Q.Explain the various methods by which a company may raise share capital under the Companies Act, 2013.
Section 23 of the Companies Act, 2013 is the gateway provision on this topic: it states that a public company may raise share capital by a public offer through a prospectus, by private placement, or, once listed, in accordance with SEBI's regulations, while a private company is confined to private placement or a rights or bonus issue, since Section 3(1)(c) read with the definition of a private company bars it from inviting the public to subscribe to its securities at all. Within this framework, several distinct methods are available.
A public issue invites the general investing public to subscribe through a prospectus; where a company goes to the public for the first time and seeks listing, this is an Initial Public Offer, and where an already-listed company issues fresh shares to the public later, it is a Further Public Offer. Both are governed jointly by the Companies Act's prospectus and allotment provisions and by SEBI's Issue of Capital and Disclosure Requirements regulations.
A rights issue, under Section 62(1)(a), requires a company proposing to increase its subscribed capital to first offer the new shares to existing equity shareholders, in proportion to their current holding, allowing them at least fifteen days (up to thirty, unless shortened by consent of holders of ninety per cent of paid-up capital) to accept, decline, or renounce the offer in favour of another person — protecting an existing shareholder's proportionate stake from being diluted without being given first refusal.
A bonus issue, under Section 63, capitalises the company's free reserves, securities premium account, or capital redemption reserve into fully paid-up shares distributed to existing members in proportion to their holding, without requiring any fresh payment — it does not raise any new money from outside, but converts what the company already holds into share capital, subject to conditions including authorisation in the articles, no default on fixed-deposit or debt-security payments, no default on employee statutory dues, and prior conversion of any partly paid-up shares into fully paid-up shares.
Private placement, under Section 42, allows an offer to a select, identified group of not more than two hundred persons in a financial year (other than qualified institutional buyers and ESOP employees), made through a formal offer letter, with application money received only through a banking channel and allotment completed within sixty days of receipt, failing which the money must be refunded with interest. A preferential allotment is a particular application of this route — an issue to specifically identified allottees, often promoters, strategic investors, or creditors, made outside a rights or public issue, requiring a special resolution and compliance with pricing and lock-in conditions.
Finally, two methods are aimed specifically at a company's own employees and directors rather than outside investors: an Employees Stock Option Scheme under Section 62(1)(b), which gives employees an option to subscribe to shares at a predetermined price after a vesting period, approved by special resolution; and sweat equity shares under Section 54, issued to directors or employees for consideration other than cash, or at a discount, in recognition of know-how or value additions they have contributed, again subject to a special resolution and prescribed conditions.
A company may raise share capital by: (i) a public issue through a prospectus (IPO or FPO), governed by the Companies Act and SEBI's regulations; (ii) a rights issue to existing shareholders under Section 62(1)(a); (iii) a bonus issue capitalising free reserves, securities premium, or capital redemption reserve under Section 63; (iv) private placement to a select group of up to two hundred identified persons under Section 42, including preferential allotment to specific allottees; and (v) an Employees Stock Option Scheme under Section 62(1)(b) or sweat equity shares under Section 54, both aimed at directors and employees. A private company can use only private placement and rights/bonus routes, since it cannot make a public offer.
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