Home » Company Law » NEW GUIDELINES FOR UNLISTED PUBLIC COMPANIES ISSUING SECURITIES ON A PREFERENTIAL BASIS OR BY PRIVATE PLACEMENT METHOD – NEW WINE IN OLD BOTTLE?

NEW GUIDELINES FOR UNLISTED PUBLIC COMPANIES ISSUING SECURITIES ON A PREFERENTIAL BASIS OR BY PRIVATE PLACEMENT METHOD – NEW WINE IN OLD BOTTLE?

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Arindam Pal, [with inputs from Arjunpal Singh Walia, 2nd Year, LL.. B (Hons) , Jindal Global Law School]

The Ministry of Corporate Affairs, Government of India is considering replacing the current Unlisted Public Companies (Preferential Allotment) Rules, 2003 with new Unlisted Public Companies (Preferential Allotment) Rules, 2011. The draft rules (currently put up on the Ministry of Corporate affairs website for public comments till June 20, 2011) are expected to come into force by the end of June, 2011.

The issuance of these draft rules have been seen as a welcome step following the Stock Exchange Board of India (“SEBI”) Order, dated November 24, 2010 in the matter of “Issuance of Optionally Fully Convertible Debentures (“OFCDs”) by Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited” wherein SEBI expressed serious concerns for the safety of the funds of the investors who have subscribed to the OFCDs issued by the said companies on private placement basis in absence of a valid offer document and without filing requisite return of allotment with the relevant Registrar of Companies.

Under the new draft rules, unlisted public companies would be allowed to issue securities (preferential issue of equity shares, fully convertible debentures, partly convertible debentures, or any other financial instrument that can be converted into equity shares on a later date) on a preferential basis or by private placement method if it is allowed under Articles of Association of the company and backed by a special resolution passed by the members of the company in a general meeting only.

The draft rules mandate the issuer company to make several disclosures in the offer document inter alia including but not limited to the following while issuing securities on a preferential basis or by private placement method:

  1. Name of issuer alongwith date and place of incorporation, address of registered office, telephone number, fax number and name of contract person, website address and e-mail address;
  2. Nature number, price and amount of specified securities offer and size of the total issue;
  3. Aggregate amount proposed to be raised through all the stages of offers made through offer documents;
  4. Date of the opening of offer;
  5. Date of closing of issue; and
  6. The object of the issue and brief detail of project, if any for which issue is made

Also, the draft rules specify the following:

(i)              there should not be a time gap of more than 30 days between the opening and the closing of issue of the private placement and

(ii)            there should be a minimum gap of 60 days between two issues;

(iii)           in the event the aggregate amount proposed to be raised through issue of debentures, convertible debentures or any other financial instruments (which would be convertible into or exchanged with equity shares at a later date) under private placement results into a cumulative amount of Rs. 5 crores or more, the concerned unlisted company has to seek prior approval of Central Government for such an issue.

Additionally, the draft rules also requires the unlisted public company to file a compliance certificate by a practicing Chartered Accountant/ Company Secretary/ Cost Accountant with the office of Registrar along with return of allotment (within 30 days of such issue) specifying that preferential allotment/ private placement of securities has been made in accordance with the required rules.

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