This article is written by Suprava Samanta from Sister Nivedita University, BBA-LLB (Hons) 4th Year, during her internship with LeDroit India.
Keywords: Public offer, Private placement, Securities law, SEBI regulations, Capital markets.
ABSTRACT: Public offer and Private placement are critical mechanisms for raising capital in modern financial markets, governed by distinct legal frameworks under the Companies Act, 2013. A public offer, characterised by wide investor outreach and transparency, involves offering securities to the public, requiring compliance with SEBI regulations and detailed prospectus disclosures. Conversely, a private placement targets a selected group of investors, limiting the offer to 50 persons per financial year, excluding Qualified Institutional Buyers (QIBs). These mechanisms address varying corporate needs, with public offers promoting broad participation and private placements ensuring efficient fundraising for specific investors.
Public offers are often favored for large-scale fundraising, their procedural rigor may deter smaller companies. On the other hand, private placements, though efficient, require stringent compliance to prevent misuse. The dynamic interplay between these approaches reflects the evolving nature of India’s capital markets, balancing transparency with efficiency.
Introduction: No business can run without funding. Private companies that seek to raise capital through issuing securities have two options: offering securities to the public or through a private placement. Regulations on publicly traded securities are subject to more scrutiny than those for private placements. An initial
public offering, or IPO, is the first issue of security made for sale on the open market. Through a public offering, the issuer makes an offer for new investors to enter its shareholding family. The shares are made available to the investors at the price determined by the promoters of the company in consultation with its investment bankers. The successful completion of an IPO leads to the listing and trading of the company’s shares at the designated stock exchanges.1
Public Offer
A public offer involves issuing securities to the public at large or to an unrestricted group of investors. It is governed by Section 23 of the Companies Act, 2013,2and SEBI regulations, which emphasize transparency and investor protection. Companies must issue a prospectus, as per Section 26, detailing the financial, operational, and risk aspects of the offering.
Types of Public Offers
• Initial Public Offering (IPO): An Initial Public Offering (IPO) is when a company offers its shares to the public for the first time. This is typically done by companies seeking to raise capital to fund growth, reduce debt, or achieve other business objectives. By going public, companies must comply with regulatory requirements, provide financial disclosures, and are listed on a stock exchange.
• Further Public Offering (FPO): A Further Public Offering (FPO) occurs when a publicly traded company issues additional shares to the public after its IPO. Companies may undertake an FPO to raise more funds for expansion, meet operational costs, or reduce debt. FPOs can dilute the value of existing shares, but they allow companies to leverage their established market presence.
Advantages of Public Offers
• Wide Inventor Base: Public Offers enable companies to access a broad range of investors, including institutional investors, retail investors, and high-net-worth individuals. This diversified investor base can provide stability and reduce reliance on a single funding source.
• Transparency: When companies go public, they are required to adhere to stringent regulatory and reporting standards. This improves transparency in operations and financial disclosures, increasing investor confidence and enhancing the company’s reputation.
1 www.legalserviceindia.com
2 The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India) s. 23
• Liquidity: Publicly traded shares can be brought and sold easily on the stock exchange, providing liquidity to investors. This feature attracts more participants, as investors are assured of the ease of entering and exiting investments.
Challenges of Public Offers
• High Costs: Launching a public offer involves substantial expenses, including underwriting fees, legal charges, auditing costs, and promotional expenses. Maintaining a public listing also incurs ongoing costs such as compliance fees, reporting costs, and investor relations management.
• Regulatory Burden: Public companies are subject to complex regulatory frameworks, requiring regular disclosures, audits, and adherence to corporate governance norms. These requirements can be time-consuming and resource-intensive, diverting focus from core business activities.
• Market Volatility: Share prices of public companies are influenced by market conditions, economic trends, and investor sentiment. Market volatility can lead to unpredictable share price movements, impacting the company’s perceived valuation and long-term strategy.
Private Placement
Private placement is a cost-effective way of raising capital without going public. “Private Placement” means any offer of securities or invitation to subscribe securities to a selected group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in Section 42 of the Companies Act, 2013.3It restricts the number of investors to 50 per offer (excluding QIBs) in a financial year and mandates detailed records of offers and subscriptions.
Types of Private Placement
• Selective Audience: Private placement involves offering securities to a select group of investors rather than the general public. These investors typically include institutional investors, high-net-worth individuals, and accredited investors. By targeting a specific audience, companies can focus on those with a strong interest and financial capability to invest.
• Efficient Fundraising: Private placements are tailored to attract investors quickly, without the need for extensive marketing campaigns or regulatory formalities. This makes them an efficient method for raising funds, especially for smaller companies or startups seeking immediate capital.
3 The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India) s. 42
• Confidentiality: Unlike public offers, private placements allow companies to maintain greater confidentiality regarding their financials and strategic plans. This limited disclosure minimizes the risk of sensitive information being publicly available.
Advantages of Private Placement
• Cost-Effective: Private placements typically Involve lower costs compared to public offers. Companies save on underwriting fees, regulatory compliance expenses, and promotional costs. This makes private placement a cost-effective option for raising capital, especially for smaller businesses.
• Speed: Since private placements do not require the extensive documentation and regulatory approvals associated with public offerings, the process is quicker. This speed is particularly advantageous for companies needing immediate funding to seize market opportunities or address financial needs.
• Strategic Investors: Private placements often attract strategic investors who can bring more than just capital to the table. These investors may offer industry expertise, networks, or partnerships that can enhance the company’s growth and competition edge.
Challenges of Private Placement
• Restricted Reach: By targeting a select group of investors, private placements limit the pool of potential participants. This restricted reach may reduce the total capital raised, especially if the targeted investors do not respond as expected.
• Risk of Misuse: Since private placements rely on minimal regulatory oversight and disclosure, there is a risk of misuse or misrepresentation by either the company or the investors. This can lead to disputes, legal complications, or reputational damage.
• Illiquidity: Securities issued through private placements are often not traded on stock exchanges, making them illiquid. Investors may face challenges in selling their holdings or existing their investment before the company’s next major funding or exit event.
Case Laws
1. Sahara Indian Real Estate Corporation Ltd. V. SEBI (2012)4 4 Sahara Indian Real Estate Corporation Ltd. V. SEBI AIR 2012, 10 SCC 603
Facts
Sahara Indian Real Estate Corporation Ltd. (SIRECL) and Sahara Housing Investment Corporation Ltd. (SHICL) issued Optionally Fully Convertible Debentures (OFCDs) to over 30 million investors, raising Rs 24,000 crore. These issuances were structured as private placements, by passing the requirement of filing a prospectus with SEBI. SEBI challenged this issuance, alleging it was a public offer under Section 67 of the Companies Act, 1956.5
Judgement
The Supreme Court held that the Sahara companies’ actions amounted to a public offer. The Court emphasized that any issuance of securities to 50 or more persons (now 200 under the Companies Act, 2013) constitutes a public offer. It ruled that the companies had violated SEBI regulations by not registering the prospectus and obtaining necessary approvals.
Illustration (IPC Concept)
Just as wrongful restraint under Section 341 IPC6involves hindering an individual’s lawful movement, structuring a transaction as a private placement to evade legal scrutiny restrains SENI’s authority and investors’ rights to transparency.
2. SEBI v. Akshya Infrastructure Pvt. Ltd. (2021)7
Facts
Akshya Infrastructure Pvt. Ltd. Issued Redeemable Preference Shares (RPS) to over 1,000 investors without adhering to the public offer regulations. The company argued that these were private placements exempt from SEBI’s oversight.
Judgement
The Securities Appellate Tribunal (SAT) upheld SEBI’s decision, stating that the issuance constituted a public offer under Section 42 of the Companies Act, 2013.8 The tribunal underscored that private placements must comply with stringent conditions, including a cap on the number of investors and mandatory disclosures.
3. Shailesh Shah v. SEBI (2023)9
5 The Companies Act, 1956, Acts of Parliament, 1956 (India) s. 67
6 The Indian Penal Code, 1860, No. 45, Acts of Parliament, 1860 (India) s. 341
7 SEBI v. Akshya Infrastructure Pvt. Ltd. AIR 2021
8 The Companies Act, 2013, No. 18, Acts of Parliament, 2013 (India) s. 42
9 Shailesh Shah v. SEBI, AIR 2023
Facts
A fintech company raised funds from 300 investors through convertible instruments, claiming it was a private placement. However, the offering was advertised on social media, raising questions about its classification as a public offer.
Judgement
The SAT ruled that advertising the offering violated the private placement norms, as public solicitation transformed the transaction into a public offer. The Court reiterated that the essence of private placement lies in limited, exclusive communication with eligible investors.
Conclusion
Public offers and Private Placements are essential instruments for raising capital, each with unique benefits and limitations. Public offers democratize investment opportunities but involve higher costs and regulatory compliance. Private Placements offer efficiency and confidentiality but require strict adherence to legal norms to prevent misuse. The distinction between public offer and private placement ensures investor protection and transparency in capital markets. The Companies Act, 2013 and SEBI regulations ensure accountability in public offers and private placements. These legal frameworks align with India’s goals of fostering economic growth while preventing market abuse. Upholding the sanctity of these regulations requires companies to navigate between public offers and private placements responsibly. As markets evolve, a nuanced approach to these mechanisms will foster robust and inclusive capital markets in India.
