preferential Allotment

As noted earlier, the conditions relating to preferential allotment are now applicable to private companies as well. Any issuance by way of preferential allotment needs to be supported by a valuation report issued by a 'registered valuer'. However, it fails to specify the valuation method to be adopted for arriving at the said valuation. Rule 13 (1) states that any issuance of preferential basis should also comply with conditions laid down in Section 42 of the Act.

However, it fails to clarify if a preferential allotment will be bound by all the conditions laid down in Section 42 and whether such preferential allotment is bound to comply with the rules prescribed under Section 42 as well. This clarification will be key to ensure that a preferential allotment can be made without going down the Private Placement route given the inherent limitations. Further, Rule 2(h) prescribed for Preferential Allotment states that if convertible securities are offered on preferential basis then the 'the price of the resultant shares shall be determined beforehand on the basis of the valuation report.' However, what it fails to clarify is whether setting out the conversion ratio of the convertible securities which is subject to future adjustments will amount to compliance with this requirement since the extant FDI policy provides an option of setting out a conversion formula at the time of issuance of convertible instruments. It has been also been argued that if the conversion price is within the price band determined by the Registered Valuer for the proposed allotment then the allotment could be deemed as compliant with the requirements of Clause (h) set out above. Hence necessary clarification will be crucial in light of the fact that many deem that Section 42 is not a code in itself and hence all issuances need to have roots in Section 62.

It is noteworthy that Rule 13 (1)(ii) defines "securities and shares" to include any security which is convertible or exchangeable with equity shares. Given this definition, one could argue that redeemable/ non-convertible securities cannot be issued through the preferential allotment process and would have to be issued by way of Private Placement. If this is not the intention of the legislature then necessary clarification should be provided in this regard.

Bonus Issue

The New Act includes a separate provision with regard to bonus issue which was earlier subsumed under Section 205 of the Old Act. A company is entitled to issue bonus shares (a) out of its free reserves; (b) securities premium account; or, (c) capital redemption reserve account. The bonus issue cannot be made by capitalizing reserves created by the revaluation of assets. A company can issue bonus shares if (a) it is authorised by its articles; (b) it has on the recommendation of the board, been authorised in the general meeting; (c) it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it; (d) it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus; (e) the partly paidup shares, if any outstanding on the date of allotment, are made fully paid-up; (f) it complies with such conditions as may be prescribed.

Similar to the conditions set out in the Issue of Capital and Disclosure Requirements ('ICDR Regulations'), a company is prohibited from issuing bonus shares in lieu of dividend.


Fifty Seventh Report of the Standing Committee on Finance notes that the number of companies has expanded from about 30,000 in 1956 to nearly 8 lakh companies. Given the ubiquitous nature of the private companies, the New Act tries to provide protection to shareholders of the private company on par with a public company. Introduction of the valuation report as a pre-requisite to issuance to third parties shows an attempt at protecting shareholders from unjust dilution and is expected to empower the shareholders to make informed decisions. Legislators have also made efforts to bring clarity to private placement to ensure that the Sahara episode is not repeated in the future.

However, in an attempt to protect the shareholders and to codify the issuance processes, the legislature has inadvertently introduced greater confusion. The overlapping nature of Private Placement and Preferential Allotment has made the process more cumbersome. By extending all the provisions of Private Placement to a Preferential Allotment, the legislature has ensured that almost all the issuance processes are riddled with unnecessary procedure and compliance requirements which appear to serve no discernible purposes. We hope that the legislators will, in keeping with the past practice, introduce necessary clarifications which will help all the stakeholders reap the benefit of this sleek new legislation without being bogged down by unwarranted complexities.


1. Sahara India Real Estate Corporation Limited & Ors. v. Securities and Exchange Board of India & Anr.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions