Private Companies and Securities

Section 2(68) of Companies Act, 2013 defines private companies. According to that, private companies are those companies whose articles of association restrict the transferability of shares and prevent the public at large from subscribing to them.
Shivani Kharai
March 16, 2021

The term ‘Company’ means a class of people associated together for a common goal or purpose such as business, incorporated under law. Section 2(20) of Companies Act, 2013 defines Company as a company incorporated under this Act or under any previous company laws.” Though this definition does not give a clear view as to what is company. The company is divided into following categories.

· One person company (Section 2(62))

· Private limited company (Section 2(68))

· Public company (Section 2(71))

What is a private company?

As per section 2(68) of Companies Act, 2013 the private companies are those companies whose articles of association restrict the transferability of shares and prevent the public at large from subscribing to them. This is basic criteria to distinguish a private company from a Public company. The section further says that a private company can have two minimum members and the maximum number of members is 200, except for one Person Company. Two persons or more, who own shares jointly are treated as a single member. Where there is a prohibition on an invitation to the public to subscribe for any securities, private placement basis may be opted for the issue of shares as per section 42 of the Act. Private companies can have a minimum paid-up capital of any amount as per an amendment in 2005.

Features of Private companies:

· No Minimum capital is required, previously it was 1 lakh but it has amended now as no minimum capital required.

· A private company can have minimum two and maximum 200 members.

· Transferability of shares are restricted, they cannot transfer their shares to the public like public companies.

· All private companies must add the word “private limited” or Pvt. Ltd after their company names.

· Since private companies do not freely transfer their shares and involve limited interest by members, the law has granted them exemptions and some privileges as well, that public companies do or do not enjoy.

Types of Private Company

Private companies are generally of three types:

· Limited by shares, the liability of members is limited to the amount unpaid to the company with respect to the shares held by them.

· Limited by guarantee, the member’s liabilities are limited to the amount of money they guarantee to pay in case the company is wound up.

  • Unlimited liability, the liability of members is unlimited in this type of private companies. Personal assets of members can be attached and sold when the company is being wound-up.

Securities Under Companies Act, 2013

According to section 2(81) of Companies Act, 2013 defines securities as defined in clause (h) of Section 2 of Securities Contracts Regulation Act, 1956. It is defined as “Securities include Shares, debentures, bonds, scrips, stocks, debenture stocks etc. in incorporated Company, Derivatives, Units issued by Collective Investment Scheme, Units or instruments issued to the investors under any Mutual fund scheme, Government Securities, such other instruments, rights, interest therein that may be declared by the Government to be securities. In simple words Securities means traded financial instruments or those financial instruments which can be bought or sold. Anything which is financial instrument but cannot be traded or transferred is not securities. For example, fixed deposits with banks are non-transferrable in nature and cannot be termed as securities.

Can private companies issue securities?

From the definition of securities it is clear that the private companies can issue the securities and can have members and shareholders, but their shares cannot be traded on public exchanges. Private company shares are not issued through an initial public offering (IPO). Basically, the shares of private companies are less liquid since it is traded amongst few closely connected investors and public participation is not allowed. Also, it is difficult to determine the market value of shares of private companies.

Modes of issue of securities by Private Company

The Private Companies can issue securities through following modes of securities under the Companies Act, 2013:

1. Private Placement

Section 42 of the Companies act, 2013, Explanation II of Sub Clause 2, “Private placement” means 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 an issue of a private placement offer letter and which satisfies the conditions specified in this section.”

· Such offer or invitation to subscribe securities through Private Placement offer can be made to a maximum of two hundred persons in total in a financial year. The said ceiling of total number of individuals is calculated separately for various types of security i.e. equity share, preference share, debenture. [Rule 14(2)(b) of the Companies (Prospectus and Allotment of Securities) Rules, 2014]

  • Each person should make a minimum Investment of Rs. 20,000/- of the nominal value of the securities. [Rule 14(2)©]
  • Provisions of Rule 14(2) (b) and © are not applicable to ‘non-banking financial companies’ and ‘housing finance companies’.
  • As per section, explanation I of section 42(2) of The Act, if a company, listed or unlisted, makes an offer to invites subscription, or offer securities to more than the number prescribed and if the offer is not made in accordance with the provisions of section 42(2), then the offer shall be Deemed as a Public offer and in such case provisions of Public offer shall govern the offer and not Section 42.
  • As per section 42(8) advertising of such an offer are banned.
  • As per section 42(3) If a particular offer or invitation has not been withdrawn or disowned by the company than no new offer or invitation shall take place.
  • Section 42(10) says that in case of contraventions of any of the provisions discussed above the company shall be liable to pay a penalty which may extend to the amount raised through private placement or two crore rupees, whichever is lower.

2. Bonus Issue

Section 63 of the Act defines as bonus shares are shares in addition to the existing shares given to the shareholders of the company with no extra cost but are based on the number of shares already held by the shareholder of the company.Section 63(1) of The Act talks about from where these bonus shares are given to the shareholders. According to this section issue of bonus shares shall be out of:

  • Its free reserves
  • Securities premium account
  • Capital reserve redemption account

As per section 63(2), bonus shares cannot be issued under sub-clause (1) of section 63 unless the following conditions are fulfilled under the Act.

3. Right Issue

Right Issue means when the shares are offered to members of the company in proportion to their shareholdings. The rationale behind this issue is that there will be equal distribution of shares and the voting rights should not get affected by the issue of new shares.

According to Section 62(1) of the Companies Act, 2013, a company decides to increase its subscribed capital by the issue of further shares; this can be done by offering shares to the shareholders of the company in proportion to persons who are already holders of equity shares of the company:

· By offering shares to the employees under the employees stock option scheme.

· Or by offering shares to any person, whether or not those people are covered under sub-section (a) and (b) to section 62(1).

As per Companies Act 1956, there was no requirement for a private company to make the right offer, though it was later observed that the matter should be authentic and motives should be honest and straightforward for it to be made.

Conclusion

Private companies can issue securities as they have their own modes of doing so. Public companies has its options limited in regard to the private placement, bonus issue and right issue and it can never make a public offer or undertake an IPO. Generally, the high cost of undertaking an IPO and motive of private ownership are some of the reason why some people prefer it to be a private company.

Get Started.
Talk to an expert.
Simply enter your details and our legal expert will contact you to get started.
Looks good.
Our counsel will contact you shortly.
Your details have been submitted. We are getting the best legal advisor for you.
Oops! Something went wrong while submitting the form.