In this blog post, Sreeja Kumar, a student at Symbiosis Law School and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyzes the provisions laid down by the Companies Act, 1956 and 2013 on the effect of raising capital.
Difference In Provisions Regarding Raising Of Capital
| Provisions | Company Act, 1956 | Company Act, 2013 |
| Issue of preference shares for more than 20 years | It was prohibited under the 1956 statute. | Section 55 and Rule 9 of the Companies (Share Capital and Debentures) Rules A mention that it is ok for a company to issue preference shares for a period exceeding 20 years for infrastructure projects. But there is a condition attached to this allowance, i.e., Redemption of a Minimum 10% of such preference shares per year from the 21st year onward or earlier, on a proportionate basis, at the option of preference shareholder should have been done.[1] |
| Issue of shares on discount | Section 79 stated that issue of such share is allowed, subject to a condition that compliance with certain conditions and Central Govt. approval are taken.[2] | It is completely Prohibited; the only exemption is given in the case of sweat equity shares where shares can be issued at a discount.[3] |
| Consolidation and division of shares | It was permitted to consolidate and divide shares by passing a resolution in a general meeting as per section 94 of the Company Act 1956. | In this act, the consolidation not only requires a voting percentage of shareholders to agree to the same but approval of the tribunal too. |
| New restrictions on alteration of object clause where Co. has any unutilized proceeds from public issues. | Earlier in the previous Act all that was required for Object clause alteration was a special resolution from members and filing of form 23 with the ROC. | The new law requires that Where Company has any unutilized proceeds from public issue; it cannot simply change its objects. The object cannot be changed unless a special resolution is passed to that effect and in compliance of other details that are prescribed. Also, the notice of the same needs to be, published in two newspapers and shall also be placed on the website of the company; Dissenting shareholders should be given an exit in accordance with SEBI regulations. |
| Permissible mode of issuing securities. | Previously the Companies could issue securities by way of public issue, private placement, rights issues or bonus issue. | The new law makes a distinction between the modes of issuance of securities by private or public company, i.e., it is possible for Private co. to issue securities only through a private placement. A public co. can raise capital through IPO via issuing a proper prospectus to that effect. |
| Raising capital through a public offer. | No such provision existed in the previous law. | The new law mandates that issue of securities by public offers can only be done by public Co. and not private Co. |
| Allotment of securities and minimum subscription | Section 69 of the old Act entails applicability of Minimum subscription only to shares. | The new Act extends minimum subscription requirement to all the securities. |
| Issue of Global depository receipts (GDR)-Clause 41. | Did not exist in the old Act. | The new Act allows the issue of the same but after Company passing a special resolution in its general meeting subject to certain conditions to be met. |
| Raising of capital by private placement basis. | Did not exist. | Chapter III, Part II of the Act, 2013 deals exclusively with private placements. Section 42 of the Act, 2013 defines private placement as Offers can be made to such number of persons as may be prescribed and for prescribed amount without issue of prospectus, If offer is made to more than prescribed no. of persons, the same shall be deemed to be an offer to the public company, therefore, such is not allowed to a private company . Hence they have to issue private placement offer only to a specified number of people.[4] |
| Alteration of share capital by consolidation or division of share capital into shares of larger amount | In the previous act the same was permitted under Section 94 (1) in fact, it was further explained with the help of provision that the same could be done through a simple AOA alteration not involving any reduction in the share capital. It did not require the approval of the court or any other authority. | The new Act directs that such alteration cannot be treated as a mere AOA alternation and should be made after an application has been made to the tribunal and obtaining of approval of the tribunal regarding the alteration has been directed. The Approval of the same has also been made mandatory for consolidation and division of share capital only if the voting percentage of shareholders changes consequent on such consolidation. |
| New enabling provision for issue of bonus shares. | No such provision has been mentioned in the Act. | The new Act provides for the issue of bonus shares. It does not exclude Private companies for the issue of the same and allows both private and public Co for the same. |
| No reduction of capital if deposits are not repaid; – Clause 66 | No such provision existed. | It has been allowed subject to the approval of the same by the tribunal and payment of deposits. |
| Special resolution required for issue of debentures with the conversion. | No such provision or requirement existed in the previous act. | The new act mandates special resolution of the members for the issue of debentures with conversion option, whether wholly or partly |
| Appointment of Debenture Trustees (DT) compulsory for public issue of debentures through prospectus to more than 500 persons | Under the previous Act no such ceiling of 500 existed as per Section 117 V. However, Appt. of DT was mandated for issuing a prospectus or a letter of offer to the public for subscription of its debentures. | Appointment of Debentures Trustee has been made mandatory compulsory for public issue of debentures through prospectus to more than 500 persons |
| Public Deposits (PD); (a)Prohibition on acceptance of PD | Section 58 A General prohibitions existed as to acceptance of public deposits. | The law specifically provides that only banking companies, NBFCs, Notified Companies and public company having such net worth as may be prescribed can go for such acceptances. Companies other than above can accept PD only from its members, only if certain conditions like resolution at GM, compliance with rules and regulations of the RBI provision of security for the repayment, filing a copy of circular with the Roc, issuance of circular to its members, creation of deposit repayment Reserve Account, Providing Deposit Insurance, etc., are met. For acceptance of PDs from persons other than members, specific conditions have to be met, like prescribed net worth or turnover, credit rating from a credit agency, creation of charge. |
| Restriction on interim dividend was introduced. | No such restriction existed in section 372 A of the Companies Act, which dealt with inter-corporate loans and investments. | It has been mandated by the new law that BOD can declare interim dividend out of the surplus in the P&L as well as the profits for the financial year in which the interim dividend is sought to be declared. However, In the case of loss, Interim Dividend rate shall not exceed average dividends declared during preceding three financial years. |
| Inter-corporate investment not to be made through more than two layers of investment companies. | No provision existed in section 372 A of the companies act, which dealt with inter-corporate loans and investments. | The new law provides that no investment is to be made through more than two layers of investment companies. The rate of interest on inter-corporate loans should be the prevailing rate of interest on inter-corporate loans the same shall be the prevailing rate of interest on dated government securities. |
Effect On Raising Capital
- The provisions of the new Act regarding private placement and additional disclosures in the prospectus while the affected IPO will help strengthen the capital markets by boosting investor confidence.
- Appointment of Debentures Trustee has been made mandatory/compulsory for public issue of debentures through prospectus to more than 500 persons as per the new Act; the same will boost investor confidence and facilitate in turn the raising of capital.
- A further issue of share capital: The previously existing requirement of section 81 of the 1956 Act regarding further issue of capital is no longer applicable and would no longer restrict private companies from doing the same since sub-section 3 of section 81 of the 1956 Act has not been acknowledged in the 2013 Act. This would help the private companies in raising capital.
- Further, the 2013 Act provides that a rights issue can also be made to the employees of the company who are under a scheme of employees’ stock option, subject to a special resolution and subject to conditions as prescribed. Further, the price of such shares should be determined using the valuation report of a registered valuer, which would be subject to conditions as prescribed [section 62 of 2013 Act]. All the above will indirectly facilitate raising of capital by the companies, and at the same time conditions like the requirement of registered valuer would, in turn, increase the investor confidence and further attract even more investors into buying shares and helping raise capital.
- Reduction of share capital: The 2013 Act imbibes to one of the amendments made in the listing agreement by SEBI. A new clause 24(i) was inserted into the listing agreement which provided that a scheme of amalgamation or merger or reconstruction, should comply with the requirements of section 211(3C) of the 1956 Act. A similar requirement has been introduced in Section 66 of 2013 Act, which states that no an application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such a reduction is in conformity with the accounting standards specified in section 133 or any other provision of the 2013 Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal. Further, the 2013 Act clarifies that no such reduction shall be made if the company is in arrears in repayment of any deposits accepted by it, either before or after the commencement of the 2013 Act or the interest payable thereon. This adds a hurdle to attracting capital in cases where the company is facing financial crunch and opting for window dressing which sometimes becomes imperative for a company to raise capital and survive.
- The 2013 Act restricts certain powers of the board of private companies, with respect to capital, which can be exercised only with the company’s consent by a special resolution. Some powers thus restricted are – To borrow money in excess of the aggregate of its paid-up share capital and free reserves. Its impact would be detrimental to the issue of raising of capital but will add accountability.
- An absolute prohibition of issuing shares at a discount could potentially affect a Company from raising capital during difficult times. The permit issue should be allowed at a discount provided; it is backed up by a valuation by a Registered Valuer.
- Provisions relating to the further issue of capital are made applicable to all types of companies, i.e., even private companies have to comply with these provisions for any further issue of capital. This extension to private companies is to ensure that the shareholders are consulted and their opinion considered for issue of shares by special resolution.
- Amounts received as share application money by private companies also will not be available for use until its allotment of shares entailing security to the shareholder’s money when the amount is raised by IPO giving a boost to investor confidence.
- Shelf prospectus (i.e., a prospectus in respect of which securities are issued for subscription on one or more issues without the issue of a further prospectus) can be issued by classes of companies to be prescribed by Regulations of SEBI facilitating the raising of capital.
- New restrictions on alteration of object clause where Co. has any unutilized proceeds from public issue. The new law requires that where Company has any unutilized proceeds from public issue; it cannot change its objects unless a special resolution is passed by it and the details as may be prescribed. Also, the notice of the same needs to be, published in two newspapers and shall also be placed on the website of the company; Dissenting shareholders should be given an exit in accordance with SEBI regulations. This provision prevents misuse of the money obtained from the public in an IPO by citing different objects, it will boost investor confidence but will not be very helpful for raising capital as many investors might back out due to change in object clause.
Reference:
[1][1]Section 55 of Company Act 2013.
[2] Section 79 of Company Act 1956.
[3] Section 53 of Company Act 2013.
[4] Section 42 of company act 2013
