The Securities and Exchange Board of India (SEBI) vide its press release dated 31 December 2015 has notified that any offer or allotment of securities shall be considered as public issue if the number of offerees / allottees exceeds 200 persons in a financial year under the Companies Act, 2013 as against the cap of 49 persons provided in the Companies Act, 1956. It further provide that in cases involving issuance of securities to more than 49 persons but up to 200 persons in a financial year, the companies may avoid penal action if they had provided the investors with an option to surrender the securities and get the refund amount at a price not less than the amount of subscription money paid along with 15% interest p.a.

PRIOR LAW

Prior to April 01, 2014, offers of securities - shares and debentures - by companies to more than 49 persons were deemed to be public offers. SEBI has initiated penal action on receipt of specific complaints against the companies offering such securities without complying with the relevant provisions of the Companies Act, 1956 and applicable SEBI Guidelines / Regulations governing a public issue. The companies making a public offer are required to issue a public offer document and an offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations.

DEEMED ISSUE

  • Issuance of securities to more than 49 persons but up to 200 persons in a financial year would constitute a deemed public issue. The company/promoters can avoid penal action if they had provided the investors with an option to surrender the securities and get the refund amount at a price not less than the amount of subscription money paid along with 15% interest p.a. thereon. Therefore unlisted companies can now raise funds without issuing a public offer document
  • The exit may be provided by the company itself or by the promoters or by such persons as arranged by the company / promoters.
  • The refund shall be made through recognized banking channels.
  • The companies will be allowed to adjust the amounts already paid to the allottees either as interest, dividend or otherwise from the amount of refund to be paid to investors.
  • In case of transfer of securities by the original allottees, option for refund may be provided to the current holders of the securities.
  • The refunds made by the company following the option for refund exercised by investors would be certified by independent practicing Chartered Accountants / practicing Company Secretaries / practicing Cost Accountants.

CONCLUSION

The Companies Act, 2013 provides for a higher cap with respect to private placement. The maximum number of allottees has been increased to 200 from 49 as provided in the Companies Act, 1956. If a company, whether listed or unlisted makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than 200 persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognized stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of the Companies Act,1956. Therefore it was necessary to bring consistency between the provisions dealing with public offer and private placement.

The proposal has taken into account the interest of investors while recognising their right to stay invested in case they feel it is beneficial to them. By providing a guaranteed payment of subscription amount plus interest at 15 percent p.a, the investors interest has been secured shielding him from the volatility of the market. At the same time, the investors can continue to hold on to their if the proposition seems favorable to them thereby insuring them against potential risks.

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