Fund Raising a ladder for Corporate Growth

Fund Raising
A ladder for Corporate Growth
By Pavan Kumar VijayDated : March 26, 2017

LEGAL ASPECTS OF FUND RAISING
Companies Act, 2013 (Chapter III & IV in case of Allotment of Securities/Chapter V in case of
Public deposit)
Rules and Regulations under SEBI Act
 SEBI (ICDR) Regulations, 2009
 SEBI (LODR) Regulations, 2015
 SEBI (Issue and Listing of Non-Convertible Redeemable Preference Shares) Regulations, 2013
 SEBI (Issue and Listing of Debt Securities) Regulations, 2008
 SEBI (Issue of Sweat Equity) Regulations, 2002
 SEBI(Substantial Acquisition of Shares and Takeovers) Regulations, 2011

MODES AVAILABLE TO INDIAN COMPANIES FOR RAISING
FUNDS WITHIN INDIA
Domestic
Issue
Equity
IPO
Offer
for sale
Issue to
Public
FPO
Offer for
sale
Issue to
public
Private
Placement
Equity
Shares with
differential
voting rights
Right
Issue Preference
Shares
Debentures
Secured
Debentures
Un-secured
debentures
Fully Convertible
debentures
Partly-
convertible
Debentures

Foreign
Issue
FDI ECB FCCB ADR/GDR
MODES AVAILABLE TO INDIAN COMPANIES FOR RAISING
FUNDS FROM OUTSIDE INDIA

PRIVATE
PLACEMENT
PREFERENTIAL
ISSUE (Equity
Shares, Preference
Shares,
Debentures)
QUALIFIED
INSTITUTIONAL
PLACEMENT

Instruments
Available For
Raising Funds
via Private
Placement
Route
Instruments
for Fund
Raising
Debentures
(Sec 71 of
CA, 2013)
Other
Securities
( Sec 42/62
of CA,
2013)
Preference
Shares
( Sec 55 of
CA, 2013)
Equity
Shares
(Section
43 of CA,
2013)

Private Placement
Preferential
Offer
Issuance of
Redeemable
Debentures
Issuance of
Redeemable
Preference
Shares
Section 42 read with Rule 14 of
the Companies (Prospectus and
Allotment of Securities) Rules,
2014
Section 62 read with Rule
13 of the Companies
(Share Capital and
Debentures) Rules, 2014
Bible for all types of
issues to a specific
group of persons
Section 71 read with Rule 18
of the Companies (Share
Capital and Debentures)
Rules, 2014
Section 55 read
with Rule 9 & 10
of the Companies
(Share Capital
and Debentures)
Rules, 2014
Compliances of Companies Act, 2013 (Applicable on all Companies)

• Prior approval of Shareholders is required to be obtained via Special Resolution for each tranche
• Justification or basis for the offer price to be disclosed in the Explanatory Statement calling General Meeting
• Minimum investment size (in face value terms) of Rs 20,000 per person
• Cash receipt prohibited
• Offer document to be circulated among all proposed allottees
Conditions related to Private Placement
A Stringent Regime governing all types of Companies
• 200 investors excluding QIB and ESOP
• Transfer of Securities is permitted
Offer in One FY
Limit would be reckoned individually for each class of
security (i.e. Equity, Debentures, Preference Shares, )
For Non-Convertible Debentures, a previous special resolution in respect of all the offers during one year can be obtained.
The above mentioned limit of 200 investors and Rs 20,000/- Face Value of Investment shall not be applicable to:
 NBFC Companies; and
 Housing finance companies;
Provided they comply with the Regulations made in respect of offers on private placement basis, by RBI or National Housing Board. However, if RBI or NHB have
not specified any similar regulations, even such companies would be required to comply with the provisions of these Rules.
Private Placement in terms of Section 42 read with Rule 14
of The Companies (Prospectus and Allotment of Securities)
Rules, 2014

 Maintenance of complete database of the persons to whom the offer to subscribe to the securities is proposed to be
made
 Offer of Securities will be made only through personalized offer letter to such persons whose names are recorded prior
to the invitation to subscribe
 Maintenance of Record of the Bank Account of the Applicants
 Allotment to be made within 60 days from the date of receipt of application money, else refund within 15 days from
the date of completion of 60 days
 In the event of non-refund within the stipulated time period, repay with 12% interest p.a. from the expiry of sixtieth
day.
 No fresh offer to be made unless previous offer is completed
 Share application money to be kept in Separate Bank Account.
Conditions related to Private Placement

Penal Provisions for contravention with
the stipulations of Private Placements
If a Company makes an offer or accepts monies in contravention with the provisions of
Section 42, its promoters & directors shall be liable for a penalty which may extend to:
(a) The amount involved in the offer or invitation; or
(b) Rupees 2 Crores,
And
The Company shall also refund all monies to subscribers within 30 days of the order
imposing the penalty.
Whichever is higher

Securities as per Securities Contract (Regulation) Act, 1956
As per Clause (h) of Section 2, Securities include:
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company or
other body corporate;
(ia) derivative;
(ib) units or any other investments issued by any collective investment scheme
to the investors in such schemes;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central Government to
be securities; and
(iii) rights or interest in securities.
Use of term ‘securities’ instead of ‘shares’ - Use of the term shares in the Companies Act, 1956
restricted the dictatorial roof for issuances of various other instruments by Company to raise funds.
Companies manipulated this loophole by using other terminology or nomenclature for instruments
used to raise funds, thereby easily escaping the regulatory oversight.

Scandals that lead Lawmakers to enact Stringent
Provisions
Saradha
Chit Fund
Scam
Sahara
Ponzi
Schemes
Influencers

SAHARA CASE
Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited
issued Optionally Fully Convertible Debentures (OFCD) and raised 20,000 crores from around 30
million investors in guise of Private Placement.
Sahara’s Contentions
 Issue of Optionally Convertible Debentures was on private placement basis
 OFCDs were neither shares nor debentures but were hybrid securities
 Hybrid instruments are not marketable securities
SEBI ‘s Contention
 OFCD was a public issue and hence it made violation of Section 73 of Companies Act, 1956
(Public Issue) They were marketable hence ‘securities’ under SCRA

Observation of Supreme Court
→ OFCD issued by Sahara are hybrid instruments but it is securities within the meaning of Companies Act, SEBI Act and SCRA
→ Although the definition of Securities under section 2(h) of SCRA does not contain the term hybrid instruments but it is
inclusive definition and covers all “Marketable securities” and OFCD issued were offered to millions of people, hence they
were marketable, thus securities under SCRA.
→ Further, the name itself contains the term ‘debenture’, thus it is deemed to be a security as per the provisions of
Companies Act, SEBI Act and SCRA
→ Issue was made to millions of people and the action of the company depicts that it wanted to issue securities to public in
the grab of private placement to bypass various laws and regulations
Outcome of case
Supreme Court ordered Sahara to refund the entire amount raised by the issue to the investors
“marketability” has always been important for determining the expression ‘securities’. In “Bhagwati Developers Vs Peerless
General Finance (Civil Appeal 12640 of 1996)” decided on 09.08.2005 Supreme Court of India held that since securities
issued by Unlisted Public Companies are marketable they are ‘securities’ as per SCRA. Further, in “SEBI Vs Pan Asia Advisors
Ltd (Civil Appeal No 10560 /2013)” decided on 06/07/2015 Supreme court held that Global Depository Receipt (GDR) are
included in the definition of securities provided under SCRA by virtue of being marketable

Why Stringency in Provisions??
 Lacunae in the legal provisions of the Companies Act, 1956 regarding private placement
have lead to increase in malpractices. :
 Provisions of the Companies Act, 1956 were narrow and covered under its ambit
only shares and not all securities, while SEBI defines the term ‘securities’
 While a private placement could be made only to a maximum of 49 persons at
one go, there was no provision to prevent companies from convening multiple
board meetings to approve such allotments. As a result, companies started calling
several meetings and made allotment to 49 allottees at each such meeting,
thereby manipulating the law.
 Companies also took advantage of the overlapping of powers between the MCA
and SEBI to make multiple private placements.
The landmark judgment in the Sahara Case has set the direction for private placement code and the Companies
Act, 2013 draws heavily out of the principles enunciated by the Apex Court

Preferential Offer in terms of Section 62 read with Rule 13 of The
Companies (Share Capital and Debentures) Rules, 2014
As per Explanation to Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, ‘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.
“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.
Section 62 read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 pertaining to issuance of
Equity Shares & other convertible securities.
Provides Procedural
Framework
Compliance of Private
Placement provisions

Main Highlights of Section 62 read with Rule 13 of the
Companies (Share Capital and Debentures) Rules, 2014
Main Highlights of Preferential Offer
• Prior approval of Shareholders is required to be obtained via Special Resolution
• Allotment to be made within 12 months from the date of Special Resolution
• Mandatory Disclosures in the Explanatory Statement to the Notice calling General Meeting:
a. Intention of the promoters, directors & KMPs
b. Change in control, if any, consequent to the preferential offer
c. Justification for the allotment proposed to be made for consideration other than cash
d. Details of the proposed allottees along with post preferential shareholding
e. Basis on which price is arrived along with the report of Registered Valuer
f. In case of convertible instruments , conversion price can be decided upfront or at the
time of conversion
Rule 13 is
applicable only
on unlisted
companies
As on date, valuation can be done by an
Independent Merchant Banker or by
Independent Chartered Accountant in
Practice having minimum experience of
10 years.

Additional Laws Applicable on Listed
Company
If a Listed Company raises fund through Private
Placement, then other than Companies Act, 2013,
following laws and Regulations are also applicable
► SEBI (ICDR) Regulations, 2009
► SEBI (LODR) Regulations, 2015
► SEBI (SAST) Regulations, 2011
► SEBI (PIT) Regulations, 2015

Applicable Chapter Chapter VII
Eligibility
No issue to persons who have sold any equity shares of company during last 6 months preceding the relevant
date
Entire Pre-Preferential holding to be in demat mode only
Consideration
Equity Shares – 100% at the time of allotment
Warrants – 25% at the time allotment of warrants and balance 75% at the time allotment of equity shares
pursuant to conversion
Lock-in Requirement
For Promoters – 3 years
From the date of trading approval
For Non- Promoters – 1 year
Allotment deadline Within 15 days of Shareholders’ approval ‘OR’ regulatory approval, whichever is later
Listing Application Within 20 days of allotment
Disclosures in Notice of General Meeting
Objects of the Issue
Pre and Post SHP along-with identity of allottees
Pricing and Relevant date
Ultimate Beneficial Natural Persons , in case of Non-Individual allottees
Pricing
If Shares are frequently traded - Higher of Average of High and Low of 26 weeks/2 weeks Weighted Avg.
Price preceding the Relevant date
If Shares are in-frequently traded – the Company shall take into account parameters like book value,
comparable trading multiples etc for determining price
Legal Requirements of Preferential Allotment as per SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009

Frequently and In-frequently Traded Shares
FREQUENTLY TRADED SHARES means shares , in
which the traded turnover on any stock
exchange during 12 calendar months preceding
the relevant date, is atleast 10% of total number
of shares of such class of shares.
Case- Company has Equity Cap. of Rs. 100 Crores, so for
being frequently traded, trading turnover should be
atleast Rs. 10 Crores during preceding 12 months,
otherwise, it would be in-frequently traded shares
RELEVANT DATE
In case of Preferential issue of Equity
Shares – 30 days prior to General Meeting
held for considering the issue
In case of Convertible Securities – either
30 days before GM or 30 days before the
date on which holders of convertible
securities become entitled to apply for
equity shares
Case – If General Meeting is on 20 April, 2017
Relevant date would be 21 Mar, 2017 and
pricing computation to start from 20 Mar, 2017

Practical Difficulties Faced By Companies
 Section 42 mandates that next offer should be initiated after completion/withdrawal of previous offer. So, if warrants have
been allotted, say on 1st Jan, 2017, can next round of Equity be initiated say in April, 2017 or Company will have to wait till
conversion of those warrants ?
 Yes, the next round can be initiated in April 2017 as upon allotment of warrants, 1st Jan, 2017 round got completed
 As per ICDR Regulations, if any promoter has sold shares during preceding 6 months, the entire Promoter Group becomes
ineligible for Pref. allotment, so if there has been an inter-se-transfer among promoters, will it refrain the promoters from
acquiring pref. allotment ?
 Yes, the entire Promoter Group is refrained, since even an Inter-se-transfer is considered a sale
 If allottee is a HUF, still the name of ultimate beneficial owner is required to be given ?
 Yes
 Can a preferential allotment be made to a Partnership firm?
Yes, in the name of Partner, who will hold it on behalf of the firm

 Can Preferential allotments be made at different prices at the same General Meeting to different categories of allottees. (Eg.
@ Rs. 20 to Promoters and @ Rs. 30 to Non-Promoter)
 Yes, this can be done, if the allottees agree to it
 In case of allotment of warrants, if the subscribers fail to convert their securities within 18 months, will the subscription
money of warrants be refunded to the allottees
 No, it stands forfeited
 If any preferential allotment is subject to due diligence, at what time, to disclose to stock exchange u/r 30 of LODR
- At the time of 1st discussion with Private Equity Firms
- Upon signing of term sheet
- Upon entering into a binding agreement
- After the board meeting
 In our opinion, upon signing the term sheet , since the disclosure required to be given u/r 30 of LODR is finalized only after
signing of term sheet

 Can allotment be made by passing resolution by circulation
 Yes
 Can a proposed preferential offer be considered by “Resolution by Circulation”
 No

If Value of transactions > Rs. 10 lacs in any Calendar Quarter
Disclosure by the Allottees (if allottee is a promoter, employee and Director)
Within 2 Trading Days from the date of Allotment
by Company
Within 2 Trading Days from the date of receipt from the allottee
Stock Exchange(s)
Applicability of SEBI PIT Regulations, 2015- Regulation 7(2)

Regulation says-
Disclosure is to be given within 2 trading days for transactions having value
of more than Rs. 10 lacs in any calendar quarter.
Issue- Allotment Size: Rs. 7 Lacs; Market Value: Rs. 11 Lacs
Whether Disclosure required???
Answer- Yes, disclosure will be made
Practical Issues

Preferential Issue
Vs
Takeovers
Issues highlighted

Preferential allotment to following category of persons:
Preferential allotment
Promoter category; Non-promoter category;

Threshold limits of Takeover Code are:
 Regulation 3(1) triggers if any person along with person acting in concert acquires
25% of more of the voting rights of the Company;
 Regulation 3(2) triggers when person already holds 25% or more in the Company
and acquires additional 5% of the voting rights in any one FY;
How Preferential allotment breaches the
threshold limit under Takeover Code

 If allotment is within the threshold limits of SAST provisions then
there would be no requirement to make Takeover Open Offer;
 The disclosures under SAST shall be made by the Acquirer
Allotment of shares

Regulation Who has to
disclose
When to disclose Time period To whom to
disclose
Regulation 29(1) Acquirer On allotment of more than
5% of the voting rights in
the Company
2 working days STX and Target
Company
Regulation 29(2) Acquirer If Acquirer already holds 5%
voting rights and then
pursuant to allotment, there
is a change in shareholding
by more than 2% of voting
rights;
2 working days STX and Target
Company
Disclosures under SAST

 If allotment of shares triggers the threshold limit of Takeover Code;
 How to check the threshold limit?
Allotment of shares

Question: Acquirer along with person acting in concert are not holding
any shares in the Target Company, allotment of more than
25% would attract the provisions of SAST?
Answer: Yes, the allotment would attract the provisions of Regulation
3(1) of SAST.
The threshold limit has to be checked individually as well as collectively
How to check threshold limit

Question: Acquirer along with person acting in concert already holds
more than 25% of the voting rights of the Target Company,
then whether the preferential allotment of more than 5% of
the voting rights would trigger Takeover Code?
Answer: The preferential allotment of more than 5% of the voting
rights would attract the provisions of Regulation 3(2) under
Takeover Code
The threshold limit has to be checked individually as well as collectively
How to check threshold limit

 If preferential issue of Equity Shares triggers the Open Offer, Public
Announcement shall be made on the date of Board Meeting
approving Preferential allotment;
 If preferential issue of convertible securities triggers the Open Offer,
the date to make Public Announcement may differ in these of the
following cases:
(a) Issuance of convertible security with fixed date conversion;
(b) Issuance of convertible security without fixed date conversion
Offer through Preferential Allotment
Timing to make an Open Offer

Convertible security with fixed date conversion;
 Public Announcement shall be made on the second working day
preceding the scheduled date of conversion of such security into
Equity Shares of the Company
Example: Fixed date conversion of security is 31.03.2017;
Public Announcement shall be made second working day preceding
the date of conversion i.e. on 29.03.2017

Convertible security without fixed date conversion;
 Public Announcement shall be made on the same day on which the
conversion of such security into Equity Shares of the Company will
be done

 Offer shall be made for 26% of the Expanded Share Capital of the Target Company;
 Expanded share capital means taking into account all potential increases in the number of outstanding
shares during the offer period contemplated as of the date of the public announcement
Example 1:
Present paid up capital: 100 shares
Preferential allotment: 50 shares
Offer shall be made for 26% of the expanded share capital i.e. 150 shares
Example 2:
Present paid up capital: 200 shares
Pending warrants for conversion: 100 shares
Offer shall be made for 26% of the expanded share capital i.e. 300 shares
Offer Size

• If the preferential allotment is triggering the requirement to make Takeover Open
Offer;
• Then the status of trading and pricing shall be calculated on the following days:
(a) As on Relevant date;
(b) As on the date of Public Announcement
Example: Issuance of Equity Shares through preferential issue
Relevant date is 30 days prior to the date of shareholders approval
Public announcement is the date of Board Meeting approving preferential allotment
Status of Trading

Pricing – Frequently traded – Preferential Pricing
 Parameter 1: Average of the weekly high and low of the Volume Weighted Average Price (VWAP)
during preceding 26 weeks prior to the relevant date;
 Parameter 2: Average of the weekly high and low of the Volume Weighted Average Price (VWAP)
during preceding 2 weeks prior to the relevant date;
Additional Parameter as per Takeover Code
 Parameter 3: the VWAMP of such shares for a period of 60 trading days immediately preceding
the date of the Public Announcement as traded on the stock exchange where the maximum
volume of trading in the shares of the target company are recorded during such period, provided
such shares are frequently traded

 Calculation
26 weeks Volume Weighted Average Price (VWAP)
Weeks High Low Average
1st week 12 10 11
2nd week 11 9 10
………. ………. ………. ……….
……….. ………. ………. ……….
26th week 9 9 9
Total 30
Average Price 10
Pricing – Frequently traded - ICDR

 Calculation
2 weeks Volume Weighted Average Price (VWAP)
Days High Low Average
1st day 14 10 12
2nd day 11 9 10
………. ………. ………. ……….
……….. ………. ………. ……….
14th day 18 12 15
Total 37
Average Price 12.33
Pricing – Frequently traded - ICDR

 Calculation
60 trading days Volume Weighted Average Market Price (VWAMP)
Days No. of Shares
traded
Weighted average
price (WAP)
VWAP
1st day 10000 14 140000
2nd day 10000 6 60000
………. ………. ………. ……….
……….. ………. ………. ……….
60th day 30000 5 150000
Total 50000 350000
Average Price 7
Pricing – Frequently traded – Takeover Code

 As per Takeover Code, the Offer Price shall be highest of all the
following price mentioned:
(a) 26 weeks VWAP;
(b) 2 weeks VWAP;
(c) 60 trading days VWAMP
Pricing – Frequently traded

 If infrequently traded, the pricing shall not be less than the price
determined after taking into account valuations parameters
including book value, comparable trading multiples and such other
parameters as may be customary for valuation of shares;
Pricing – Infrequently Traded

PARTICULARS
COMPANIES ACT
(SECTION 42)
COMPANIES ACT
(SECTION 62)
SEBI LODR SEBI ICDR
Eligibility <200 investors - - No Sale by the allottee Within Last 6 months
Issue of Securities
Shares or other
Securities
Specified Securities Shares or Convertible Securities
Shareholders Approval Yes, Special Resolution Yes, Special Resolution - Yes, Special Resolution
Offer Document Yes - - -
Consideration
Through Banking Channels,
No cash
Through Banking
Channels or
consideration other than
cash
-
Banking Channels/Consideration other than
cash
Disclosure document In the Offer Document
In the GM Notice
- In the GM Notice
Pricing
For Unlisted Companies
by Registered Valuer
-
As per pricing methodology, depending
upon Frequently Traded/ Infrequently
Traded scrip
Valuation report Not required Required - CA Certificate needed for pricing
Allotment periods
60 days from receipt of
money
Within a period of 12
months
-
15days from shareholders’ approval/
regulatory approval, whichever is later
Listing Application -
20 days of
allotment
-
SUMMING UP PREFERENTIAL ALLOTMENT

Qualified Institutional
Placements

Governing Provisions
Chapter VIII of SEBI (ICDR)
Regulations, 2009
Section 42 and 62 of the
Companies Act, 2013

► Prospective Allottees: Only- QIBs belonging to Non- promoter category
► Minimum Price: Avg. of the weekly High & Low of closing prices during 2 weeks preceding
the Relevant Date;
Relevant Date (R.D.)
Case 1. In case of Placement of Equity Shares:
Date of Board meeting in which Board decides to open the Issue;
Case 2. In case of Placement of Convertible Securities:
Either date mentioned in Case 1
or
Date on which the Holders of
Convertible Securities become entitled to apply for Conversion
Qualified Institutional Placements-Chapter VIII ICDR

► Pre-Requisite : Only- QIBs belonging to Non- promoter category:
 Shareholders Approval (Valid for 12 months);
 Securities are listed on Stock Exchanges having nationwide trading terminal for
atleast 1year.
 Appointment of MB to conduct due diligence;
 Preparation of Placement Document;
 Allotment cannot be made to a Promoter QIB
► No. of allottees: 2, if issue size<Rs. 250cr.
5, if issue size >Rs. 250cr
 Lock –in: 1 year. However no lock-in requirement if transaction take place
through the Stock Exchanges.
Continued…

Particulars Preferred Allotment QIP
Proposed Allottees Can be anyone- Promoter or non
Promoter
Only QIPs, that too not belonging
the promoters
Pricing 26W/2W averaging as on Relevant
Date
2 weeks averaging as on Relevant
Date
Validity of Special
Resolution
15 days- allotment to be made
within 15 days
12 months
Appointment of MB &
due diligence
Not Mandatory Mandatory
Offer Document Companies Act: Yes
ICDR: NO
Companies Act: Yes
ICDR : Yes
No. of Allottees < 200 2, if issue size<250cr.
5, if issue size >250cr.
Lock In 1yr/3yr, depending upon non-
promoter/promoter allottees
1yr, Except on a recognized Stock
Exchange.
Private Placement V/S QIP Issue

Section 62 of the
Companies Act, 2013
Chapter IV of SEBI (ICDR)
Regulations, 2009

Key Provisions
 Under Rights Issue, subscribed capital is increased by offering shares to the existing shareholders in proportion
to their existing shareholding the Company.
 All shareholders are treated equal in terms of shares offered. Key Provisions related to right issue
 Key provisions
- the offer limiting a time not being less than 15 days and not exceeding 30 days;
- the offer shall include right to renounce;
- BOD may dispose of unsubscribed shares in such manner which is not dis-advantageous to the shareholders
and the company.
- No pricing guidelines prescribed
- Offer Letter has to be sent to the shareholders atleast three days before the date of opening of the Rights
Issue
- Private Company can keep offer period less than the statutory requirements and can send letter of offer ,
earlier than three days before the date of opening of the offer, if it obtains consent of 90% of its members.
 In case of right issue size of more than Rs 50 Lacs by listed company, appointment of Merchant Banker is
mandatory

Issues in Rights Issue
 Have been used as a tool to avoid compliances of provisions of private
placement as shares offered to the existing shareholders , can be renounced to
any third party
 Right to dispose off the unsubscribed issue, gives Board unfettered right to offer
shares to any third party

Practical Queries
 Is there any time period within which the Board shall dispose of the shares not subscribed under the rights
issue to any other person in a manner which is not disadvantageous to the shareholders?
No period is prescribed but the Board should act within a reasonable time.
 Whether share can be renounced to even non-shareholders?
Yes
 Whether the Board can cancel the unsubscribed portion of the right issue?
Yes, the Board is empowered to cancel the unsubscribed portion of the right issue under section 62.

Rights Issue triggering Takeover
Code

 Promoter proposes to acquire beyond his entitlement pursuant to a
rights issue then he should disclose this intention to acquire
additional shares in the application to acquire rights shares;
 Acquisition of additional shares beyond entitlement may trigger the
provisions of Regulation 3(2) of SEBI (SAST) Regulations, 2011;
 Regulation 10 of SEBI (SAST) Regulations, 2011 exempts the
shareholders from the provisions of Regulation 3(2) of SEBI (SAST)
Regulations, 2011
Shares acquired under Rights Issue

 Automatic exemption from Regulation 3(2) can be claimed only
when the following conditions are met:
(A) Acquirer has not renounced any his entitlements in such rights
issue;
(B) The pricing at which rights issue is made shall not be higher
than the sum of ex-rights price of the shares of the Target
Company
Shares acquired under Rights Issue

First = VWAP (60 trading days) X Total share capital prior to right issue
Total share capital post right issue
+
Second = Right Issue Price X Right Issue shares
Total share capital post right issue
What is Ex-Rights Issue Price

Example:
Rights Issue Price = Rs. 20 per share;
Volume weighted average price of 60 trading days = Rs. 80;
Total share capital prior to rights issue = 100 shares;
Total share capital post to rights issue = 200 shares;
Ex Rights Price = 80x100 + 20x100 = Rs. 50 per share
200 200
As calculated above, exemption can be claimed if the Right Issue Price is less than the Ex-Right Price
calculated
What is Ex-Rights Issue Price

The pricing at which rights issue is made shall not be higher than
the SUM of ex-rights prices calculated above
To summaries

SHARES WITH DIFFERENTIAL RIGHTS

Section 43 of the
Companies Act, 2013
Rule 4 of the Companies
(Share Capital and
Debentures) Rules, 2014

Key Provisions
 Authorization in Articles of Association
 Authorized by an Ordinary Resolution; [If the company is listed or if the number of members are
more than 200 then ensure it obtains the approval of its shareholders through postal ballot
 Shares with differential rights shall not exceed 26% of the total post-issue paid up equity share
capital including equity shares with differential rights issued at any point of time;
 Having track record of distributable profits for last 3 years;
 Not defaulted in filing financial statements and annual returns for 3 financial years;

Key Provisions
 No subsisting default in payment of dividend/ repayment of deposits/ redemption of preference shares or
debentures/ payment of interest on such deposits or debentures;
 Not defaulted in payment of dividend on preference shares/ repayment of any term loan from Banks or PFI’s
or interest payable thereon/ dues with respect to statutory payments/ default in crediting the amount in IEPF;
 Not penalized by Court or Tribunal during the last three years of any offence under the RBI Act, SEBI Act,
SCRA, FEMA, or any other special Act.
 The holders of the equity shares with differential rights shall enjoy all other rights such as bonus shares, rights
shares etc., which the holders of equity shares are entitled to, subject to the differential rights with which
such shares have been issued.
 Listed Companies can’t issues equity shares with superior voting or dividend rights (SEBI (LODR) Regulations )

Section 63 of the
Companies Act, 2013
Rule 14 of the
Companies (Share Capital
and Debentures) Rules,
2014
Chapter IX of SEBI
(ICDR) Regulations,
2009

Common Conditions applicable to all Companies
 Authorization in Articles of Association
 Approval of shareholders by way of special resolution
 No default in payment of principle / int. on FDs or debts securities.
 No partly paid up shares should exist
 Can be made out of free Reserves/ Share Premium/CRR
 Revaluation Reserve not to be utilized
 Bonus Shares can’t be issued in lieu of dividend.

Additional Conditions for Listed Companies
 Record date shall be only after the date of General meeting
 Bonus issue to be completed within 2 months from the date of Board
approval. Completion means including obtaining trading approvals from
the SEs.
 If these are compulsorily convertible debentures, reservation for bonus
shares must be made in respect of them

Practical Queries
 Can a company withdraw the bonus issue of shares once it is announced?
Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014 clearly states that a
company which has once announced the decision of its Board recommending a bonus issue,
shall not subsequently withdraw the same.
 Whether the company can issue bonus shares if it has rectified its default in interest
payments or principal amount in respect of fixed deposits or debt securities issued by it?
Law is silent on it, but answer is probably yes.

Acceptance of Deposits under the
Companies Act, 2013

Chapter V of the
Companies Act, 2013
Companies
(Acceptance of
Deposits) Rules, 2014

“Deposit” includes any receipt of money by way of deposit or loan or in any other
form by a Company, but does not include such categories of amount as may be
prescribed in consultation with the Reserve Bank of India.
Deposits – As per Section 2(31) of the
Companies Act, 2013

• Any share application money accepted under this Act shall be treated as Deposit if allotment is not made
within 60 days.
• Customers Advances if not appropriated within 365 days shall be deposit.
• Convertible Bond or debentures with conversion period of more than 10 years are deemed deposit.
• Any amount received by a company from any other company shall not be treated as Deposits.
• Any amount received from the Government/ Authority shall not be treated as Deposits.
Amounts exempted from Deposits

• Any amount received from a person who, at the time of the receipt of the amount, was a director of the
company or a relative of the director of the private company shall not be treated as Deposit.
• Any amount received from an employee of the company exceeding his annual salary with the company shall
be treated as Deposit.
• An amount of Rs. 25 lacs or more received by a start-up company by way of a convertible note (convertible
into equity shares or repayable within a period not exceeding five years from the date of issue) in a single
tranche, from a person shall not be treated as Deposit.
• Any amount received by a company from alternate Investment Funds, domestic Venture Capital Funds and
Mutual Funds registered with the Securities and exchanges Board of India in accordance with regulations
made by it.
Amounts exempted from Deposits

Eligible Company Non-Eligible Public Company Private Company
From any memberFrom Public
* Eligible Companies are Public Companies having net worth of at least INR 100 crore
or turnover of at least INR 500 crore and are allowed to raise deposits from the
persons other than its members
From whom Deposits can be accepted??

C
O
M
P
A
N
I
E
S
DEPOSITS
Deposits From Public
From Members
By Eligible Companies
25% of paid-up capital,
free reserves and
securities premium
account.
free reserves and
securities premium
account
By Public Company (Non-eligible
Company)
-
free reserves and
securities premium
account
By Private Company -
free reserves and
securities premium
account
By Government Company
35% of paid-up capital, free reserves and securities
premium account
Limit on Acceptance of Deposits

* A company may, for the purpose of meeting its short term
requirement, accept the deposits for repayment earlier than 6
months, but not earlier than 3 months & such deposits shall not
exceed 10 % of paid-up share capital, free reserves & security
premium account.
No Company shall accept any deposit which is repayable within a
period of :-
Less than 6
months
More than
36 monthsOR
Period for Accepting Deposits

Non-
Applicability
of Deposit
Rules
Banking
Company
NBFC
Housing Finance
Company
registered with
NHB
Non-Applicability of Public Deposits Rules
on certain Companies

• By Eligible CompaniesSpecial Resolution
• By Non-eligible Public Companies
• By Private Companies
Ordinary Resolution
Resolutions Required

Issuance of Circular to all its
members by registered post or
speed post or by electronic mode
in Form DPT-1
Filing a copy of the Circular with
ROC within 30 days before the
date of issuance of the Circular.
Not applicable on
private company
Mandatory Appointment of one or more Deposit Trustees for
creating security for the Deposits (in the event of inviting secured
deposits) by executing Trust Deed as prescribed in terms of Form
DPT-2 within 7 days before issuing the advertisement inviting
Deposits.
Important Compliances

As per Section 73 (2) (c) of the Companies Act, 2013 read with Rule 13 of the Companies
(Acceptance of Deposits) Rules, 2014, a deposit of not less than 15% of the amount of its deposits
maturing during the Financial Year and the next following financial year is required to be maintained
with scheduled commercial bank in a separate bank account to be called as Deposit
Repayment Reserve Account on or before the 30th day of April of each year.
For Example: If the Company came out with the Deposit Issue of Rs. 50 Crores wherein Deposits
amounting to Rs. 12 Crores are to be redeemed during the current financial year and Rs. 20 Crores are
proposed to be redeemed in the next financial year, then the Company is required to deposit Rs. 4.80
Crores
(15% of 32 Crores)
Note- this provision is not applicable on private company
Deposit Repayment Reserve Account

Every eligible company shall
* Furnishing of Return with ROC in Form DPT-3 on or before 30th June of
every year for the period ended 31st March as per the information duly
audited by the Auditor.
obtain, at least once in a year, credit rating for deposits accepted by it
and a copy of the rating shall be sent to the Registrar of Companies
along with the return of deposits in Form DPT-3.
Important Filing

• The Company shall in addition to the payment of the amount of deposit or part thereof
and the interest due, be punishable with fine which shall not be less than Rs 1 crore
but which may extend to Rs 10 crore; and
• every officer of the company who is in default shall be punishable with imprisonment
which may extend to seven years or with fine which shall not be less than Rs 25 Lacs
but which may extend to Rs 2 crore, or with both:
• If the default is knowingly or wilfully with the intention to deceive the company or its
shareholders or depositors or creditors or tax authorities, he shall be liable for action
under section 447.
Penal Provisions as per Section 76A

• Penal Rate of Interest: 18% per annum for the overdue period in case of deposits,
whether secured or unsecured, matured and claimed but remaining unpaid.
• Punishment for Contravention: Company & every officer of the Company who is in
default shall be punishable with fine which may extend to Rs. 5000 and where the
contravention is a continuing one, with a further fine which may extend to Rs. 500 for
every day after the first day during which the contravention continues.
Penal Provisions as per Rules

Pavan Kumar Vijay
Founder & Managing Director
D-28, South Extn. Part- I,
New Delhi 110049
F: +91 1140622201
T: +91 1140622200
pkvijay@indiacp.com
www.corporateprofessionals.com
/pkvijay
/pkvijay
www.pkvijay.com
/pkvijay
/pavanvijay

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