Tight cap on pvt placement for fund raising by firms

Ashish Sinha Posted online: Saturday, Sep 21, 2013 at 0000 hrs
New Delhi : Aimed at tightening the norms for the much-abused private placement route of raising funds, the government on Friday proposed a stringent cap on private placement route for fund raising by companies under the new Companies Act, 2013.

These norms are part of the second set of draft rules for the implementation of the new companies law. The second set of draft rules also bring clarity on the issues of private placement, registered valuers, creation of National Company Law Board (NCLB) and the tribunal (NCLBT) among others.

Private placement: The draft rules have made it clear that a company shall not make private placement unless the proposed offer of securities has been approved by the shareholders by way of a Special Resolution for each of the offers/invitations. Also, the draft rules proposes a cap on the number of private placement to 200 persons in one financial year subject to maximum of four such offers in a financial year.

Companies opting for private placement route for fund raising will need to maintain a minimum gap of 60 days between any two such offers. Also the value of such offer shall be with an investment size of not less than Rs 50,000 per person, the draft rules said.

The need to bring in stringent law on private placement mechanism for fund raising arose after instances of cases came to the fore where thousands of crores worth money was raised through private placement of various securities, including debentures, without going through the public offer route where norms are much more stringent. For example, a long-running regulatory dispute over such a fund raising has been in courts.

Sahara has been involved in a legal battle over allegations that it had raised over Rs 24,000 crore through issuance of certain debentures on private placement to more than three crore investors.

After Sebi cracked the whip, Sahara had challenged Sebi's jurisdiction saying that the money was raised through private placement and was not a public offer.

Dormant Company: Aimed at providing lakhs of inactive/defunct companies a chance to convert to the status of a 'dormant company', the draft rules on dormant company provides India Inc faster mechanism for either winding up financially stressed companies or resurrecting them within a five year time-frame because most rules and regulations of the Companies Act will not be applied on dormant companies during the duration of their dormant status.

However, in case a company retains the dormant status for more than five consecutive years, its name will be struck off the register maintained by RoC, the second set of draft rules released on Friday said.

The concept of a 'dormant company' has been included for the first time in the new company law.

A company which has not made any transactions for last two financial years has been defined as a dormant or inactive company. Such companies can now apply to the Registrar of Companies (RoC) seeking the status of a dormant company. The new draft rules paves way for around 5 lakh defunct/inactive companies to apply and get the status of a "dormant company".

Registered Valuers: This is also a new concept introduced in the Companies Act, 2013 whereby any valuation in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets will need to be done by a person having certain qualifications.

The draft rules said registered valuers can be a chartered accountant, company secretary or cost accountant who is in whole-time practice or a retired member of the Indian Corporate Law Service and few more professionals like SEBI approved merchant bankers and architects among others.

The second set of draft rules cover eight chapters and clauses therein including those on prospectus and allotment of securities, management and administration, appointment and remuneration of managerial personnel, compromises, merger and amalgamations, registered valuers, National Company Law Tribunal and Appellate Tribunal, and special courts among others.

With this the corporate affairs ministry has released the draft rules for as many as 24 chapters of the new legislation. Overall, the Companies Act, 2013 has 470 sections spread across 29 chapters. The second tranche of draft rules would be open for public comments till October 19, the corporate affairs ministry said in a statement.

On September 9, the ministry had come out with the first set of draft norms that covered 16 chapters of the new legislation. Draft rules for the remaining chapters are expected by October.