Fundraising for businesses was an arbitrary practice without any formal guidelines and regulations before Companies Act 2013. Due to lacunae of legal provisions in Companies Act 1956, many a times, corporate with fraudulent mindset have found their way to dupe investors and public of their hard-earned money. It has created many legal disputes and controversies. Now, new Companies Act and the consequent rules have formally covered all the modes of fund-raising and have tried to fill in the loopholes of old law. Stringent rules and cumbersome compliances are to ensure safeguard of the public money and restrict the malpractices. But these provisions have created confusion in respect of implementation and compliances. The easy availability of funds for businesses in real need has also dried up. MCA must come out some clarification to give breathing time to companies specifically for private companies.

1. Fund Raising:
A Combat for Corporate Houses

2. Modes Available For Indian Companies For Raising Funds

3. Private Placement
A Genre for raising funds

4. Ambit of Private Placement
Preferential
Offer
Issuance of
Redeemable
Preference
Shares
Issuance of
Redeemable
Debentures
Section 42 read with
Rule 14 of the Companies
(Prospectus and Allotment of Securities) Rules, 2014
Bible for all types
of issues to a
specific group of
persons
Section 62 read with Rule 13
of the Companies
(Share Capital and Debentures) Rules, 2014
Section 55
read with
Rule 9 & 10
the
Companies
(Share
Capital and
Debentures)
Rules, 2014
Section 71 read with Rule 18
the Companies (Share Capital
and Debentures) Rules, 2014

5. Framework Governing Issuance of specific class of Securities
If the Company proposes to issue Redeemable Preference Shares, then it is required
to comply:
1.Conditional Based Provisions:
Section 42 read with Rule 14 of the
Companies (Prospectus and Allotment of Securities)
Rules, 2014
2. Procedural Based Provisions:
Section 55 read with read with Rule 9 & 10 the
Companies (Share Capital and Debentures) Rules,
2014

6. Instruments Available For Raising Funds via Private Placement Route

7. Private Placement as per Section 42 of the Act
For the 1st time in Indian legal history, the term “Private Placement” has been
defined under the Companies Act 2013
Private Placement has been specifically defined to mean any offer of securities or
invitation to subscribe securities to a select group of persons by a company (other
than by way of public offer) through issue of a private placement offer letter.
Securities as defined in clause (h) of Section 2 of the
Securities Contracts (Regulation) Act, 1956
Securities Securities as defined in clause (h) of Section 2 of the
Securities Contracts (Regulation) Act, 1956
Companies Act, 2013 seeks to regulate issue of all types of securities and not just
shares and debentures

8. Securities as per Securities Contract (Regulation) Act, 1956
As per Clause (h) of Section 2, Securities include:
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company
or other body corporate;
(ia) derivative;
(ib) units or any other investments issued by any collective investment
scheme to the investors in such schemes;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central
Government to be securities; and
(iii) rights or interest in securities.
Use of term ‘securities’ instead of ‘shares’ - Use of the term shares in the Companies Act,
1956 restricted the dictatorial roof for issuances of various other instruments by Company to
raise funds. Companies manipulated this loophole by using other terminology or
nomenclature for instruments used to raise funds, thereby easily escaping the
regulatory oversight.

9. Scandals that lead Lawmakers to enact Stringent Provisions

10. Why Stringency in Provisions??
· Lacunae in the legal provisions of the Companies Act, 1956 regarding private placement
have lead to increase in malpractices. :
o Provisions of the Companies Act, 1956 were narrow and covered under its ambit
only shares and not all securities, while SEBI defines the term ‘securities’
o While a private placement could be made only to a maximum of 49 persons at one
go, there was no provision to prevent companies from convening multiple board
meetings to approve such allotments. As a result, companies started calling several
meetings and made allotment to 49 allottees at each such meeting, thereby
manipulating the law.
o Companies also took advantage of the overlapping of powers between the MCA and
SEBI to make multiple private placements.
The landmark judgment in the Sahara Case has set the direction for private placement code and
the Companies Act, 2013 draws heavily out of the principles enunciated by the Apex Court

11. Ambit of Listed Companies as per Companies Act, 2013
A company which has any of its securities listed on any recognized
stock exchange.
Meaning thereby
The company even if having its debentures/preference share listed on
any recognized stock exchange is now deemed to be considered as
the Listed Company.
For the Preferential offer, the Listed Companies are required to comply with
SEBI (ICDR) Regulations, 2009 in addition to Section 42.

12. Private Placement in terms of Section 42 of the Act:
A Stringent Regime governing all types of Companies
Offer in One FY
• 200 investors excluding QIB and ESOP
Limit would be reckoned
individually for each class of
security (i.e. Equity, Debentures,
Preference Shares, )
Conditions related to Private
Placement
• Prior approval of Shareholders is required to be obtained via Special Resolution
For Non-Convertible Debentures, a previous special resolution in respect of all
the offers during one year can be obtained.
• Justification or basis for the offer price to be disclosed in the Explanatory Statement
calling General Meeting
• * Minimum face value investment size of Rs 20,000 per person
• Cash receipt prohibited
The above mentioned limit of 200 investors and Rs 20,000/- Face Value of Investment shall not be applicable to:
•NBFC Companies; and
•Housing finance companies;
Provided they comply with the Regulations made in respect of offers on private placement basis, by RBI or National Housing Board.
However, if RBI or NHB have not specified any similar regulations, even such companies would be required to comply with the
provisions of these Conditions.

13. Private Placement in terms of Section 42 read with Rule 14 of
the Companies (Prospectus and Allotment of Securities) Rules, 2014
Conditions related to Private
Placement
• Maintenance of complete database of the persons to whom the offer to subscribe to the
securities is proposed to be made
• Offer of Securities will be made only through personalized offer letter to such persons
whose names are recorded prior to the invitation to subscribe
• Maintenance of Record of the Bank Account of the Applicants
• Allotment to be made within 60 days from the date of receipt of application money, else
refund within 15 days from the date of completion of 60 days
• In the event of non-refund within the stipulated time period, repay with 12% interest p.a.
from the expiry of sixtieth day.
• Minimum gap between two offers to be not less than 60 days
• No fresh offer to be made unless previous offer is completed
• Share application money to be kept in Separate Bank Account.
• * Transfer of securities is permitted

14. Disclosures Required under Offer Document
• General Information about the Company
• Factors that directly impact the business of the Company
• Details of default, if any, including therein the amount involved, duration of default and present status,
in repayment of –
I. statutory dues;
II. debentures and interest thereon;
III.deposits and interest thereon;
IV.loan from any bank or financial institution and interest thereon.
• Details of Issuance of Securities
• Disclosures with regard to interest of Directors, Litigation etc.
• Financial Information of the Company

15. Preferential Offer
As per Explanation to Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014,
‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or
group of persons on a preferential basis and does not include shares or other securities offered through a
public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of
sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign
securities.
“shares or other securities” means equity shares, fully convertible debentures, partly convertible
debentures or any other securities, which would be convertible into or exchanged with equity shares at a
later date.
Section 62 read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014
pertaining to issuance of Equity Shares & other convertible securities.
Provides Procedural Framework

16. Main Highlights of Section 62 read with Rule 13 of the
Companies (Share Capital and Debentures) Rules, 2014
Main Highlights of Preferential Offer
• Prior approval of Shareholders is required to be
obtained via Special Resolution
• Allotment to be made within 12 months from the date of
Special Resolution
• Mandatory Disclosures in the Explanatory Statement to
the Notice calling General Meeting:
a. intention of the promoters, directors & KMPs
b. Change in control, if any, consequent to the
preferential offer
c. Justification for the allotment proposed to be made for
consideration other than cash
d. Details of the proposed allottees along with post
preferential shareholding
e. Basis on which price is arrived along with the report of
Registered Valuer

17. Who are presently covered under the ambit of
Registered Valuers
Till the time provisions related to Registered Valuers are not notified,
Valuation of Stock, shares, debentures, securities, etc.
Shall be done by an Independent Merchant Banker or
by Independent Chartered Accountant in Practice
having minimum experience of 10 years.

18. Registered Valuers as per Section 247 of the Companies Act, 2013
(Yet to be Notified)
Registered Valuers as per Section 247 of the
Companies Act, 2013
Financial Valuer Technical Valuer
Stock, Shares,
Debentures,
Securities,
Goodwill
Stock, Shares,
Debentures,
Securities,
Goodwill
Property
Persons eligible to apply for being Registered as
• A Chartered Accountant, Company
Secretary or Cost Accountant in
whole time practice or retired
member of Indian Corporate law
Service or any other person as
prescribed.
• A Merchant Banker registered with
SEBI and which has in employment
under it CA/CS/CWA for carrying out
(signing) Valuation by such qualified
persons.
Valuer
• Member of the Institute of
Engineers or Member of the
Institute of Architects in whole
time practice.
• A person or firm or LLP or
Merchant Banker possessing both
qualifications may act in dual
capacity.
Shall have 5
Years of
Continuous
Experience,
Post
Qualification
Shall have 5
Years of
Continues
Experience, Post
Qualification
Registered
Valuer to be
appointed by
Audit
Committee or in
its absence by
the Board of
Directors.

19. Issuance of Redeemable Preference Shares
Section 55 read with Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014
pertaining to issuance and redemption of preference shares.
Provides Procedural Framework
Main Highlights for issuance of Redeemable Preference Shares:
a.Prior approval of shareholders via Special Resolution is required for issuance of
Redeemable Preference Shares;
b.Maximum tenure for redemption of preference shares shall not exceed 20 years;
c.Enhanced disclosure requirement in the Explanatory Statement to the Notice calling
General Meeting of the Shareholders;
d.Specific requirement of making disclosures of certain parameters in the shareholders’
resolution that have a direct bearing on the interest of shareholders’.

20. Relaxation for Issuance of Redeemable Preference Shares by
Infrastructure based Companies
Company Engaged in Infrastructural Projects
May Issue
Preference Shares for a maximum period of 30 years.
Provided option be given to preference shareholder for
redemption of a minimum 10% preference shares per year
from the 21st year onward or earlier.

21. Issuance of Redeemable Debentures
Section 71 read with Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014
pertaining to issuance and redemption of Debentures
Provides Procedural Framework
Main Highlights for issuance of Redeemable Debentures:
a.Creation of Charge or mortgage on securities;
b.Maximum tenure for redemption of Debentures shall not exceed 10 years;
In case of Company engaged in setting infrastructure projects, maximum tenure
for redemption is 30 years.

22. Procedural Aspects under Private Placements
• Filing of Form MGT 14 with ROC: In compliance with the provisions of Section 117(1) of
the Companies Act 2013, a copy of special resolution along with the Explanatory Statement
is required to be filed within 30 days from the date of passing of the said resolution.
• Preparation of a private placement offer letter in terms of Form PAS-4: In terms of
Rule 14(1)(a) of the Companies (Prospectus and Allotment of Securities) Rules,
2014: A Company may make an offer or invitation to subscribe to securities through issue of a
private placement offer letter in Form PAS-4.
• Filing of private placement offer document in Form PAS-5 within 30 days from the
date of circulation of the private placement offer: In terms of Section 42(7) read with proviso
to Rule 14(3) of the Companies (Prospectus and Allotment of Securities) Rules,
2014
• Filing of Form PAS 3 with ROC within 30 days of allotment of securities: As per Section
42(9) of the Companies Act, 2013 read with Rule 14(4) of the Companies
(Prospectus and Allotment of Securities) Rules, 2014
• Maintenance of Register of holders of securities in compliance with the provisions of Section 88 of
the Companies Act, 2013

23. Penal Provisions for contravention with the stipulations of
Private Placements
If a Company makes an offer or accepts monies in contravention with the provisions of
Section 42, its promoters & directors shall be liable for a penalty which may extend to:
(a)The amount involved in the offer or invitation; or
(b)Rupees 2 Crores,
And
Whichever is higher
The Company shall also refund all monies to subscribers within 30 days of the order
imposing the penalty.

24. Industry Concerns with the promulgamation of New Provisions
Nowadays, one of the major dilemma that Corporate Houses are facing as to how to
deal with the application money outstanding in the books of accounts as on 1st
April, 2014?
As per Section 42(6) of the CA’13,
“A company making an offer or invitation under this section shall allot its securities within sixty days from
the date of receipt of the application money for such securities and if the Company is not able to allot the
securities within that period, it shall repay the application money to the subscribers within fifteen days from the
date of completion of sixty days and if the Company fails to repay the application money within the aforesaid
period, it shall be liable to repay the money with interest at the rate of twelve percent per annum from the
expiry of the sixtieth day.”
As per Rule 1(c)(vii) of The Companies (Acceptance of Deposits) Rules, 2013:
Deposits does not include
“any amount received and held pursuant to an offer made in accordance with the provisions of the
Act towards subscription to any securities, including share application money or advance towards
allotment of securities pending allotment, so long as such amount is appropriated only against the
amount due on allotment of securities applied for”.

25. Industry Concerns with the promulgamation of New Provisions
Contd…
Explanation: For the purpose of this sub-clause, it is hereby clarified that-
(a)Without prejudice to any other liability or action, if the securities for which application money or advance
for such securities was received cannot be allotted within sixty days from the date of receipt of the application
money or advance for such securities and such application money or advance is not refunded to the
subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a
deposit under these rules.”
Further, Clause 6 of General Clauses Act, 1897 that clearly demonstrates that unless a different intention
appears, the Repeal shall not affect any right, privilege, obligation or liability acquired, accrued or incurred
under any enactment so repealed.
On applying the principles of harmonious construction, can it be construed
that the intent of the statute is to regulate only the application money received
under this Act?

26. Industry Concerns with the promulgamation of New Provisions
Section 42(7) of the Act mandates the Companies that the offer shall be made only to
those persons whose names are recorded prior to invitation to subscribe and only
such persons should receive the offer. The said provisions would lead to practical
difficulties in raising funds via Qualified Institutional Placement, a route prescribed by
SEBI ICDR Regulations.
As per SEBI ICDR Regulations, the Company can make offer to
“n” no. of QIBs and if they find potential in the Company’s
business, they will accept the offer accordingly.

27. Industry Concerns with the promulgamation of New Provisions
SEBI presently allows listed Companies to come out with Warrant issues, however,
Companies Act restricts the issuance of warrants as the term securities does not cover
issuance of Warrants. In such scenario, what would be the status of Warrants that have
already been issued by the Listed Companies. Would it also tantamount to outstanding
share application money?
If Company is having its Debt Securities Listed then whether such Company is
required to comply with the SEBI ICDR Regulations or Rule 13 of the Companies
(Share Capital and Debentures) Rules, 2014 for issuance of Equity or other
convertible Securities?
As per FEMA, the allotment to be made to foreign investor within 180 days from the
date of receipt of Share Application Money whereas as per Companies Act, 2013, the
allotment is required to be made within 60 days from the date of receipt of application
money. Whether the allotment is supposed to be made within 60 days or 180 days from
the receipt of application money from Non-Resident?

28. 09/20/14
Public Issue
A Genus for sharing ownership podium with Public

29. REGULATORY FRAMEWORK FOR PUBLIC ISSUE AS PER COMPANIES
ACT 2013
Part I of Chapter III: Prospectus & Allotment of Securities
Section 23 to 40 of the Act read with
•The Companies (Prospectus & Allotment of Securities) Rules, 2014

30. Public Issues
• Source of Promoter’s contribution in prescribed manner
• * Summary of Reservation or adverse remark of auditors and the related
party transaction since last five financial year
• * Acts of material frauds committed against the company in the last 5
years, if any,
• Any litigation or legal action pending or taken by any Statutory Body
against the Promoters during last 5 years.
Disclosure in
Prospectus –
Sec 26
Offer of Sale
– Sec 28
• Offer for sale now specifically defined in the 2013 Act
• A document for OFS shall be deemed to be prospectus
• Persons desiring to make an OFS shall authorise company to
take necessary actions for OFS and reimburse all the expenses
• No option to get physical allotment of shares in IPO
• Shares to be compulsorily allotted in Demat form by a company
making an IPO and other prescribed classes of companies
• Advertisement of prospectus to specify main objects, liability of
members, amount of share capital, details of subscribers to MOA and
Capital Structure

31. Liability for Mis-statements
Mis-statement
Untrue
Statement
Misleading
Statement
Liability
Civil - Sec 34 Criminal -Sec 35
Min 6
mths
Max 10
Yrs
Min Amt
Involved
Max 3x Amt
Involved
Compensate
those who have
suffered loss or
damage
Withdrawal of consent after issue but before allotment now not a
defense
In case of a fraud every person involved personally liable without
limitation of liability
Civil Liability for
Mis-statements

32. Impersonation – Sec 38
Impersonation
Fictitious Name
Multiple Applications
Different Names Different Combination
Shall be punishable as fraud under Section 447
Imprisonment: Min. 6 months &
Max 10 years, subject to Min. term
of 3 years where public interest is
involved.
Fine: May extend to 3 times of the
amount involved in the Fraud.
For the first time, the provisions related to money siphoning are introduced

33. Public Issues…..
Fraudulent Inducement for Investing money -Sec 36
• Scope of section extended to obtaining credit facilities
from banks or financial institutions
• The offence made non compoundable
• Stringent punishment prescribed under section 447
Allotment of Securities – Sec 39
• Return of allotment to be filed for issue of any kind of security
• Power given to SEBI to modify the minimum amount to be paid
on application which shall not be less that 5% of the nominal
amount
• Minimum subscription to be received in 30 days as against
earlier 120 days. Power to SEBI to modify the same

34. Variation in terms of Contracts or Objects – Sec 27
I want to change the terms of
contracts referred to in
prospectus or objects of the
Issue ?
Its easy pass an
ordinary resolution in
general meeting
Its no
longer easy
Revised Process

35. Concerns in the provisions of Public Issues…

36. Concerns pursuant to the enactment of new provisions governing
Public Issue
As per Section 26(2)(b) of the Companies Act, 2013, in the event of Follow-up Public Offer
(FPO), the provisions governing the content of Prospectus will not apply.
That means the Companies coming out with FPO are primarily required to comply
with SEBI norms only and are not required to comply with the Parent Law.
In Rule 5 of the Companies (Prospectus & Allotment of Securities) Rules, 2014, the
word “issue of shares and debentures” is used whereas Chapter III deals with
“issuance of securities”
The free use of terminologies will lead to anomaly and open the avenues for
malpractices.

37. Rights Issue
Section 62(1)(a)

38. Companies Act 2013:
A Breather for Companies for raising funds via Rights Issue
o Dispensation from the provision that the Company can raise funds only
after the expiry of 2 years from incorporation or 1 year from date of 1st
allotment post formation, whichever is earlier;
o Now the maximum time period for acceptance of offer is 30 days
(i.e. min 15 days & max 30 days);
o The requirement to dispatch letter of offer either registered post or speed
post or through electronic mode to all the existing shareholders at least 3
days before the opening of the issue.

39. Rights Issue:
Proposed Relaxation for Private Companies
Taking into consideration the shareholders’ base in Private Companies, it is
proposed to relax the time period stipulated for giving offer to the existing
shareholders :
Stipulation as on date for all
Companies
Proposed stipulation for Pvt. Cos.
Minimum: 15 days
Maximum: 30 days
Minimum: 7 days
Maximum: 15 days

40. Rights Issue:
May be considered as another egress for excavating Scams
On one hand, to plug all the loopholes that existed under the extant 1956 Act,
the Regulators thought it prudent to make stringent conditions, so that the
managements are left with no excuses to flout the laws.
This has been very well reflected in the Private Placement code
prescribed under the New Act
But then why there appears to be a lenient approach when it
comes to right issue?
Merely, because the fund raising is from existing shareholders or
the law makers have not given a thought as to how this route
can also be used for siphoning money from innocent investors.

41. Whether the New Provisions are acting as a Barrier for the Growth of the
Industry??
Scams that took place in the recent past have paved the way for framing
stringent provisions under Companies Act, 2013.
But that stringency in the provisions have exaggerated the practical concerns in
Raising funds by the Corporate Houses.
Govt. intervention would be required to chalk out a path
that leads to a win-win situation of resolving problem of
fund raising by Corporate Houses on one hand and
protection of interest of stakeholders on the other.

42. Thank You
Pavan Kumar Vijay
Corporate Professionals Capital Private Limited
09/20/14
D-28, South Extension –I, New Delhi-110 049
Ph: +91.11.40622200; Fax: +91.11.40622201; E: pkvijay@indiacp.com