Issue of Securities | Company Law - CLAT PG PDF Download

Introduction

Securities can be issued in various ways, primarily classified into Public, Rights, and Preferential (or Private Placement) issues. While Public and Rights issues follow a detailed procedure, Preferential issues are relatively simpler.

Legal Framework for Securities Issuance

Chapter III of the Companies Act, 2013, titled "Prospectus and Allotment of Securities," outlines the legal framework for issuing securities. This chapter is divided into two parts:

• Part I: Focuses on Public Offers.
• Part II: Covers Private Placements.

According to Section 23 of the Companies Act, 2013, both public and private companies can issue securities. A public company can issue securities in the following ways:

• Public Offer: By issuing a prospectus and complying with the provisions of Part I of Chapter III.
• Private Placement: By adhering to the regulations in Part II of Chapter III.
• Rights or Bonus Issue: In accordance with the Act, and for listed companies or those intending to list, also following the SEBI Act, 1992, and its associated rules and regulations.

Securities Issuance by Private Companies

Methods of Issuing Securities

• A private company can issue securities through:
• Rights Issue or Bonus Issue in accordance with the provisions of the Act.
• Private Placement by complying with the provisions of Part II Chapter III of the Act.

Definition of Securities

• Securities, as per Section 2(81) of the Companies Act, include a variety of financial instruments beyond just equity, preference shares, or debentures.
• The definition of securities is based on the Securities Contracts (Regulation) Act, 1956.

Types of Securities Included

• Shares, Scrips, Stocks, Bonds, Debentures: Marketable securities of incorporated companies or other bodies corporate.
• Derivatives: Financial instruments whose value is derived from other underlying assets.
• Units or Instruments by Collective Investment Schemes: Issued to investors in such schemes.
• Security Receipts: Defined in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
• Mutual Fund Units: Instruments issued to investors under mutual fund schemes.
• Certificates or Instruments by Special Purpose Entities: Acknowledging beneficial interest in assigned debts or receivables, including mortgage debts.

What are Securities?

• Securities refer to financial instruments that hold monetary value and can be traded. They include shares, bonds, and other investment contracts.
• In the context of the Companies Act, 2013, the term "securities" encompasses a range of instruments such as:
• Shares: Represent ownership in a company.
• Debentures: Long-term securities yielding a fixed interest rate, issued by a company and secured against assets.
• Other Instruments: As declared by the Central Government, these can include various types of government securities, mortgage debt, and other financial instruments.

Types of Securities

• Shares: These represent ownership in a company and come with various rights and obligations.
• Debentures: These are a type of debt security issued by a company to raise funds, typically with a fixed interest rate.
• Government Securities: These are debt instruments issued by the government to finance public expenditure.
• Mortgage Debt: This refers to debt secured by a mortgage on property.
• Rights or Interests in Securities: This includes various rights associated with securities, such as options or warrants.

Methods of Issuing Securities

• Public Offer: A public company can issue securities through a public offer, which includes:
• Initial Public Offer (IPO): This is the first time a company offers its shares to the public.
• Further Public Offer (FPO): This is an additional offering of shares to the public after the IPO.
• Offer for Sale (OFS): This is when existing shareholders sell their shares to the public.

Private Placement

• Private placement refers to the offer or invitation to subscribe for securities to a select group of persons, other than through a public offer. This method is often used to raise capital quickly and efficiently.
• The definition of private placement in the Companies Act, 2013 emphasizes the need for accountability and transparency in the process of issuing securities.

Conclusion

• Securities are essential financial instruments that represent ownership or debt in a company.
• Public companies have various methods to issue these securities, including public offers and private placements, each serving different purposes and audiences.
• Understanding these concepts is crucial for investors and stakeholders in the financial market.