Topics for End Terms for LCF:

1. Profit Maximisation and shareholder concept

2. Module 1 and Module 2 in entirety
3. IPO vs FPO - process not as important, who are promoter group, elgiibility criteria - Section 62 criteria,
ESOP Scheme
4. Green shoe option - price stabilising mechanism, only activated in case of post listing of shares in IPO (as
after 3 days shares are to be listed), in case shares are listed low.
5. Fast Track - certain compliances are reduced, some options not available, SEBI scrutiny compliance is
reduced.
6. Private Funding - you can skip AIF, and you can skip. Crowdfunding in any case not allowed to issue equity.
7. Non-fund based: can be asked in different ways
8. Registration of charge - whenever you avail any form of borrowing

ECB Study Points Pt. 2

1. ECB is not only pure loan, but also complex products such as FCCB/FCEB
2. Why ADR and GDR aren’t covered? Because the underlying security is equity, not borrowing
3. Masala Bond - the term isn’t used so, but Indian denominated currency, that itself is the masala bond, first
time launched in 2014. Everything covered in ECB.
4. Rest instrument, other than ECB - uniform guideline for all, go through company law aspect.
5. Master Circular vs. Master Directions

ECB Study points:

1. Parking of funds
2. What is FCCB/FCEB - write it in the form of concept, which scheme, which Directions etc.
3. For Debentures - as per companies act. Floating outside India, it is ECB policy/scheme - maturity, lender,
etc. Of course, ADR/GDR is not part of it.
MODULE 1: INTRODUCTION TO THE LAW OF CORPORATE FINANCE
1. Understanding the concept of corporate finance and its importance
2. Concept of Project Finance
3. Difference between Corporate Finance and Project Finance

MODULE 2: FINANCIAL MANAGEMENT

2. Principles of Corporate Finance

Investment decision
Financial decision
Dividend decision
3. Capital Reconstruction
Concept of “Capital”
Alteration of Share Capital
Reductions of Share Capital
 MODULE 4: DEBT FINANCE

Overview

1. Debentures- Nature, Issue and Types

2. Creation of charge

3. Debt funding: Indian fund-based

· Bonds
· Bank Finance
o Overdrafts
o Cash Credits
o Bill Finance
o Hire Purchase
Debentures Section 2(30) of Companies Act, 2013, “debenture” includes debenture stock, bonds
or any other instrument of a company evidencing a debt, whether constituting a
charge on the assets of the company or not.

Types

§ On the basis of Convertibility

o Non-convertible debentures
o Partly convertible debentures
o Full convertible debentures
o Optionally convertible debentures

§ On the basis of security

o Secured
o Unsecured

§ On the basis of redemption ability

o Redeemable debentures
o Perpetual/irredeemable debentures: A Debenture, in which no time is
fixed for the company to pay back the money, is an irredeemable
debenture. The debenture holder cannot demand payment as long as
the company is a going concern and does not make default in
making payment of the interest. Irredeemable debentures cannot be
issued after Companies Act, 2013.

§ On the basis of registration

o Registered debentures: Registered debentures are made out in the
name of a particular person, whose name appears on the debenture
certificate and who is registered by the company as holder on the
Register of debenture holders. Such debentures are transferable in
the same manner as shares by means of a proper instrument of
 transfer duly stamped and executed and satisfying the other
requirements specified in Section 56 of the Companies Act, 2013
o Bearer debentures: Bearer debentures on the other hand, are made
out to bearer, and are negotiable instruments, and so transferable by
mere delivery like share warrants.

Debenture v. Loan: Debenture is a form of loan but not all loans are debentures.

Issue of more than 500 requires the appointment of a debenture trustee(s).

Issue of Debentures can be issued in three ways:

Debentures [S.
1. Public Offer (by issuing prospectus): Need to appoint debenture trustees
23 Companies
Act] 2. Private placement

3. Rights/Bonus Issue
Public issue § A public issue may be defined as an offer for subscription by a company of its
securities to the general public.

§ Public issue v. IPO: IPO is a form of Public issue. There could also be FPOs.
Public issue is governed by SEBI (Disclosure and Investor Protection)
Guidelines, 2000. These Guidelines have been framed by SEBI to facilitate and
regulate different forms of capital offerings by companies and other related and
ancillary issues.

§ Three types of public issues: IPO, FPO, and Rights issue.

DIP Guidelines define a Public Issue to mean an invitation by a Company to the

public to subscribe to its securities offered by a prospectus.
Essentials of a As per the DIP guidelines, the following three are required for a public issue:
public issue
§ A prospectus

§ An invitation to the public

The offer must be to subscribe to the securities of the company

Private § “Private placement” means any offer or invitation to subscribe or issue of securities
Placement to a select group of persons by a company (other than by way of public offer)
through private placement offer-cum-application, which satisfies the conditions
[S. 42(3)]
specified in this section.
Rule 14(2) of
(Prospectus and § The number shall not exceed fifty or such higher number as may be prescribed [200
Allotment of as prescribed under Sub-rule (2) to Rule 14 of the Companies (Prospectus &
Securities) Allotment of Securities) Rules, 2014] in a financial year.
Rules.
§ QIBs and employees have to be excluded from private placement.

Securities have to be issued within 60 days and if not done, money has to be repaid
within fifteen days from the expiry of sixty days and if not done, 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.
Preferential The term “Securities” play a crucial role in interpretation of these two terms.
offer v. Private Allotment of any kind of security on a private basis which attracts provisions of
Placement Section 42 is called as Private Placement of Securities whereas allotment of equity
shares or securities convertible into equity shares attracts both Section 42 and 62(1)(c)
and called as Preferential Allotment of securities. Any procedural compliance under
Section 62(1)(c) shall be in addition to that of Section 42 but not in substitute of the
same. In simple words, Preferential Allotment means Private Placement of equity
shares or convertible securities.

· For issue of non-convertible debentures: Private Placement [S. 42(3)]

· For issue of convertible debentures: Preferential Allotment [S. 62(1)(c)]

Bonus Shares When a company is prosperous and accumulates large distributable profits, it
converts these accumulated profits into capital and divides the capital among the
existing members in proportion to their entitlements. Members do not have to pay
any amount for such shares.

According to section 63(1), a company may issue fully paid-up bonus shares to its
members, in any manner whatsoever, out of—

§ its free reserves;

§ the securities premium account; or

§ the capital redemption reserve account.

No bonus shares shall be issued unless:

§ It is authorized by AoA.

§ It is authorized in general meeting of the company on the recommendation of the

board.

§ No default w.r.t. statutory dues or payment of interest/principal.

§ the partly paid-up shares, if any outstanding on the date of allotment, are made fully
paid-up.

Bonus shares cannot be issued in lieu of dividend.

Rights issue v. The key difference between bonus issue and rights issue lies in their purpose and
Bonus issue impact on shareholders. A bonus issue offers additional shares to shareholders for
free, using the company's reserves. In case of rights issue, shareholders purchase new
shares at a discount. It aims to raise fresh capital for the company.

Creation of Charge can only be created when a loan is acquired from a limited number of
charge on persons. If debentures are raised from the general public, charges are created in the
debentures name of debenture trustees who hold the charge on behalf of the general public.
They enforce the charge in case of default and are listed to all debenture holders.

CHARGE
S. 2(16) of ‘charge’ means an interest or lien created on the property or assets of a company or
Companies Act any of its undertakings or both as security and includes a mortgage. [includes both
property and assets]

“interest” is legal share in something. Any right, privilege, power or immunity is

“interest”.

“lien” is simply a right to retain a property unless a claim attaching to it is satisfied or

discharged.
S. 100 of TPA Where immoveable property of one person is by act of parties or operation of law
made security for the payment of money to another, and the transaction does not
amount to a mortgage, the latter person is said to have a charge on the property; and
all the provisions hereinbefore contained 4[which apply to a simple mortgage shall, so
far as may be, apply to such charge
Fixed charge v. · Fixed charge is a charge on a definite property which can be ascertained
Floating charge and the company cannot dispose of the property without the consent of the
charge holder. However the company is allowed to use it for business
purpose. Generally fixed charge is created on fixed assets such as plant and
machinery.

· Floating charge is charge on variable property which keeps on changing

or moving. The property or asset of the company cannot be specifically
ascertained in case of a floating charge.
Types of charge · Pari Passu charge: Under this, the charge is shared by more than one lender in the
ratio of their outstanding amount. The prior consent of the existing charge
holder(s) is required by the company.

· Exclusive charge: The security under the exclusive charge is provided to a

particular lender only.

· Further charge: With the consent of the first charge holder, the particular assets
on which charge is already created may be provided to other lenders as second
charge. In case of liquidation of assets, the first charge holder has the right to
recover his dues and the balance is recovered by the second charge holder
followed by others.
Registration [S. · The intent behind the section seems to ensure that all encumbrances
77 to 87 of made by the company on its property or assets or any of its undertakings are
Companies Act] made public. This is especially required to protect the interest of the lenders
to ensure that the assets being offered as security for their proposed facilities
are not already encumbered.

· This section serves two fold purpose: preventing the company from
simultaneously borrowing on the same assets without notice to previous
lender and providing clear information to the new lender about the status of
the assets.

· Under the Companies Act, 1956, only 9 types of charge were required to
be registered whereas the provisions under Act covers any kind of interest or
lien created on the property of the company or its assets as a security
including mortgage.

Charge could both be created by act of parties or operation of law. S. 77 deals only
with charge created by act of parties.

(Read Sections 77 to 87)

Charge v. · Mortgage is the transfer of an interest in an immovable property as a
Mortgage security whereas there is no such transfer in charge but the right only arises
in case of a default.

· A charge is a security interest created on an asset, such as property, to

secure the repayment of a debt. Unlike a mortgage, where the ownership of
the property is transferred to the lender, a charge only gives the lender a right
to claim the asset if the borrower defaults. This means that the borrower
retains ownership but grants the lender a legal interest in the property.

Mortgage is deemed to be a charge under the companies act.

Charge v. A ‘pledge’ is a bailment of personal property as security for some debt or

Pledge engagement, redeemable on certain terms, and with an implied power of sale on
default. It consists of a delivery of goods by a debtor to his creditor as security for a
debt or other obligation. The goods are to be held until the debt is repaid along with
interest or other obligation of the debtor. After discharge from liability, the goods are
to be delivered back to the pledger, the title not having changed during the
continuance of the pledge. Unlike a pledge, a ‘charge’ is not a physical transfer of
property of one to another. It is a right created in favour of one, referred to as “the
lender” in the property of another (either movable or immovable), referred to as “the
borrower”, as security for repayment of the loan and payment of interest on the
terms and conditions contained in the loan documents evidencing charge.

Under Companies Act, pledge is simply creating a charge on movable property.

Hypothecation Movable property as charge but possession is with the borrower only.
Cases 1. Official Liquidator v. Sri Krishna Deo: Plant and machinery embedded to Earth
is immovable property and thus registration should be under Companies Act as
well as Indian Registration Act.

2. Cosslett (Contractors) Ltd., Re: Company’s washing machine on site was declared
as employer’s property and was fixed charge, not floating because it was fixed and
not bound to change.

3. Maturi U. Rao v. Pendyala: When the floating charge crystallises it becomes fixed
and the assets comprised therein are subject to the same restrictions as the fixed
charge.

4. Smith v. Bridgend County Borougn Council: Employer was entitled to sell the
plan and equipment of the contractor on default and it was considered as floating
charge as it could be consumed or removed from site in the ordinary course of
business.

5. Government Stock Investment Co. Ltd. v. Manila Railway: Even on default, the
charge holder did not take any action after 3 months and thus it remained a
floating charge.

Debt Funding
Bonds A bond is an instrument of indebtedness of the bond issuer to the holders. It is a
debt security, under which the issuer owes the holders a debt and, depending on the
terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the
principal at a later date, termed the maturity. There are both corporate and
government bonds.

Types of bonds (seems unimportant)

§ Traditional Bond: A bond in which the entire principal can be withdrawn at a single
time after the bond’s maturity date is over is called a Traditional Bond.

§ Callable Bond: When the issuer of the bond calls out his right to redeem the bond
even before it reaches its maturity is called a Callable Bond. Through this type of
bonds, the issuer can convert a high debt bond into a low debt bond.

§ Fixed-Rate Bonds: When the coupon rate remains the same through the course of
the investment, it is called Fixed-rate bonds.

§ Floating Rate Bonds: When the coupon rate keeps fluctuating during the course of
an investment, it is called a floating rate bond.

§ Puttable Bond: When the investor decides to sell their bond and get their money
back before the maturity date, such type of bond is called a Puttable bond.

§ Mortgage Bond: The bonds which are backed up by the real estate companies and
equipment are called mortgage bonds.

§ Zero-Coupon Bond: When the coupon rate is zero and the issuer is only applicable
to repay the principal amount to the investor, such type of bonds are called
zero-coupon bonds.

§ Serial Bond: When the issuer continues to pay back the loan amount to the investor
every year in small instalments to reduce the final debt, such type of bond is
called a Serial Bond.
 § Extendable Bonds: The bonds which allow the Investor to extend the maturity
period of the bond are called Extendable Bonds.

§ Climate Bonds: Climate Bonds are issued by any government to raise funds when
the country concerned faces any adverse changes in climatic conditions.

§ War Bonds: War Bonds are issued by any government to raise funds in cases of war.

Inflation-Linked Bonds: Bonds linked to inflation are called inflation linked bonds.
The interest rate of Inflation linked bonds is generally lower than fixed rate bonds
Debentures v. § Collateral requirement: Bonds are secured by some kind of collateral. Debentures,
Bonds on the other hand, might be secured or unsecured.

§ Tenure: Bonds are generally long term. Debentures are mostly short term.

§ Issuing body: Bonds are generally issued by financial institutions, government

agencies, large corporations, and the like. Debentures are issued by private
companies in almost all cases.

§ Convertability: Bonds cannot be converted into equity shares while certain

debentures do offer this facility.
 Bank Finance
Overdraft An overdraft is a facility in which the bank allows the customer to withdraw an
amount from his account in excess of the available balance up to an approved limit. A
high rate of interest is charged on daily debit balance of overdraft account as these are
clean advances., banks do not have any securities to fall back if these facilities are not
repaid.
Cash Credit Cash credit account is an account opened to provide a short-term loan offered to a
company by a bank to meet its working capital requirement. In cash credit the
company is allowed a short-term finance up-to a borrowing limit fixed by the bank
and the interest is charged on the actual withdrawn amount not on the borrowing
limit. In other words, a cash credit facility is a short- term finance to a borrower
company, having a tenure of up to one year which can be renewed for further period
by the bank on the basis of projected sales and satisfactory operation in the account
during the period of finance. This facility is only available to company.

Bill Finance Bill Discounting is short-term finance for traders wherein they can sell unpaid
invoices, due on a future date, to financial institutions in lieu of a commission. The
Bank purchases the bill (Promissory Note) before its due date and credits the bill’s
value after a discount charge to the customer’s account. The Bank will realise the bill
amount on the bill’s due date directly from the debtor. This helps the traders optimise
their cash flows and business (payment) cycles without disturbing their balance
sheets. Lenders usually offer tenors of up to 180 days while offering bill discounting
facilities.

Example: Let’s assume, a business owner sells goods to Mr. X worth Rs. 20,000 on
credit but Mr. X agrees to pay after two months of purchase. However, the business
owner is in urgent need of funds and can’t wait for two months. Therefore, a business
owner can discount the bill with the bank for two months before its due date. For
example, if the same trader discounts his bill(s) with a bank offering a discount rate of
12% p.a., then he would receive Rs. 19,600 after paying a commission of Rs. 400 to
the bank.
Hire Purchase Hire purchase (HP) is a type of asset finance that allows a buyer to use an item while
paying for it in installments. It is also known as a rent-to-own transaction.

How it works

The buyer makes a down payment and then pays the remaining balance plus interest
in installments. The buyer can use the item immediately after signing the agreement.
Ownership is transferred to the buyer only after the final payment is made.

Miscellaneous

Types of issue Public offer, preferential issue, rights issue, private placement
Public issue ➔ A public issue may be defined as an offer for subscription by a
company of its securities to the general public.
➔ Public issue v. IPO: IPO is a form of Public issue. There could also be
FPOs. Public issue is governed by SEBI (Disclosure and Investor
Protection) Guidelines, 2000. These Guidelines have been framed by
SEBI to facilitate and regulate different forms of capital offerings by
companies and other related and ancillary issues.
➔ Three types of public issues: IPO, FPO, and Rights issue.
➔ DIP Guidelines define a Public Issue to mean an invitation by a
Company to the public to subscribe to its securities offered by a
prospectus.
Essentials of a public As per the DIP guidelines, the following three are required for a public issue:
issue
❖ A prospectus
❖ An invitation to the public
❖ The offer must be to subscribe to the securities of the company

Security S. 2(h) of Securities Contract (Regulation) Act, 1957: Security includes within its
scope equity shares, convertible preference shares, non-convertible preference
shares, convertible debentures, warrants, etc.
SEBI guidelines for The following requirements are required to be satisfied:
public issue
a Draft Prospectus has been filed with SEBI by the Merchant Banker
at least 21 days prior to the filing of the same with the ROC
SEBI’s corrections, if any, have been incorporated in the Prospectus
The company has made an application for listing of the securities to
the Exchanges; and
It has entered into an Agreement for the dematerialisation of its
securities with a Depository
What is an FPO? FPO refers to Follow on Public Offer in which an existing company listed on
the stock exchange issue new shares to the existing shareholders or to the new
investors. The FPO is a direct follow-up to an IPO and allows companies to
raise fresh capital after having already raised funds in the past through the
IPO.

Types of FPO
o Diluted: This is the process where the company issues
additional fresh shares to the public to raise capital. It results
in increasing the company’s total outstanding shares,
decreasing the Earnings Per Share (EPS).
o Non-diluted: Non-diluted FPO is when the company’s largest
shareholders, such as the founders or board of directors, offer
the shares they hold privately to the general public.
o At the market: This allows the companies to raise funds based
on the real-time price of the shares. If the company that is
issuing the fresh shares through FPO witnesses the fall in the
share price, it can pull out from offering the shares to the
public.
Option A: Making an Conditions for Option A (all have to be satisfied)
IPO
§ Net tangible assets >= Rs. 3 crores in each of the 3 preceding full years of 12
months each. Out of this, a maximum of 50% can be held as monetary
assets. If more than 50%, then a firm commitment to deploy such
monetary assets in its business or in a project.

§ Minimum networth >= 1 crore in each of the 3 preceding full years of 12

months each

§ Track record of distributable profits for 3 out of immediately preceding 5

years. The distributable profits must be computed under S. 205 of the
Companies Act (functions of a CS).

§ The proposed issue + all other issues made in the same financial year have to
be lesser than or equal to 5 times the pre-issue networth as per the latest
audited balance sheet of the last financial year.

§ In case of a name change in the last one year, at least 50% of the revenue of
the last one full year is from the activity suggested by the name. E.g., if
XYZ Finance Ltd. becomes XYZ Biotech Ltd., then in the full year
preceding the IPO, at least 50% of the company’s revenue must arise from
biotech activities.

If all of this is satisfied, the company could make an offer both by way of Book
building process or by way of a Fixed Price Offer. The minimum number of
allottees must be 1000.
Option B Under this, an offer can only be made by Book building process. The following
have to be satisfied:

§ At least 75% of the Offering must be allotted to Qualified Institutional

Buyers failing which the full subscription money must be refunded.

OR

§ The Project is appraised by FIs/ Scheduled Banks and at least 10%

participation comes from the Appraiser and a further minimum 5% from
other FIs/ Scheduled Banks. A further 10% must be allotted to QIBs. If
this is not complied with, the full subscription money has to be refunded.

§ The minimum post-issue face value (without the premium) is INR 10 crores.

OR

§ There is a compulsory market-making for 2 years from date of listing. The

minimum buy and sell quotes must be for 300 shares and the difference
between sell and buy quotes must not exceed 10%. Further, the market
maker must keep at least 5% of the issue size as inventory.

§ The minimum number of prospective allottees must be 1,000.

Underwriting An IPO underwriter is a specialist who works closely with the issuing company
and helps satisfy all regulatory requirements of the Securities and Exchange
Board of India (SEBI). An underwriter in an IPO also acts as an intermediary
between the issuing company, investors, and the market regulator. It can be an
investment bank or a financial institution. Depending on the size of an IPO, the
issuing company can hire one or more underwriters.

After thoroughly assessing the issuing company’s fundamentals, objectives, and

business plan, an underwriter guarantees the minimum number of IPO shares
that will be sold. Alternatively, IPO underwriters assure issuing companies of a
certain revenue by selling a specific quantity of shares to public investors.

Issue
Deemed public issue § S. 25 of CA, 2013: Document containing offer of securities for sale to be
(position in 2013 Act) deemed prospectus

(1) Where a company allots or agrees to allot any securities of the company
with a view to all or any of those securities being offered for sale to the
public, any document by which the offer for sale to the public is made
shall, for all purposes, be deemed to be a prospectus issued by the
company; and all enactments and rules of law as to the contents of
prospectus and as to liability in respect of mis-statements, in and omissions
from, prospectus, or otherwise relating to prospectus, shall apply with the
modifications specified in subsections (3) and (4) and shall have effect
accordingly, as if the securities had been offered to the public for
subscription and as if persons accepting the offer in respect of any
securities were subscribers for those securities, but without prejudice to the
liability, if any, of the persons by whom the offer is made in respect of
mis-statements contained in the document or otherwise in respect thereof.

(2) For the purposes of this Act, it shall, unless the contrary is proved, be
evidence that an allotment of, or an agreement to allot, securities was made
with a view to the securities being offered for sale to the public if it is
shown—

(a) that an offer of the securities or of any of them for sale to the public was
made within six months after the allotment or agreement to allot; or

(b) that at the date when the offer was made, the whole consideration to be
received by the company in respect of the securities had not been received by it.

§ S. 42(2) of CA, 2013: 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. The
prescribed number is 200 as per Rule 14 of the Companies (Prospectus and
Allotment of securities) Rules, 2014

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.
Sahara India case § Under the garb of private placement, SIRCEL floated the issue of the
OFCDs as an open-ended scheme and collected Rs 19,400 crore from
25.4.2008 to 13.4.2011 from 2,21,07,271 investors.

§ SEBI treated it as a public offer and therefore, the securities were considered
to be liable to be listed on the stock exchange. They were considered to
have violated the Companies Act, the SEBI Act, the erstwhile DIP
guidelines and ICDR Regulations, 2009.

§ First, Sahara argued that hybrid instruments were not ‘securities’ under the
SEBI Act. Second, it argued that the securities were issued by way of
private placement.

§ SEBI found that the instruments issued by definition, design and

characteristics intrinsically and essentially, were debentures and the Saharas
had designed the OFCDs to invite subscription from the public at large
through their agents, private offices and information memorandum.

§ “The issue of OFCDs by the two Companies is public in nature, as they have been offered
and issued to more than fifty persons, being covered under the first proviso to Section
67(3) of the Companies Act. The manner and the features of fund raising under the
OFCDs issued by the two Companies further show that they cannot be regarded to be of
a domestic concern or that only invitees have accepted the offer.”

§ The case dealt with the interpretation of Section 67 and Section 73 of CA

1956.

§ For S. 73 which deals with listing of securities, it was submitted that

companies who do intend to list their securities on the stock exchange are
not covered.

§ For deemed prospectus issue [S. 64 (similar to S. 25 of 2013 Act)], it was

submitted that the purpose of issue of prospectus is to disclose true and
correct statements and it cannot be characterized as an invitation to the
public for subscription of shares or debentures.

Judgment
 § The SC noted that Section 67 dealt with the offer of shares and debentures
and with the entry of first proviso, it is clear that any offer of securities by a
public company to fifty persons or more will be treated as a public issue
under the Companies Act, even if it is of domestic concern or it is proved
that the shares or debentures are not available for subscription or purchase
by persons other than those receiving the offer or invitation.

§ If a public offer is being made, there is no option but to list the security on
stock exchange.

Issue of securities
Types § Public issue

§ Rights issue

§ Bonus issue

§ Preferential issue

§ Private placement

Chapter III, Companies Act:

§ Part I: Public Offer

§ Part II: Private Placement

Section 23 Section 23 of the Companies Act, 2013 provides that a company whether
public or private may issue securities. As per Section 23(1), a public
company may issue securities:

(a) to public through prospectus (“public offer”) by complying with the

provisions of Part I of Chapter III of the Act; or

(b) through private placement by complying with the provisions of Part

II of Chapter III of the Act; or

(c) through a rights issue or a bonus issue in accordance with the

provisions of this Act and in case of a listed company or a company which
intends to get its securities listed also with the provisions of the SEBI Act,
1992 and the rules and regulations made thereunder.

For a private company, Section 23(2) provides that a private company may
issue securities:

(a) by way of rights issue or bonus issue in accordance with the

provisions of this Act; or

(b) through private placement by complying with the provisions of Part

II Chapter III of the Act.

Apart from public issue, a private company can issue shares in any manner.
Public offer Explanation to Section 23 states that “public offer” includes initial public
offer or further public offer of securities to the public by a company, or an
offer for sale of securities to the public by an existing shareholder, through
issue of a prospectus.

Misstatements in Prospectus:

S. 34, CA, 2013 provides for criminal liability for untrue or misleading
statements and for inclusion or omission of any matter which is likely to
mislead. Every person authorizing issue of such prospectus is held liable
under s. 447 for imprisonment. Defences of immateriality of such
statements or omission, reasonable belief about truthfulness of the
statement and necessity of inclusion or omission are available.
Prospectus Types:

§ Deemed

§ Shelf: In the process of going public for the first time, a company issues
shares through an Initial Public Offering (IPO) to raise funds.
Conversely, a company that is already publicly traded can raise funds by
selling bonds. While a company launching IPO files a Red Herring
Prospectus, a company issuing bonds is required to file a shelf
prospectus. The prospectus will encompass comprehensive information
about the issued bonds, including crucial details such as prices, maturity
dates, and more. A shelf prospectus is a regulatory-approved document
allowing multiple securities offerings over a period. In India, the validity
is a period not exceeding one year which shall commence from the date
of opening of the first offer of securities under that prospectus. Only a
specified list of companies can issue securities by way of shelf
prospectus.

(How are debentures different from bonds? Debentures are a type of bond.
Any unsecured bond without any collateral is a debenture. Payment from
debentures depend on the company’s performance but payment from bonds
doesn’t.
https://cleartax.in/s/difference-between-shares-debentures-bond#)

§ Red-herring: It means a prospectus which does not include full particulars

of the quantum or price of securities included in the issue. A company
proposing to make an offer of securities may issue a red herring
prospectus prior to the issue of a prospectus. The RHP provides more
comprehensive information about the company, its operations,
financials, and risks associated with the investment when compared to
DRHP. The RHP acts as an intermediary stage between the preliminary
DRHP and the Final Prospectus, aiming to provide a more
 comprehensive understanding of the investment opportunity while still
withholding the exact pricing details until the final stages of the offering.

(https://www.nism.ac.in/2024/01/understanding-drhp-rhp-and-prospectus
/)

§ Abridged: It means a memorandum containing salient features of a

prospectus as are specified by SEBI in this behalf. No form of
application for the purchase of any of the securities of a company shall
be issued unless such form is accompanied by an abridged prospectus.
(S. 33)
Further issue of Where at any time, a company having a share capital proposes to increase its
share capital [S. 62] subscribed capital by the issue of further shares, such shares shall be offered—

§ To existing holders of equity shares (Rights issue), subject to following:

o Offer to be made by a notice giving time not less than 15 days
and not more than 30 days. No communication means a
denial.
o The offer would be deemed to include a right to renounce the
shares offered to him to any other person.
o Upon denial, the Board of Directors may dispose of them in
such manner which is not disadvantageous to the shareholders
and the company

§ E-SOP- subject to special resolution

§ To any other person authorized by a special resolution (Preferential basis).

Exceptions
§ Conversion of debentures/loans to shares as a part of the terms of
loan/debentures.
§ Conversion of debenture/loan of the government into shares upon a
direction issued by the government for public interest. Appeal can be
filed against this.
Offer for sale It is an invitation to the general public to purchase the shares of a company through an
intermediary, such as an issuing house or a merchant bank.

According to the section 25, in order to construe “Offer for Sale” either of the
following conditions needs to be fulfilled: (a) “Offer for sale” to the public was made
within six months after the allotment or agreement to allot; or (b) at the date when the
offer was made, the whole consideration to be received by the company in respect of
the securities had not been received by it.

Section 28: It permits certain members of a company, in consultation with Board of

directors, to offer, the whole or a part of their holdings of shares to the public. The
document by which the offer of sale to the public is made shall, for all purposes, be
deemed to be a prospectus issued by the company.

The section lays that the members, whether individuals or bodies corporate or both,
whose shares are proposed to be offered to the public, shall collectively authorise the
company, whose share were offered for sale to the public, to take all actions in respect
of offer of sale for and on their behalf and they shall reimburse the company all
expenses incurred by it on this matter.
E-SOP “Employees’ stock option” means the option given to the directors, officers or
employees of a company or of its holding company or subsidiary company or
companies, if any, which gives such directors, officers or employees, the benefit or right
to purchase, or to subscribe for, the shares of the company at a future date at a
pre-determined price.

There has to be one year gap between the grant of options and vesting of option.
Preferential § It can be done when:
Offer [62(1)(c)] (a) The company in General Meeting passes a special resolution to
this effect
(b) The price of such shares is determined by the valuation report of
a registered valuer, subject to the compliance with the applicable
provisions of Chapter III and any other conditions as may be
prescribed.

§ 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.

§ In case of listed companies, compliance with SEBI regulations along with the act.
For unlisted, only the act and associated rules.

§ Requirements under the act:

o Should be authorized by the AoA
o Should be authorized by a special resolution
o While taking the decision, requirement to disclose objects, total
number of shares, price/price band and the basis on which price
has been arrived at along with report of the registered valuer
o Allotment has to be made within 12 months from the date of
passing of the special resolution.
o The price cannot be less than the one decided by the registered
valuer.
Private § “Private placement” means any offer or invitation to subscribe or issue of securities
Placement to a select group of persons by a company (other than by way of public offer)
through private placement offer-cum-application, which satisfies the conditions
[S. 42(3)]
specified in this section.

§ The number shall not exceed fifty or such higher number as may be prescribed [200
as prescribed under Sub-rule (2) to Rule 14 of the Companies (Prospectus &
Allotment of Securities) Rules, 2014] in a financial year.

§ QIBs and employees have to be excluded from private placement.

§ Securities have to be issued within 60 days and if not done, money has to be repaid
within fifteen days from the expiry of sixty days and if not done, 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.
Preferential offer The term “Securities” play a crucial role in interpretation of these two terms.
v. Private Allotment of any kind of security on a private basis which attracts provisions of
Placement Section 42 is called as Private Placement of Securities whereas allotment of equity
shares or securities convertible into equity shares attracts both Section 42 and 62(1)(c)
and called as Preferential Allotment of securities. Any procedural compliance under
Section 62(1)(c) shall be in addition to that of Section 42 but not in substitute of the
same. In simple words, Preferential Allotment means Private Placement of equity
shares or convertible securities.
Bonus Shares When a company is prosperous and accumulates large distributable profits, it converts
these accumulated profits into capital and divides the capital among the existing
members in proportion to their entitlements. Members do not have to pay any amount
for such shares.

According to section 63(1), a company may issue fully paid-up bonus shares to its
members, in any manner whatsoever, out of—

§ its free reserves;

§ the securities premium account; or

§ the capital redemption reserve account.

No bonus shares shall be issued unless:

§ It is authorized by AoA.

§ It is authorized in general meeting of the company on the recommendation of the

board.

§ No default w.r.t. statutory dues or payment of interest/principal.

§ the partly paid-up shares, if any outstanding on the date of allotment, are made fully
paid-up.

§ Bonus shares cannot be issued in lieu of dividend.

Rights issue v. The key difference between bonus issue and rights issue lies in their purpose and
Bonus issue impact on shareholders. A bonus issue offers additional shares to shareholders for free,
using the company's reserves. In case of rights issue, shareholders purchase new shares
at a discount. It aims to raise fresh capital for the company.
Issue of Securities at A company may issue securities at a premium when it is able to sell them at a price
a Premium above par or above nominal value. In accordance with the provisions of Section
52(2) of the Act, the securities premium can be utilised only for:

§ issuing fully paid bonus shares to members;

§ writing off the balance of the preliminary expenses of the company;

§ writing off commission paid or the expenses incurred on issue of shares or

debentures of the company;

§ for providing for the premium payable on redemption of any redeemable

preference shares or debentures of the company; or

§ for the purchase of its own shares or other securities under section 68.

Firstly, the premium cannot be treated as profit and as such the amount of
premium is not available for distribution as dividend. Secondly, the amount of
premium whether received in cash or in kind must be kept in a separate account,
known as the “Securities Premium Account”. Thirdly, the amount of premium is to
be maintained with the same sanctity as the share capital.
Prohibition to issue Section 53 states that except as provided in section 54 (i.e. issue of sweat equity
shares at discount shares), a company shall not issue shares at a discount. Any share issued by a
company at a discount shall be void.

A company may issue shares at a discount to its creditors when its debt is
converted into shares in pursuance of any statutory resolution plan or debt
restructuring scheme

What are sweat equity shares?

Sweat equity is often used in the context of startups or small businesses, where the
founders or early employees are compensated for their work with equity in the
company rather than a salary.
 Alteration, Reduction, and Buyback
Alter A limited company having a share capital may, if so authorized by its articles, alter its memorandum
ation in its general meeting to:
[S.
§ increase its authorized share capital
61]

§ consolidate and divide the existing shares. Example- No consolidation and division which results
in changes in the voting percentage of shareholders shall take effect unless it is approved by
the Tribunal.

§ convert all or any of its fully paid-up shares into stock or reconvert that stock into fully paid-up
shares of any denomination

§ sub-divide its existing shares or any of them, into shares of smaller amount than is fixed by the
Memorandum, so however, that in the sub-division the proportion between the amount paid
and the amount ,if any, unpaid on each reduced shall be the same as it was in the case of the
share from which the reduced share is derived

§ cancel shares which, at the date of the passing of the resolution in that behalf, have not been
taken up or agreed to be taken by any person and diminish the amount of the share capital by
the amount of the shares so cancelled [“diminution”].

It can be done by ordinary resolution if authorized by the AoA.

 [S. § The need for reduction: accumulated business losses, assets of reduced value, having higher paid
66] up capital than required.

§ Requirements: Special Resolution + Approval by the tribunal

§ Ways of reduction:
o In respect of share capital not paid-up, extinguishing or reducing the liability on
any of its shares. (For example, if the shares are of face value of INR 100 each
of which INR 75 has been paid, the company may reduce them to INR 75
fully paid-up shares and thus relieve the shareholders from liability on the
uncalled capital of INR 25 per share); or
o Cancel any paid-up share capital, which is lost, or is not represented by
available assets. This may be done either with or without extinguishing or
reducing liability on any of its shares (For example, if the shares of face value
of INR 100 each fully paid-up is represented by INR 75 worth of assets. In
such a case, reduction of share capital may be effected by cancelling INR 25
per share and writing off similar amount of assets); or
o Pay off the paid-up share capital, which is in excess of the needs of the
company. This may be achieved either with or without extinguishing or
reducing liability on any of its shares. (For example, shares of face value of
INR 100 each fully paid-up can be reduced to face value of INR 75 each by
paying back INR 25 per share.)

Paid-up share capital for the purpose of capital reduction would include securities premium and
capital redemption reserve.

§ Reduction of share capital by following methods also do not need any sanction/approval of the
Tribunal:
o Redemption of redeemable preference shares.
o Purchase of shares of a member by the Company on order of the Tribunal
under Section 242 of Companies Act, 2013.
o Buy-back of its own securities under Section 68.

(https://www.bcasonline.org/Referencer2016-17/Other%20Laws/Company%20Law/reduction_
of_share_capital_an_overview.htm#:~:text=Reduction%20of%20share%20capital%20means,a%2
0more%20efficient%20capital%20structure.
https://www.icsi.edu/media/webmodules/JANUARY_2021_COMPANY_LAW_CORNER.pdf))

Anand sir: Most brutal weapon. You can reduce the shareholding of the company by selective
removing people. This is because of the phrase ‘any reason whatsoever’. Buyback is optional.
Reduction gives no option.

Read more on protection of minority interests.

(https://indiacorplaw.in/2017/12/can-company-selectively-reduce-capital.html)

The same exercise can be done under Chapter 15.

Diminution v. § According to section 61(2), cancellation of shares under section 61(1) shall not be
Reduction deemed to be reduction of share capital. It does not need any confirmation of
the Tribunal under section 66.

§ In the following cases, the diminution of share capital is not to be treated as

reduction of the capital:
o Where the company cancels shares which have not been taken
or agreed to be taken by any person [Section 61(1)(e)
Companies Act, 2013];
o Where redeemable preference shares are redeemed in
accordance with the provisions of Section 55 [Explanation to
section 55(3) Companies Act, 2013];
o Where any shares are forfeited for non-payment of calls and
such forfeiture amounts to reduction of capital;
o Where the company buys-back its own shares under Section 68
of the Act [Section 66(6)];
o Where the reduction of share capital is effected in pursuance of
the order of the Tribunal sanctioning any compromise or
arrangement under section 230.
Buyback [S. 68] S. 67: No company limited by shares or by guarantee and having a share capital
shall have power to buy its own shares unless the consequent reduction of share
capital is effected under the provisions of this Act.

The term buy-back implies the act of purchasing its own shares/securities by a
company at a price usually higher than the market price. This facility enables the
Company to go back to the holders of its own shares/securities and make an offer
to purchase such shares/ securities from them.

It can be done out of:

§ its free reserves

§ the securities premium account

§ the proceeds of the issue of any shares or other specified securities

However, no buy-back of any kind of shares or other specified securities can be

made out of the proceeds of an earlier issue of the same kind of shares or same
kind of other specified securities.

NCLT permission: No permission required.

Reasons for buyback:

§ To improve Earning per Share;

§ To use ideal cash;

§ To give confidence to the Shareholders at the time of falling price;

§ To increase promoters shareholding to reduce the chances of takeover;

§ To improve return on capital return on net-worth;

§ To return surplus cash to the Shareholder.

Modes of buyback:

§ Tender offer (offer a price higher than the market price for people to apply)

§ Open market operations (maximum 15% allowed):

o Book-building process: The minimum price is specified and
bids accepted to arrive at a final price (Dutch auction
method).
o Stock market: Purchasing from the market directly via brokers

§ By purchasing from employees [e-SOP or sweat equity]

§ Odd lot buybacks: Odd-lot buybacks are done by a company to repurchase shares
from investors owning 100 shares or less.

Conditions for buyback [S. 68(2)]:

§ Articles must permit. If AoA is silent, amend AoA.

§ Special Resolution required for buyback between 10-25% of the paid up capital.
For less than 10%, board resolution is sufficient.

§ Has to be less than 25% in a FY.

§ Debt-equity ratio of 2:1 has to maintained with respect to the paid up share
capital. Debt cannot get higher than this ratio.

§ No offer of buyback can be made within one year of closure of past buyback.

SEBI Guidelines:
§ Buyback has to completed within 1 year after passing of the special resolution.

§ In case of open market, the maximum price has to be specified in the resolution.

§ Promoters cannot sell their shares to the company by way of buyback route.

§ Offer for buyback cannot last for more than 30 days except in case of purchase
via stock exchanges

§ Shares bought have to be extinguished within 7 days of purchase.

Transfer of certain sum to Capital Redemption Reserve Account [S. 69]

§ When company buybacks out of free reserves or securities premium account, a

sum equal to nominal value has to be transferred to the capital redemption
reserve account.

Prohibition of buyback in certain circumstances [S. 70]

§ Cannot purchase shares through any subsidiary company

§ Through any investment company

§ in case of any default in repayment of deposits, payment of dividend, repayment

of term loan, interest, etc. Can be done once this is remedied and 3 years have
passed.

Two things company can do after buyback:

§ Keep shares with yourself for 7 days and put them back to the market

§ They get automatically reduced after 7 days.

 Company cannot do buyback once an open offer is made. Reason? In India, unlike
USA, we believe that if someone is buying shares of the company, it is a good sign
and someone who wants to leave would be able to leave. If someone is trying to
takeover, it is not allowed to go for buyback.

Minimum § Governed by Securities (Contracts) Regulation Rules, 1957.

offer to
§ The minimum number of shares is calculated based on the post issue paid up share
public
capital.

§ Minimum offer as per Rule 19(2)(b) of SCRA:

o 25%, when post issue capital is less than/equal to 1600 crores
o 400 crore rupees, more than 1600 but less than 4000 crore rupees
o 10%, when greater than 4000 crore rupees.
They will have to maintain at least 25% public shareholding subsequently.

§ A company may offer shares to the public either:

o by way of a fresh issue of shares, in which case the company’s paid up share
capital will increase, or
o by way of an offer for sale where an existing shareholder offers the
company’s shares to be sold or transferred to the public. Herein, the
paid-up share capital does not increase because the shares offered were
already owned by the existing shareholders.
Rule 19A of (1) Every listed company shall maintain public shareholding of at least twenty-five per cent:
SCRA Rules
(2) Where the public shareholding in a listed company falls below twenty-five per cent. at
any time, such company shall bring the public shareholding to twenty-five per cent. within a
maximum period of twelve months from the date of such fall in the manner specified by
the Securities and Exchange Board of India.

(6) Notwithstanding anything contained in sub-rules (1) to (5), the Central Government
may, in public interest, exempt any listed entity in which the Central Government or State
Government or public sector company, either individually or in any combination with
other, hold directly or indirectly, majority of the shares or voting rights or control of such
listed entity, from any or all of the provisions of this rule.

Minimum § at least ninety per cent of the offer through the offer document, except in case of an offer
Subscription for sale of specified securities.
(Regulation
§ In the event of non-receipt of minimum subscription referred to in sub-regulation (1), all
45)
application monies received shall be refunded to the applicants forthwith, but not later
than four days from the closure of the issue.
IPO v. OFS
(Offer for
Sale)
Types of Issues · IPO

· Further Public Offer

· Bonus Issue

· Rights issue

· Private Placement

· Preferential Issue

· Qualified Institutional Placement

· Initial Public Offer: An offer of specified securities by an unlisted issuer to the

public for subscription.

· Further Public Offer: It is an offer of specified securities by a listed issuer

company to the public for subscription. In other words, another issue to the
public other than its existing shareholders or to a select group of persons by
the listed persons is referred to as a Further Public offer.

· Rights Issue: Rights issue of securities is an issue of specified securities by a

company to its existing shareholders as on a record date in a predetermined
ratio.

Shareholders may or may not subscribe, may subscribe in full or in part. They can
also renounce the shares offer to any other person who need not be a shareholder.

· Preferential Allotment: It refers to an issue, where a listed issuer issues shares

or convertible securities, to a select group of persons on a private placement
basis it is called a preferential allotment.

· Shall not be made to anyone who has sold or transferred the equity shares
during six months preceding the relevant date. SEBI can also grant relaxation
under Regulation 11 of SAST Regulations.
 · Where a person belonging to promoter group has transferred shares in
preceding 6 months, the promoter(s) and promoter group shall be ineligible.

· All shares have to be fully paid up at the time of allotment.

· Qualified Institutional Placement (QIP): It refers to an issue by a listed entity to

only qualified institutional buyers in accordance of Chapter VI of the SEBI
(ICDR) Regulations, 2018.

· Bonus Issue: Bonus issue of shares means additional shares issued by the
Company to its existing shareholders to reward for their royalty and is an
opportunity to enhance the shareholders wealth. The bonus shares are issued
without any cost to the Company by capitalizing the available reserves.

Conditions for § AoA should authorize issue of bonus shares, capitalization of reserves, etc.
bonus issue
§ If no provision, resolution to be passed to alter AoA to authorize the
[Regulation 293]
capitalization of reserve.

§ No default in payment of interest or principal in respect of FD or debt securities.

§ No default in payment of statutory dues of employees.

§ Any outstanding partly paid shares are made fully paid up.

§ Any promoters/directors is not a fugitive economic offender.

Promoters’ Promoter should hold at least 20% of the post-issue capital.

Contribution
If not satisfied, AIF/SCB/Foreign VCs can contribute to meet the shortfall to an
(Regulation 14)
extent of 10%.
 Requirements for IPO

Regulation 7, (1) An issuer making an initial public offer shall ensure that:
ICDR
a) it has made an application to one or more stock exchanges to seek an
in-principle approval for listing of its specified securities on such stock exchanges
and has chosen one of them as the designated stock exchange, in terms of Schedule
XIX;

b)it has entered into an agreement with a depository for dematerialisation of

the specified securities already issued and proposed to be issued;

c) all its specified securities held by the promoters are in dematerialised form prior
to filing of the offer document;

d) all its existing partly paid-up equity shares have either been fully paid-up
or have been forfeited;

e) it has made firm arrangements of finance through verifiable means

towards seventy five per cent of the stated means of finance for a specific project
proposed to be funded from the issue proceeds, excluding the amount to be raised
through the proposed public issue or through existing identifiable internal accruals.

(2) The amount for general corporate purposes, as mentioned in objects of

the issue in the draft offer document and the offer document shall not exceed
twenty five per cent. of the amount being raised by the issuer.
Additional · Shares must be fully paid up
Requirements
· Shall be held by the sellers for a period of 1 year before filing the draft offer
[Regulation 9]
document

· Holding Period has to be complied with at the time of filing a draft offer
document

1 year period does not apply for:

· Government company or statutory authority

· Scheme or arrangement

· Bonus issue of shares held for one year

Promoters’ Promoter should hold at least 20% of the post-issue capital.
Contribution
If not satisfied, AIF/SCB/Foreign VCs can contribute to meet the shortfall to an
(Regulation 14)
extent of 10%.
Lock in · Promoters’ contribution shall be locked in for a period of 3 years.
(Regulation 16
· In case promoter has contributed more than the requirement, lock in period of
and 115)
1 year.
Regulation 17 · For other than promoters holding pre-issue share capital, lock-in period of one
year.

Requirements for FPO

Regulation 103 · No change in name in last one year. If name changed, at least 50% revenue in
new name.

· If above condition not complied, offer via book building offer and at least 75%
of net offer to QIBs.
Regulation 104 (1) An issuer making an FPO shall ensure that:

a) it has made an application to one or more stock exchanges to seek an in-principle

approval for listing of its specified securities on such stock exchanges and has
chosen one of them as the designated stock exchange, in terms of Schedule XIX;

b)it has entered into an agreement with a depository for dematerialisation of

the specified securities already issued and proposed to be issued;

c) all its specified securities held by the promoters are in dematerialised form prior
to filing of the offer document;

d) all its existing partly paid-up equity shares have either been fully paid-up
or have been forfeited;

e) it has made firm arrangements of finance through verifiable means

towards seventy five per cent. of the stated means of finance for a specific project
proposed to be funded from the issue proceeds, excluding the amount to be raised
through the proposed public issue or through existing identifiable internal accruals.

(2) The amount for general corporate purposes, as mentioned in objects of

the issue in the draft offer document and the offer document shall not exceed
twenty five per cent. of the amount being raised by the issuer.

Fast track FPO An issuer company need not file a draft offer document with SEBI and obtain
observations if it satisfies the conditions specified for a Fast track FPO. Shares
should be listed for at least 3 years and many other conditions with respect to
market capitalization, turnover, etc.