Equity Funding under The Companies Act, 2013

The article 'Equity Funding under The Companies Act, 2013' by Soniya examines the various methods of equity funding available to companies, such as public and private offerings, rights issues, and preferential allotments. The article also discusses the legal requirements, procedures, and compliances that companies need to adhere to when raising equity capital.

By understanding the provisions of the Companies Act, 2013 related to equity funding, companies can ensure compliance and effectively utilize this financing method to fuel their growth and expansion.

Introduction

In general parlance, Funding means providing money or otherwise assistance such as equity or debt to an entity to increase its value in the market. The fundamental of any entity is Funds. Funding can be in the form of Equity and Debt. Equity holders do not create any charge or security over an asset of the company on the contrary, debt creates charges whether fixed or floating over assets of the company. For a well-functioning company, there shall be an ample mix of both equity and debt. In India, Companies who want to issue shares shall abide by:

a) Companies Act, 2013 and Rules made thereunder.

b) Securities Contract Regulation Act, 1956 and Rules made thereunder.

c) Securities and Exchange Board of India Act, 1992, and the Rules and Regulations made thereunder.

There are the following ways through which a Company raises funds under the Companies Act, 2013:

1. Public offer

2. Private Placement

3. Depository receipts

4. Sweat Equity Shares

5. Right Issue

6. Employees Stock Option Scheme

7. Preferential Offer

1. Public Offer:

The foremost way of raising funds is through public offer. A public limited company can issue its shares to the public. Public offer may further be divided into two parts i.e.,

a) Initial public offers: Public may purchase shares of a company by subscribing to their shares in an initial public issue (IPO). The first time issuing shares of an unlisted company to the public is initial public offers.

b) Further public offers: Public may purchase shares of a company by subscribing to their shares in further public issue (FPO). A company with its securities already listed at any stock exchange i.e., a listed company, when issuing its further shares to the public is a public issue.

Who can purchase shares under Public Offers?

Any person i.e., An individual, any corporate entity, financial institutions, institutional buyers, venture capital funds, or any other funds or institutions as may be permitted on this behalf can apply to public offer purchase shares or become a shareholder to the company. Shares can be purchased physically or in dematerialized form. However, to ensure transparency and corporate governance SEBI has made it mandatory to hold shares in a dematerialized form. In case of the death of a shareholder, the rights attached to such shares shall be exercised by his legal heirs or nominees. Shares can be taken up jointly. In the joint holding of shares, a notice of meetings or other reports shall be communicated to the first name holder.

Procedure to Offer Shares in Public

The Procedure for public offer has been enunciated under Chapter III of the Companies Act, 2013, it is summarised below

• The company is required to prospectus to the public in which all the information on the performance of the company, proposed agendas, future goals, valuations, etc. are written. In case where the prospectus is a Red-Herring prospectus, the company fixes the amount and quantity of the shares through the book-building method.
• A prospectus is required to register with the Registrar of Companies having jurisdiction before being issued to the public.
• Once the prospectus (in which amount and quantity stated) is issued, it is required to be subscribed by the public by giving their willingness to purchase such quantity of shares at a pre-determined price.
• The company receives the willingness of the proposed shareholders. In case where the issue is over-subscribed, it rejects some of the applications or makes pro-rata allotments.
• Now, the shares are being issued to the applicants. Upon allotment of shares, the applicants will become Shareholders of the Company.
• In the case of Secondary market purchase, a person may purchase shares through his Dematerialised A/c from a stock exchange at STK price. The only parties involved in this type of transaction are a Seller who wants to sell a pre-determined quantity at a fixed price and a Purchaser who wants to purchase a pre-determined quantity at a fixed price.
• The allotment shall be made to the consented shareholders.
• The Company shall deliver the share certificates or credit the Dematerialised account of the shareholders.

2. Private Placement

Companies offer private placements to a selected group of persons. The public is not a party to such type of issues of shares. The main advantage of private placement is that disclosure requirements and the costs are less than public offer.

Who can purchase shares under Private Placement?

The company shall issue such shares only to the Identified Persons as Identified by Board. These identified persons are the selected persons under the definition of private placement. The maximum number of selected persons shall be 200 persons. It is to be averred that, Qualified Institutional Buyers (QIBs) and Employees who receive shares under the Employees' Stock Options shall not be included in 200 persons.

Procedure to Offer Shares through Private Placement

The procedure for public offer has been enunciated under Chapter III of the Companies Act, 2013, it is summarised below:

• Company (Whether listed or unlisted) offers or invites applications for the private placement of securities (either shares or debentures) to selected persons by issuing an offer letter.
• The applicants give their willingness to purchase the securities by subscribing their names to a certain quantity of securities and paying the amount out to the Company.
• After receiving the subscription money from selected persons allotment of securities takes place.
• The Company shall deliver the share certificates or credit the Dematerialised account of the shareholders.
• In case where Company is not able to allot the securities within the prescribed time period, it is required to refund the amount to the applicants within such time as may be prescribed.
• In case of failure of refund of application money by the Company, the interest will be levied at a specified rate.

3. Depository Receipts

A company can issue Depository receipts overseas to raise funds. Depository Receipts are negotiable financial instruments that is to say, it is transferable from one person to another. It is not limited to equity shares only but debt or bond securities are also available under the depository receipts. In cases where Depository receipts are being issued in America known as American Depository Receipts (ADRs) or any other country known as Global Depository Receipts (GDRs). A foreign company can also issue depository receipts in India to raise funds from the Indian Securities market known as Indian Depository Receipts (IDRs).

Acts and Laws

In India, Companies who want to issue Depository Receipts overseas shall abide by:

a) Companies Act, 2013 and Rules made thereunder.

b) Securities Contract Regulation Act, 1956 and Rules made thereunder.

c) Securities and Exchange Board of India Act, 1992, and the Rules and Regulations made thereunder.

d) Ministry of Finance

e) Depository Receipts Scheme, 2014

Who can purchase Depository Receipts?

Any person or foreign investor outside India can purchase Depository Receipts issued by an Indian Company.

Procedure to Offer Depository Receipts

The provisions of Depository receipts are enumerated under Chapter III of the Companies Act, 2013, the procedure is summarised below

• Issuing Company (Indian Company) enters into an agreement with an Overseas Domestic Bank to issue a certain quantity of shares at a certain price in the overseas securities market.
• Overseas Domestic Bank issues shares to Foreign Investors. The allotment shall be made to such investors by crediting their Dematerialised account.
• The Company shall amend the Register of Members by entering therein the particulars of Depository Receipts issued overseas.

4. Sweat Equity Shares

Sweat Equity Shares are equity shares offered at a discount. In other words, a company issue equity shares to its employees against certain value additions to its positions, which are offered at a price less than the market price at which it is being issued to the public. It is the only exception of a company cannot issue its shares less than the face value. It encourages the employees of a company to give their exertions at their best. The main advantage of issuing sweat equity shares is that it leads to devoting employees toward the company.

Who can purchase shares under Sweat Equity Shares?

The Company shall issue such shares to an existing Employee or Director of the Company an employee or a director of holding or of a subsidiary company against the value additions or any technical know-how provided by them in its intellectual property

Procedure to Offer Shares through Sweat Equity Shares

The Procedure for Sweat Equity Shares has been enunciated under Chapter IV of the Companies Act, 2013, it is summarised below

• The company is required to pass Special Resolution in the meeting. An explanatory statement shall be annexed to the Notice of the special resolution containing the total number of shares to be issued, the valuation of the shares, The value of technical know-how provided, the names of the employees or directors to whom such shares shall be issued etc.
• Sweat Equity Shares to be issued by the company shall not be more than 15% of paid-up equity share capital or 5 crores, whichever is higher.
• The company shall prepare the list of employees or directors to whom Sweat Equity Shares shall be given and finalize it.
• The company thereafter determines the value additions made by such employees or directors, these valuations shall be determined on the basis of a valuation report by a Registered valuer.
• The shares shall be issued to the consented employees or directors thereto, Transactions under these shares shall be locked for 3 years.
• The Company shall deliver the share certificates or credit the Dematerialised account of the shareholders.

5. Right Issue

A Company can issue its equity shares to its existing equity shareholders at the same price at which it is being offered to the public. This offer shall be deemed to include the Right of Renouncement. In other words, equity shareholders can renounce (in whole or in part) the right in favour of some other person. In some emergent conditions, where the loan has been borrowed by the company from the Government, by way of debentures, the Government may require conversion in the public interest.

Who can purchase shares under Right Issue?

Existing Equity shareholder is solely entitled to purchase shares under Right Issue. In some cases, the Government is also entitled under Right Issue by way of conversion of debentures issued by it to the company.

Procedure to Offer Shares through Right Issue

• The procedure for the Right issue has been enunciated under Chapter IV of the Companies Act, 2013, it is summarised below
• There shall be a clause in the Articles of Association of the Company permitting Right Issue, in case of its absence, the Company is required to amend its Articles.
• The company is required to pass Special Resolution in the meeting. An explanatory statement shall be annexed to the Notice of special resolution containing the total number of shares to be issued, the time limit within which the right should be exercised, etc.
• A Notice shall dispatch to the existing shareholders at least 3 days after the opening of the issue.
• The Notice shall state therein in the case where the offer has not been accepted, it shall be deemed to decline.
• The allotment shall be made to the consented shareholders.
• The Company shall deliver the share certificates or credit the Dematerialised account of the shareholders.
• In the case where the offer is not accepted or the time mentioned in the notice has been expired or rejected, the Board shall dispose of them in such a manner which is disadvantageous to the Company.

6. Employees Stock Option Scheme

It is an option given to the Employees or Directors of the Company to purchase equity shares at a pre-determined price at a pre-determined date. Where a company wants further issue of shares it is required to offer by way of firstly, Right issue secondly, Employees Stock Option Scheme, and lastly, to any person. If employees do not consent to such an issue, the company then shall look forward to other options to offer their shares.

Who can purchase shares under the Employees Stock Option Scheme?

Equity shares under the Employees Stock Option Scheme shall be purchased by a Permanent employee of the company or a Director of the Company subject to such conditions as may be prescribed or an employee or a director of holding or of a subsidiary company. However, an independent director of the Company is not entitled to purchase shares under the Scheme.

Procedure to Offer Shares through Employees Stock Option Scheme

The procedure for the Employees Stock Option Scheme has been enunciated under Chapter IV of the Companies Act, 2013, it is summarised below

• There shall be a clause in the Articles of Association of the Company permitting Right Issue, in case of its absence, the Company is required to amend its Articles.
• The company is required to pass Special Resolution in the meeting. An explanatory statement shall be annexed to the Notice of special resolution containing the total number of shares to be granted, the pre-determined price, The maximum period within such options to be vested, the names of the employees or directors to whom such shares shall be issued etc.
• The company is free to determine the price of such shares which shall be in accordance with accounting policies and proper disclosure of reaching such price shall be made.
• The options given under the shares shall be vested after the expiration of the minimum vesting period of 1 year. The shareholder shall not be entitled to any right under such shares till the option is exercised.
• The Company shall deliver the share certificates or credit the Dematerialised account of the shareholders.

7 Preferential Offer

Where a company wants further issue of shares it is required to offer by way of firstly, Right issue secondly, Employees Stock Option Scheme, and lastly, to any person. The part of “ANY PERSON” is being discussed here. Where, shares are not issued by way of Public offer, Private placement, Depository receipts Sweat Equity Shares, Right Issue, or Employees Stock Option Scheme, such issue is known as a Preferential Issue.

Who can purchase shares under a Preferential Offer?

Any class of persons as specified on this behalf by the company can purchase shares under the Preferential Offer. The preferential issue is given to the selected class of persons therefore, it is often confused with private placement. The main difference between private placement and preferential issue is that an issue upon which the provisions relating to private placement are applicable to a selected group of persons whereas preferential issue is offered to a class of persons.

Procedure to Offer Shares through Preferential Offer

The procedure for Preferential offer has been enunciated under Chapter IV of the Companies Act, 2013, it is summarised below

• There shall be a clause in the Articles of Association of the Company permitting Right Issue, in case of its absence, the Company is required to amend its Articles.
• The company is required to pass Special Resolution in the meeting. An explanatory statement shall be annexed to the Notice of the special resolution containing the total number of shares to be issued, the price or the price band for allotment, objects of issue, the class of persons to whom such shares will be issued, etc.
• The company shall prepare the list of classes or classes of persons to whom the Preferential issue shall be given and finalize it.
• The company thereafter determines the price at which shares shall be issued on the basis of a valuation report by a Registered valuer.
• The allotment shall be made to the consented shareholders.
• The Company shall deliver the share certificates or credit the Dematerialised account of the shareholders.

References

[1] Companies Act, 2013

[2] Securities and Exchange Board of India Act, 1992

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