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Public Offer and Private Placement under Section 23 of Companies Act

Private companies that seek to raise capital through issuing securities have two options: offering securities to the public or through a private placement.
Written by:
Simran Bhullar
Published on
25-Jul-18

No business can run without funding. Private companies that seek to raise capital through issuing securities have two options: offering securities to the public or through a private placement. Regulations on publicly traded securities are subject to more scrutiny than those for private placements. Each offers capital but the criteria for issuing, ongoing financial reporting and availability to investors differs with each type of issue.

An initial public offering, or IPO, is the first issue of security made for sale on the open market. These issues are under regulation by the Securities and Exchange Commission, or SEC, and require financial reporting on a regular basis to remain available for trade by investors.

Private companies that seek to raise capital through issuing securities have two options: offering securities through a public offer or through a private placement. Regulations on publicly traded securities are subject to more scrutiny than those for private placements. Each offers the necessary capital but the criteria for issuing, ongoing financial reporting and availability to investors differs with each type of issue.

 

An initial public offering, or IPO, is the first time a particular issue of a security is made available for sale on the open market. These issues are under regulation by the Securities and Exchange Commission, or SEC, and require strict financial reporting criteria on a regular basis to remain available for trade by investors.

Though the underwriting firms such as Goldman Sachs or Morgan Stanley that bring the issue to market hold shares to sell to their clients at the initial sales price, average investors can obtain the shares once they begin trading in the secondary market. IPOs can be a risky bet for investors, as there is no previous market activity to evaluate. This is why reading the IPO prospectus report and gaining any knowledge about the company is crucial before investing.

Private placement offerings are securities released for sale only to accredited investors such as investment banks, pensions or mutual funds. Some high-net-worth individuals may also purchase the shares through these options. Companies using private placements generally seek a smaller amount of capital from a limited number of investors.

According to Section 23 of the Companies Act, 2013, companies have two options for getting funding, a public offering or a private placement. Each option has distinct features that affect funding costs and/or the timing of a bond issue.

A public or private company can issue capital by issuing ‘securities’. Section 23 of the Act reads as follows:

Section 23 of Companies Act, 2013 deals with Public offer and private placement and states that:

(1) A public company may issue securities-

  • to public through prospectus (herein referred to as "public offer") by complying with the provisions of this Part; or

  • through private placement by complying with the provisions of Part II of this Chapter; or

  • through a rights issue or a bonus issue in accordance with the provisions of this Act and in 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 made thereunder.

(2) A private company may issue securities-

  • by way of rights issue or bonus issue in accordance with the provisions of this Act; or

  • through private placement by complying with the provisions of Part II of this Chapter.

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.”

Only a public company can issue public offer. Sections 23 to 41 under Part I of Chapter III of the Companies Act are applicable to public companies for issue of its securities through prospectus; referred to as a ‘public offer’. A Public offer includes issue of securities by way of initial public offer (IPO) or further public offer (FPO). A Public offer also includes issue of securities to the public through a prospectus by way of an offer for sale by an existing shareholder.

In a public offering, the issuer publicizes the anticipated bond issue and provides a fixed time frame and platform for which bids will be accepted. The issuer also provides any additional guidelines or details related to the bond issue. Generally, the winning bidder is the one who has offered the lowest of total interest costs. The two methods by which an issuer can sell bonds to the public are: negotiated sale and a competitive sale.

Private placement can be used to issue securities by private companies and public companies. Under private placement, funding is provided through direct negotiation with one or a select number of private financial institutions. In general, private placements do not have to be registered with the Securities and Exchange Commission and do not require majority of disclosure requirements found in public offerings. As such, private placement bonds are not publicly issued or publicly traded and typically do not require a rating from a credit rating agency.

It is advised to talk to a corporate lawyer in India to understand public offer and private placements. Connect to the best corporate lawyers near you through MyAdvo. Email us at info@myadvo.in or call us at +919811782573.