Section 23 of the Companies Act, 2013 – Public Offer and Private Placement

Section 23 of The Companies Act, 2013 reads as –

Public offer and private placement.—

(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; or

(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 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 (15 of 1992) and the rules and regulations made thereunder.

(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.

Explanation.— For the purposes 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.

Section 23 of the Companies Act defines the regulatory framework for the issuance of securities by both public and private companies. This section outlines the permitted methods for capital-raising while ensuring compliance with the prescribed legal standards.

Below is a comprehensive overview of the key provisions under this section.

Issuance of Securities by a Public Company

• Public Offer

Public companies have the ability to issue securities to the general public through a process known as a public offer. This involves the following key elements:

• Prospectus Requirement: A public offer must be conducted through a prospectus, a formal document that provides investors with essential details about the company, the securities on offer, and associated risks. The prospectus promotes transparency and helps investors make informed decisions.
• Legal Compliance: The issuance of securities via a public offer must adhere to the specific provisions set forth in this Part of the Companies Act. This ensures that public offerings follow a legally sound process and meet regulatory standards.

• Private Placement

Public companies also have the option to issue securities through private placement. Key aspects of private placements include:

• Regulatory Requirements: Private placements must comply with the provisions of Part II of this Chapter of the Companies Act. Unlike public offers, private placements involve offering securities to a select group of investors, allowing for a controlled and targeted capital-raising process.
• Rights Issue and Bonus Issue

Public companies can also issue securities via rights issues or bonus issues, as per the Companies Act:

• Rights Issue: This method enables existing shareholders to buy additional shares in proportion to their current holdings. It allows the company to raise additional capital while maintaining shareholder equity.
• Bonus Issue: A bonus issue involves allocating additional shares to existing shareholders at no extra cost, serving as a reward for their investment in the company.
• SEBI Compliance: If a public company is listed or intends to be listed on a stock exchange, it must comply with the Securities and Exchange Board of India (SEBI) Act, 1992, along with applicable rules and regulations governing listed entities. This ensures adherence to fair trading practices and transparency norms.

Issuance of Securities by a Private Company

• Rights Issue and Bonus Issue

Private companies can also issue securities via rights issues or bonus issues, in accordance with the Companies Act. These methods help enhance the company’s capital structure while benefiting existing shareholders.

• Private Placement

Similar to public companies, private companies can raise capital through private placement. The issuance of securities via private placement must align with the provisions set forth in Part II of this Chapter of the Companies Act. These regulations ensure that private placements maintain transparency and legal integrity.

Definition of Public Offer

For the purposes of this Chapter, the term “public offer” encompasses various forms of securities offerings, including:

• Initial Public Offer (IPO): The first issuance of securities to the public, enabling a company to transition from private to publicly traded status. This allows the company to raise significant capital and provides liquidity to early investors.
• Further Public Offer (FPO): A subsequent offering of securities after an IPO, typically undertaken to raise additional funds for expansion or new business ventures.
• Offer for Sale: This occurs when existing shareholders, such as promoters or venture capitalists, sell their shares to the public rather than the company itself. It provides an opportunity for new investors while enabling current shareholders to liquidate their holdings.

Issuance via Prospectus

All public offerings, including IPOs, FPOs, and offers for sale, must be carried out through the issuance of a prospectus. This requirement ensures transparency and provides investors with critical information necessary for making informed investment decisions.

This article is presented by CA B K Goyal & Co LLP Chartered Accountants, your trusted partner in audit and compliance solutions. For expert assistance, feel free to contact us.