Private Placement, Rights Issue, and Advisory Shares issued by a Private Limited Company
In the dynamic world of business, the issuance of equity shares is a common practice adopted by private limited companies to raise capital. This process, while beneficial, is governed by a set of rules and regulations under the Companies Act. In this article, we will delve deep into the nuances of issuing equity shares, focusing on rights issues, private placement, and advisory shares.
1. Understanding Equity Shares in a Private Limited Company
Equity shares represent ownership in a company. When a private limited company issues these shares, it’s essentially offering a piece of its ownership to investors. The primary objective is often to secure funds for expansion, debt repayment, or other business needs.
2. Rights Issue of Shares
A rights issue is a way for companies to raise capital by giving existing shareholders the right to purchase additional shares at a discounted price. This method ensures that the company’s ownership remains largely with the existing shareholders.
Relevant Section of Companies Act: Section 62(1)(a) deals with the rights issue of shares. It mandates that the offer made to existing shareholders be in proportion to their current shareholding.
3. Private Placement of Shares
Private placement is a method where shares are sold to a select group of investors, rather than the open market. This is often preferred when the company wants to raise capital discreetly without the regulatory burdens of a public offering.
Relevant Section of Companies Act: Section 42 of the Companies Act, 2013, governs the private placement of shares. It lays down the procedure, including the need for a special resolution, the preparation of an offer letter, and the filing of a return of allotment.
4. Advisory Shares
Advisory shares are typically issued to mentors, advisors, or professionals who offer their expertise to the company without a regular salary. Instead of cash compensation, they receive shares, ensuring they have a vested interest in the company’s success.
While the Companies Act doesn’t have a specific section dedicated to advisory shares, it’s essential to draft clear agreements detailing the terms of issuance, roles, and responsibilities.
5. Rules Around the Issue of Shares
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Pricing of Shares: The price of shares issued through private placement or rights issue should be determined by a registered valuer.
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Utilization of Funds: The funds raised through the issue of shares should be utilized for the purpose mentioned in the offer letter.
- Separate Bank Account: In the case of Private Placement, a separate bank account has to be opened to receive the share subscription account.
Conclusion
The issuance of equity shares by a private limited company is a strategic decision, influenced by various factors. While it offers a robust mechanism to raise funds, it’s imperative to be well-versed with the legal implications. Companies must adhere to the provisions of the Companies Act to ensure transparency, protect shareholders’ rights, and foster trust.