New Companies Bill may raise private placement limit to 1,000

Written by Ronojoy Banerjee | Ronojoy Banerjee | New Delhi | Updated: Oct 22 2011, 08:46am hrs
Close on the heels of the Securities Appellate Tribunal (SAT) upholding market regulator Sebis June order directing two unlisted Sahara Group companies to repay over R24,000 crore collected in the form of optionally fully convertible debentures or private placements, the corporate affairs ministry is learnt to have devised a carrot and stick policy to tackle the problem.

It is learnt that MCA has increased the private placement threshold limit from 50 persons to 1,000 personsin line with the extant public issue norms governing IPOsin the new Companies Bill that is slated to be tabled before the Cabinet shortly. At present, the minimum issue size for such public issues or IPOs is 1,000 persons.

The government hopes this would remove uncertainties especially in those case when an unlisted company breaches the 50-person cap but the issue size is below the threshold limit for public issues. Meanwhile, MCA has also inserted a caveat as to the number of issues an unlisted company can undertake in a quarter.

As per section 67 of the existing Companies Act if a company issues private placements to more than 50 persons, it is construed as having been made to the public which requires getting listed on the stock exchange and follow stringent disclosures. The ministrys move has been prompted because of the limited options available for a company. Either a company can issue private placements to 49 persons (thereby just meeting the threshold limit) or go for a full public issue i.e. to 1,000 persons.

As of now there is less clarity when it comes to issues that hang in between 50 persons and 999 persons. We hope that the issue can be tackled through the changes in the new Bill, a government source told FE. The proposal for increasing the private placement route has also got backing from the finance and law ministry, sources said.

Another source confirming the development, said, The alignment between private placement requirements and public issue norms is necessary. But companies cannot misuse this route because we are going to clearly mention the number of private placements a company can undertake during a period, he said.

Under the Companies Act an unlisted firm can undertake several private placements if it wants till the time it does not breach the 50-persons cap. That would stop now, source said. As per one of the steps to tighten private placement norms, a company cannot go for a new issuance till the time proper certificates have been awarded to the investors of the previous placements.

In response to a text message corporate affairs secretary said, Companies Bill is a secret document till its introduction in Parliament.

Head research at SMC Global Jagannadham Thunuguntla said though the governments efforts to address the vast grey area is welcome but the spirit of private placements would be lost if the threshold limit is increased to 1,000 persons. The government could have increased it to 500, he said. He added that from 50 to 500 the government could have set limited disclosures while beyond that the disclosures could have been made more stringent.

As per practices in the West, the cap on private placements is 500. So if a company issues private placements to more than 500 investors then it is required to follow the same set of disclosures as mandated for listed companies without having to get actually listed on the stock exchanges, Thunuguntla said.

However, in India companies do not have the option of not getting listed if they exceed the cap on private placements, an issue that had come up during the Sahara case as well.