Time Limit for allotment of securities under the new Companies Act, 2013

As per Section 23 of the new Companies Act, 2013, a public or private company may issue securities in any of the following manner:

Public Company

  • To public through issue of Prospectus
  • Private Placement
  • Rights Issue or a Bonus Issue

Private Company

  • Rights or Bonus Issue
  • Private placement

Private Placement vis-a-vis Preferential Allotment

Section 42 of the new Companies Act, 2013 deals with private placement. Any offer of securities or invitation to subscribe to securities to 200 persons or less (excluding qualified institutional buyers and employees) in a financial year will be a ‘private placement’ under Section 42(2) of the Companies Act, 2013. Reading the Rule 13 of the of Companies (Share Capital and Debentures) Rules, 2014 makes it is very clear that any preferential allotment by rights issue has to comply with private placement.

As per the amended definition of 2011, ‘preferential allotment’ means allotment of shares or any other instrument convertible into shares including hybrid instruments convertible into shares on preferential basis made pursuant to the provisions of sub section(1A) of section 81 of the Companies Act, 1956. Earlier, preferential allotment envisaged a situation when a listed issuer issues shares or convertible securities, to a select group of persons in terms of provisions of Chapter XIII of SEBI (DIP) Guidelines.

Time Limit for allotment of securities:

Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011 amended the erstwhile Rules of 2003. The 2011 Rules provided that allotment of securities should be completed within 60 days from the receipt of application money. If not so allotted, the company should repay application money within 15 days thereafter, failing which it should be repaid along with an interest at 12% p.a. However, please note that these Rules applied only to unlisted public companies, and no such conditions were prescribed for private companies back then.

Time Limit for allotment of securities under the new Companies Act, 2013:

Under the new Companies Act, Sections 62 & 42 and Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 deals with issue of shares on preferential basis. Rule 13 prescribes that any such issue on preferential basis has to comply with conditions laid down in section 42 of the Companies Act, 2013. Section 42(6) further provides that-

“(6) 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 that money with interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day:

Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.”

Whether such time limitation apply to convertible instruments as well.

Explanation to Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 provides that-

 “Explanation.- For the purposes of this rule, (i) the expression ‘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;

(ii) the expression, “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.”

Thus, it is clear that the restriction regarding the number of days permitted for allotment of securities, as mentioned in Section 42(6) of the new Act will be applicable for convertible instruments as well. It is also to be noted that the provisions for private placement under Section 42 applies to the issue of “securities” and not “shares”.

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