Methods of Raising Share Capital

A company does not raise fresh share capital only in one standard way; the Companies Act, 2013 — read together with Section 23, which sets out how a public and a private company may respectively offer securities — recognises several distinct routes, each suited to a different situation and each carrying its own procedural requirements. Section 23(1) restricts a public company to raising capital either by a public offer (through the issue of a prospectus) or by a private placement, or, where the company is already listed or seeking listing, in accordance with SEBI's regulations; a private company under Section 23(2) may raise capital only by private placement or a rights/bonus issue, since it is barred from inviting the public to subscribe to its securities at all.

Public issue. A public issue is an invitation to the general investing public to subscribe to a company's securities, made through a prospectus. Where the company is issuing shares for the very first time to the public and getting them listed on a stock exchange, this is called an Initial Public Offer (IPO); where an already-listed company issues fresh shares to the public afterwards, it is called a Further Public Offer (FPO). Both are governed jointly by the Companies Act, 2013 and by the Securities and Exchange Board of India (SEBI) — the statutory regulator for the securities market, constituted under the Securities and Exchange Board of India Act, 1992 — whose Issue of Capital and Disclosure Requirements regulations lay down the detailed disclosure, pricing, and procedural conditions a public issue must satisfy.

Rights issue. Under Section 62(1)(a), where a company proposes to increase its subscribed capital by issuing further shares, those shares must first be offered to the persons who, on the date of the offer, are holders of equity shares, in proportion to their existing shareholding — this is the statutory "pre-emption right" that protects an existing shareholder's proportionate stake from being diluted without being given the first opportunity to maintain it. The offer must specify a period of not less than fifteen days (and not more than thirty days, unless a shorter period is agreed by shareholders holding not less than ninety per cent of paid-up share capital) within which the offer, if not accepted, is deemed declined, and the offer must state whether the shareholder may renounce the right in favour of another person.

Bonus issue. Section 63 permits a company to capitalise its free reserves, securities premium account, or capital redemption reserve by issuing fully paid-up bonus shares to existing members in proportion to their holding, without requiring any fresh payment from them. A bonus issue is not a fresh inflow of capital from investors at all — it merely converts accumulated reserves into share capital — and Section 63(2) makes it conditional on authorisation by the articles, a shareholders' resolution, no default in payment of interest or principal on fixed deposits or debt securities and no default in payment of statutory dues of employees, and on all existing partly paid-up shares being made fully paid-up before or along with the bonus issue; bonus shares can never be issued by capitalising a revaluation reserve.

Private placement. Section 42 allows a company to offer securities to a select group of persons (other than by way of a public offer) through a private placement offer letter, subject to strict conditions: the offer can be made to not more than two hundred persons in a financial year (excluding qualified institutional buyers and employees under a stock option scheme), it must be made only to identified persons whose names are recorded before the offer is made, application money must be paid only by cheque, demand draft, or other banking channel (never cash), and allotment must be completed within sixty days of receipt of the application money, failing which the money must be refunded within fifteen days with interest for the delay. …