How a Company Raises Money: Public Offer and Private Placement
Chapter Eighteen
Syllabus topic 1.3, "Prospectus & allotment of securities"
Pages 101 to 105 of 830
In one line
A company can raise money in only the ways the Act allows: a public company has three routes and a private company has two, and which route it takes decides which rules apply to it.
In exam wording: section 23(1) provides that a public company may issue securities to the public through a prospectus, through private placement, or through a rights issue or bonus issue; section 23(2) provides that a private company may issue securities only by way of rights or bonus issue or through private placement. Section 24 divides the administration of Chapters III and IV between the Securities and Exchange Board for listed companies and the Central Government for the rest.
Why the law has this at all
The two ways of raising money need completely different regulation, and section 23 exists to sort transactions into the right box before anything else happens.
A public offer is an invitation to strangers. They know nothing about the company except what it tells them, they cannot negotiate, and there may be a hundred thousand of them. The law's answer is compulsory disclosure: a prospectus, filed, dated, signed, with liability attached to what it says.
A private placement is a negotiated deal with a small number of identified people. They can ask questions, take advice and walk away. The law's answer is numerical limits and a ban on advertising, so that a public offer cannot be dressed up as a private one.
A rights or bonus issue goes to people who are already members. They already have the company's accounts and its annual return, so a prospectus would tell them little they do not have.
Section 23 is therefore the sorting hat, and section 24 is the second sorting: who regulates, SEBI or the Central Government.
Some words this chapter uses
Securities is defined by section 2(81) by reference to the Securities Contracts (Regulation) Act 1956 and covers shares, debentures and similar instruments. A public offer is defined in the Explanation to section 23. An initial public offer is a company's first offer of shares to the public; a further public offer is a later one. A rights issue is an offer to existing members in proportion to their holdings, under section 62(1)(a). A bonus issue is a free issue to existing members out of reserves, under section 63. Listed means the securities are traded on a recognised stock exchange.
The three routes for a public company: section 23(1)
A public company may issue securities:
- (a) to public through prospectus (herein referred to as "public offer") by complying with the provisions of this Part;
- (b) through private placement by complying with the provisions of Part II of this Chapter; or
- (c) through a rights issue or a bonus issue in accordance with the provisions of this Act, and in the case of a listed company or a company which intends to get its securities listed, also with the provisions of the Securities and Exchange Board of India Act 1992 and the rules and regulations under it.
How a Company Raises Money: Public Offer and Private Placement
The Explanation defines a public offer, and it is broader than students expect:
"public offer" includes initial public offer or further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus.
So an offer for sale by an existing shareholder is a public offer even though the company is issuing nothing. That is why section 25 deems the offer document to be a prospectus and why section 28 exists.
The two routes for a private company: section 23(2)
A private company may issue securities:
- (a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or
- (b) through private placement by complying with the provisions of Part II of this Chapter.
Route (a) of section 23(1) is missing, and its absence is the point. A private company cannot make a public offer, because section 2(68) requires its articles to prohibit any invitation to the public to subscribe for its securities. Section 23(2) is the same prohibition stated from the other side.
Listing abroad: section 23(3) and (4)
Section 23(3). Such class of public companies as may be prescribed 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.
Section 23(4). The Central Government may, by notification, exempt any class of those companies from any of the provisions of Chapter III, Chapter IV, section 89, section 90 or section 127, and a copy of every such notification shall be laid before both Houses of Parliament as soon as may be after it is issued.
These two sub-sections are the direct listing framework. They matter for the exam mainly as an illustration of how the Act now contemplates Indian companies listing outside India, and of the parliamentary check on the exemption power.
Who administers Chapters III and IV: section 24
This section answers a question students often cannot: when is it SEBI's job and when is it the Government's?
Section 24(1). The provisions of Chapter III, Chapter IV and section 127 shall:
- (a) in so far as they relate to (i) issue and transfer of securities and (ii) non-payment of dividend, by listed companies or those companies which intend to get their securities listed on any recognised stock exchange in India, except as provided in this Act, be administered by the Securities and Exchange Board by making regulations; and
- (b) in any other case, be administered by the Central Government.
How a Company Raises Money: Public Offer and Private Placement
The Explanation removes the doubt that follows. All powers relating to all other matters relating to prospectus, return of allotment, redemption of preference shares and any other matter specifically provided in this Act shall be exercised by the Central Government, the Tribunal or the Registrar, as the case may be.
So SEBI's writ under section 24 is narrow and precise: two subjects (issue and transfer of securities, and non-payment of dividend) for two kinds of company (listed, and intending to list). Everything else stays with the Government, the Tribunal or the Registrar.
Section 24(2) gives SEBI its enforcement toolkit: in respect of the matters in sub-section (1), and matters delegated to it under the proviso to section 458(1), it may exercise the powers conferred on it by sections 11(1), 11(2A), 11(3), 11(4), 11A, 11B and 11D of the Securities and Exchange Board of India Act 1992.
A worked example
Three companies want money. Follow each through section 23.
Vidyut Power Limited, a listed public company, wants three hundred crore rupees from the market. It is a public offer under section 23(1)(a), so Part I of Chapter III applies: a prospectus under section 26, dematerialised issue under section 29, allotment under section 39, and listing under section 40. Because it is listed and the subject is the issue of securities, SEBI administers it under section 24(1)(a)(i).
The same company later declares a dividend and fails to pay it. Non-payment of dividend by a listed company is the second subject in section 24(1)(a), so that too is SEBI's.
The same company wants to reduce its share capital. That is section 66, and it is not "issue and transfer of securities" or "non-payment of dividend". It goes to the Tribunal, and the Explanation to section 24 confirms that all other matters stay with the Central Government, the Tribunal or the Registrar.
Nashik Vintners Private Limited wants two crore rupees. It is a private company, so section 23(2) gives it two routes only. It may make a rights issue to its existing members under section 62(1)(a), or a private placement under section 42. It may not invite the public, and if it tried, it would breach both section 23(2) and its own articles under section 2(68).
Sagar Shipping Limited, an unlisted public company, has a founder who wants to sell forty per cent of his own shares to the public. The company issues nothing. Even so, by the Explanation to section 23 an offer for sale of securities to the public by an existing shareholder through issue of a prospectus is a public offer. So section 25 deems the offer document a prospectus, section 28 governs the mechanics, and prospectus liability under sections 34 to 38 attaches. The company is not listed and does not intend to be, so administration is with the Central Government under section 24(1)(b).
How a Company Raises Money: Public Offer and Private Placement
Distinctions that carry marks
| Public offer | Private placement | Rights or bonus issue | |
|---|---|---|---|
| Section | 23(1)(a), Part I of Chapter III | 23(1)(b) and 23(2)(b), Part II, section 42 | 23(1)(c) and 23(2)(a), sections 62 and 63 |
| Who is invited | The public at large | Identified persons, within the section 42 ceiling | Existing members, and employees under an option scheme |
| Prospectus needed | Yes, section 26 | No, an offer letter instead | No |
| Available to a private company | No | Yes | Yes |
| Advertising | Permitted, subject to section 30 | Prohibited by section 42 | Not applicable |
| Administered by SEBI, section 24(1)(a) | Administered by the Central Government, section 24(1)(b) | |
|---|---|---|
| Which companies | Listed, or intending to list | All others |
| Which subjects | Issue and transfer of securities; non-payment of dividend | The same subjects, for unlisted companies |
| Everything else | Central Government, Tribunal or Registrar, per the Explanation | The same |
What this does NOT mean
It does not mean a private company can never take outside money. It can, by private placement under section 42, which is a genuine and much used route. What it cannot do is invite the public.
It does not mean SEBI regulates everything a listed company does. Section 24(1)(a) is confined to two subjects, and the Explanation puts everything else with the Government, the Tribunal or the Registrar.
It does not mean a public offer requires the company to issue new shares. An offer for sale by an existing shareholder is a public offer under the Explanation to section 23.
It does not mean a company intending to list is treated as unlisted. Section 24(1)(a) covers companies which intend to get their securities listed, so SEBI's jurisdiction attaches before the listing does.
Quick revision
- Section 23(1), public company, three routes: public offer through prospectus; private placement under Part II; rights or bonus issue, with the SEBI Act as well for listed companies or those intending to list.
- Section 23(2), private company, two routes: rights or bonus issue; private placement. No public offer.
- Explanation to section 23: public offer includes an initial or further public offer, and an offer for sale by an existing shareholder through a prospectus.
- Section 23(3) and (4): prescribed classes may list on permitted foreign exchanges; the Central Government may exempt them from Chapter III, Chapter IV, sections 89, 90 or 127, by notification laid before both Houses.
- Section 24(1): SEBI administers Chapters III and IV and section 127, so far as they relate to issue and transfer of securities and non-payment of dividend, for listed companies and those intending to list. Everything else, and every other company, is with the Central Government.
- Explanation to section 24: all other matters relating to prospectus, return of allotment and redemption of preference shares are for the Central Government, the Tribunal or the Registrar.
- Section 24(2): SEBI exercises its powers under sections 11(1), (2A), (3), (4), 11A, 11B and 11D of the SEBI Act 1992.
How a Company Raises Money: Public Offer and Private Placement
Test yourself
1. What are the three ways a public company may issue securities? To the public through a prospectus, that is a public offer; through private placement under Part II of Chapter III; or through a rights issue or bonus issue, and for a listed company or one intending to list, also in accordance with the SEBI Act 1992: section 23(1).
2. May a private company make a public offer? No. Section 23(2) gives it only a rights or bonus issue and private placement, and section 2(68) requires its articles to prohibit any invitation to the public to subscribe for its securities.
3. Is an offer for sale by an existing shareholder a public offer? Yes. The Explanation to section 23 expressly includes an offer for sale of securities to the public by an existing shareholder through the issue of a prospectus.
4. Which matters does SEBI administer under section 24? Chapters III and IV and section 127, so far as they relate to the issue and transfer of securities and to non-payment of dividend, and only for listed companies or those which intend to get their securities listed. All other cases are administered by the Central Government.
5. A listed company wants to reduce its share capital. Is that SEBI's jurisdiction under section 24? No. It is neither issue and transfer of securities nor non-payment of dividend. By the Explanation to section 24, all other matters are exercised by the Central Government, the Tribunal or the Registrar; capital reduction under section 66 goes to the Tribunal.
6. What check applies to an exemption granted under section 23(4)? A copy of every such notification shall, as soon as may be after it is issued, be laid before both Houses of Parliament.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.