Private Companies’ Legitimacy on Issue of Shares in India
Booming business does not necessarily translate shun on the need for help. In fact, it seems the other way around. The bigger the business grows, the more they need to raise capital if only to defray the cost of expansion.
If private companies need capital, India’s Companies Act of 2013 provides legal options in which they can infuse funds. One of them is the issue of shares.
A private company’s issue of shares spares entrepreneurs from the burden of having to go through the tedious government bureaucratic ladders. Hence, it cuts short the process of sourcing out funds, for less.
Issue of Shares by Listed Companies
As a matter of protection of shareholders’ interests, India’s Security Exchange Board invokes Companies Act of 1956. It stipulates the Issuance of Capital and Disclosure Requirements. The act helps ensure fair and proper share issuance by private companies in India.
Listed companies in India are made to comply with a separate government regulation seen to benefit both the private companies and their shareholders.
Issue of Shares by Unlisted Companies
On the other hand, unlisted public companies don’t have public shareholders who don’t require strict regulations.
The issue of shares by unlisted companies is already regulated under the Preferential Allotment rules of Companies Act of 1956. Moreover, even if the act has gone through several amends, the regulations as still in place.
Several big businesses opt to incorporate two separate companies. One helps to push the main business and the other one serves the purpose of infusing funds.
Raising Capital Through Issue of Shares
There are three dominant ways by which a private company having a share capital may increase its subscribed capital by the issue of shares.
- A private company offers to issue shares to existing shareholders, and employees who have a stock option. They can also choose to give the share to any person who has the board’s authorization.
- However, a Board Meeting must approve it within 15 days from the date of allotment.
- This process is aptly referred to as Right Issue. The Companies Act of 2013 covers it under Section 62
- A company may also issue fully paid-up bonus shares to its members through Free Reserves, Securities Premium, and Capital Redemption Reserve
- However, the law provides that a private company cannot tap profit, savings, or reserves just for the purpose of issuing fully paid-up bonus shares. The rule doesn’t apply if there is an authorization or if pre-determination by its Articles of Incorporation.
- India also makes sure that such issue of shares is not borne out of default in payment of interest or principal of fixed deposits or debt securities. The Companies Act of 2013 also does not allow the issue of shares to pay for the employees’ contribution to provident fund, gratuity. Not even for the bonuses.
- The same principle applies to partly-paid-up shares, withdrawal of shares or dividend.
There is one crucial provision which avoids the issue of shares. Citing Section 63 of the Companies Act of 2013, the government strictly observes a 15-day timetable for the company board to approve and make the necessary allotment of funds.
Another Option
Issue of shares by a private company through a private placement offer is another option. Under the private placement scheme, the government’s transparency policy requires them to convene a general meeting where they have to execute a clear declaration on the recipient.
Afterwhich, the company must forward a board resolution to the Registrar within a month. India, however, provides a relaxed period of 60 days to allocate the equivalent funds for the issued shares
Is the Topic at Hand Still Confusing?
A private company could effectively issue shares with the help of a competent corporate service provider in India.
However, choosing the right channel should embark on its track record of excellence, efficiency, and economy. Well, that’s three essential Es for which 3E Accounting in India is known for.
For more information, feel free to contact us.
3E Accounting India
3E Accounting India is a corporate service provider and accounting firm assisting clients with company formation and incorporation. We offer company secretary and business-related services in India.
