The inclusion of two definitions — “private company” and “listed company” — in the Companies Bill, 2012 (“Bill”) raises some questions. Our current understanding of company law suggests that the two terms cannot apply to the same company at the same time. Let us see how the Bill has changed that.
Under Section 3(1)(iii) of the Companies Act, 1956 (“Act”), a “private company” cannot have more than fifty members. The definition in Clause 2(68) of the Bill says a “private company”:
“… means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred…”
So the Bill has proposed that the limit on the maximum number of members that can constitute a private company be increased from fifty to 200.
When is a public offer necessary?
There is a problem when this proposal is read with Clause 42 of the Bill. Clause 42 is part of Chapter III, which deals with the allotment of securities by companies and features in Part II of Chapter III, where private placement is discussed. It states that:
“42. (1) Without prejudice to the provisions of section 26, a company may, subject to the provisions of this section, make private placement through issued of a private placement offer letter.
(2) Subject to sub-section (1), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, [excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62], in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.
Explanation I. – If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter.”
Clause 42(2) will therefore create a contradiction when it becomes law. Private companies are permitted to have more than fifty members but any offer to more than fifty people will amount to a public offer and trigger all the requirements to be fulfilled under Part I of Chapter III of the Bill, which deals with public offers.
Another question arises when we consider the definition of “listed companies” in the Bill. Currently, Section 2(23A) of the Act defines the term “listed public companies”. The Bill, however, defines the term “listed company” in Clause 2(52), thus proposing an increase in the scope of the current definition. The new definition is not limited to public companies and includes any company that has any securities listed on a recognised stock exchange.
The proposed change will impact companies that have so far listed securities like debentures without technically falling within the ambit of the definition of “listed public companies”. Additionally, where such companies are private companies and have offered these securities to more than fifty people, it will be difficult to determine how they are to be treated under the proposals of the Bill.
The proposed definitions therefore, can create a dichotomy in the law — a company can be a private company and still be forced to make a public offer, while remaining a private company under the provisions of the same law. Until this position is clarified, it remains to be seen how securities lawyers and companies issuing securities will tackle it once the bill is notified.
(Deeksha Singh is part of the faculty on myLaw.net.)
3 replies on “Companies Bill – Of public offers and private companies”
Madam nice article. But you should also look at ICDR regulations, which requires that you have to ensure that there is minimum 1000 subscribers to the issue.
That is merely a listing requirement, clarified in the sahara judgment. Even a placement of 400 shares is a public one, if the co is not going for listing. theoritically in law, this is the position.
You are correct in saying that the stipulations in the ICDR Regulations also need to be fulfilled for puclic issues.
The question I am raising in this post is simply one of clarity in the law. If a private company issues shares to, say forty people, there is no issue. However, pursuant to Clause 42, if it issues shares to say sixty people, it still falls under the definition of a ‘private company’, but is required to follow the laws applicable to a public offer.
This is an issue that all private companies will need to contend with once the Companies Bill is notified.