Pvt. placement of shares
Guest
(Querist) 08 August 2012
This query is : Resolved
Is it necessary to issue a SLP for pvt. placement of shares by an unlisted public company?
Guest
(Expert) 08 July 2013
"Can an unlisted company issue shares on private placement basis? What is the liability of directors of such a company? What if that company's shares don't get listed on any stock exchange? Do the investors in such a company have any exit route?
Whether an offer of shares or debentures to a few persons amounts to a public offer would depend upon the facts and circumstances of each case. However, the Companies Act, 1956, has a provision in terms of section 67, which, inter-alia, provides that in a case where the offer or invitation to subscribe for shares or debentures is made to 50 persons or more, then such an offer would be deemed to be an offer to the public to subscribe. The important point to be noted is that, when such an offer is treated as public offer then it has to comply with all the Sebi requirements as are applicable in the case of an IPO. In other words, any private offer by an unlisted public company to subscribe to shares or debentures should be restricted to a maximum of 49 persons. Such a company would be under an obligation to comply with the rules applicable to unlisted public companies for issuing shares on preferential basis viz. "Unlisted Public Companies (Preferential Allotment) Rules, 2003". The said rules are applicable to all unlisted public companies in respect of preferential issues (private placement) of equity shares, fully convertible debentures, partly convertible debentures or any other financial instruments, which would be convertible into or exchanged with equity shares at a later date. The unlisted public company has to make the specified disclosures as per the said rules. The prospective investor has every right to ask the unlisted public company for the information memorandum giving the highlights of the proposed private placement, which the company is under obligation to provide.
The investors should remember that subscribing to shares offered by an unlisted public company by way of private placement with a promise of getting the same listed, does not mean that the shares would be automatically listed. It also does not mean that a stock exchange would be under any obligation to list the said shares. An unlisted company has to comply with the Sebi requirements and make the initial public offer (IPO). Hence, a mere promise of listing at a later date would depend upon several factors. Moreover, the chances are that such a company would not give any written commitment about having the shares listed on any of the recognised stock exchanges. Any investment in equity shares is always fraught with risks, which would vary depending upon several factors. The directors of the unlisted public company, that has offered shares on a private placement basis, do not incur any extra liability if they have complied with the provisions of the Companies Act while making the private placement. However, if the offer of private placement is misleading or the directors have committed a fraud on the investors, then they could be personally held liable. However, investors should note that even if the directors of the unlisted company had promised that the said shares would be listed and no such listing takes place, though a complaint may be filed against them, seeking effective action would not be easy. In case the shares are not listed, then the investors have no exit route and if they intend to sell the shares then they have to look forward to the persons who sold them the said shares.
Legally speaking, in the case of an unlisted public company, it is not necessary that the said shares should be sold back to the promoters or the persons from whom they were acquired. Such shares can be sold to any person, but normally it would be difficult to find a buyer for unlisted shares. The legal position is that any person who buys such shares can have the same transferred in his name in the register of the company without any objection by the company. Of course, normal compliances like proper transfer deed, affixing transfer stamps, etc., have to be duly adhered to by the seller and the buyer. In conclusion, one can only say that it would be advisable for investors to keep away from unknown unlisted public companies. Unless the promoters are personally known, the investors should refrain from investing in shares or debentures offered by an unlisted public company. Otherwise, the investors would run the risk of getting shares that may be difficult to dispose of even at a discount.
