Section 23 of the Companies Act, 2013, forms a very basic regulation that any company needs to follow if it aims to raise capital in India. There are two modes under this section: one for public offers and another for private placements. Under this, for public companies, the options are to issue securities through a prospectus or a private placement. However, the rights issue or bonus issue also comes into play. All these are subjected to their respective compliances. Private companies are streamlined and focusing on rights issues and private placements. In comprehending the provisions of Section 23, businesses would know which one is appropriate to raise funds that comply with the law.
Detailed Breakdown of Section 23 of the Companies Act 2013
Section 23 of the Companies Act, 2013, establishes the primary methods through which public and private companies can issue securities. This section outlines the options available to each type of company and specifies the necessary compliance requirements.
1. Issuance Options for Public Companies
Section 23(1) covers public companies and provides them with three options for issuing securities:
Public Offer: Public companies can issue securities directly to the public through a prospectus, which is called a "public offer." This option is governed by the elaborate rules and regulations contained in Chapter III, Part I of the Act.
Private Placement: A public company can also issue securities by way of private placement. Private placement means issuing securities to a limited number of investors and not to the public. The company is required to follow the provisions contained in Part II of Chapter III for this purpose.
Rights or Bonus Issue: A public company can also issue securities through rights or bonus issues.
Rights Issue: This is an offer given by the company to its existing shareholders to purchase additional shares in proportion to their prevailing holdings.
Bonus Issue: This refers to the issue of free of charge additional shares to existing shareholders.
For a listed company (or a company that is proposing to get its securities listed), the Securities and Exchange Board of India Act, 1992, and other regulations as applicable also need to be complied with.
2. Issuance Options for Private Companies
Section 23(2) gives the issue options specifically for private companies. As private companies have relatively fewer sources to raise funds compared to public companies, private companies can issue securities in the following ways:
Rights or Bonus Issue:, private companies also can issue securities by a rights issue or bonus issue as permitted under the provisions of the Companies Act, 2013.
Private Placement: Private companies can raise capital by issuing securities to a selected group of investors through private placement. Like public companies, they must also comply with the provisions of Part II of Chapter III.
Read in detail about the classification of companies
Explanation and Key Definitions
Public Offer: The term "public offer" would encompass both initial public offers (IPOs) and further public offers (FPOs). It also encompasses the offers for the sale of securities to the public by existing shareholders, provided that these are issued through a prospectus.
Initial Public Offer (IPO): An initial public offer is the first instance when the company sells shares of the company to the public.
Further Public Offer (FPO): After its initial offer, a public company can make further issues of shares to the public.
Illustration on Section 23 of the Companies Act, 2013
Public Offer by a Public Company
Example: ABC Ltd., a public limited company, seeks to raise capital to expand its manufacturing facilities. The company decides to issue shares to the public through an Initial Public Offer (IPO). By following the provisions under Section 23(1)(a), ABC Ltd. issues a prospectus detailing the offer and complies with SEBI regulations (since it plans to list the shares on a recognized stock exchange).
Outcome: The public subscribes to ABC Ltd.’s shares, and once listed, the shares are publicly traded, allowing the company to raise funds for its expansion.
Private Placement by a Public Company
Example: XYZ Ltd. is a public company that does not wish to make a public offer but needs capital for an R&D project. It opts for a private placement, where it offers shares to a select group of investors rather than the general public.
Outcome: By complying with Section 23(1)(b) and Part II of Chapter III, XYZ Ltd. successfully issues shares to institutional investors without going through the broader public offer process, allowing it to raise funds more discreetly.
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In Summary
Section 23 of the Companies Act, 2013 establishes clear guidelines for public and private companies on issuing securities, whether through public offers, private placements, rights issues, or bonus issues. This section not only ensures that companies follow specific regulatory frameworks, such as those set by SEBI for listed companies but also provides flexibility in capital-raising methods to suit different business needs. By setting out structured methods for issuing securities, Section 23 promotes transparency, investor protection, and compliance within the securities market. Overall, it plays a vital role in fostering a well-regulated environment for corporate financing in India, supporting both corporate growth and stakeholder trust.
FAQs for Section 23 of the Companies Act, 2013
1. What is the purpose of Section 23 in the Companies Act, 2013?
Section 23 outlines how companies can issue securities, either through public offers, private placements, rights issues, or bonus issues. It ensures companies follow specific methods for raising capital, providing structure and protection for investors.
2. How can a public company issue securities under Section 23?
A public company can issue securities to the public through a prospectus, via private placements, or through rights or bonus issues. For listed companies, this must align with SEBI regulations, adding an extra layer of oversight.
3. Can a private company offer securities to the public under Section 23?
No, private companies cannot issue securities to the public. They can only raise funds through private placements, rights issues, or bonus issues, in line with the Act's restrictions to protect investor interests.
4. What does "public offer" mean in the context of Section 23?
"Public offer" includes an initial or further public offer of securities by a company or by an existing shareholder offering securities to the public. It involves issuing a prospectus to give potential investors clear information.
5. Why is compliance with SEBI important for listed companies under Section 23?
For listed companies, compliance with SEBI regulations ensures transparency and fairness in the securities market. It provides investors with protections and confidence, making the process of capital raising more reliable and regulated.
