How to Issue Shares in Private Limited Company?
Private Limited Company

How to Issue Shares in Private Limited Company?

7 Mins read

Since many entrepreneurs prefer to opt for private limited company registration as an ideal business formation type, many new enterprises tend to function as such.  It is usually more desirable than a partnership or sole trader enterprise as the latter offers a limited liability. A private limited company has its rights and is an independent legal entity.

This article further expounds on how share can be issued by a private company through many provisions of the Companies Act 2013 through a right issue, bonus issue, and private placement.

Understanding Shares in a Private Limited Company

Equity shares are referred to as control in a company. In other words, when a private limited company floats such shares, it is, in effect, giving up partial control over the company to investors. The main objective remains always to secure the finances for expansion, debt payment, or other need of the business.

In case of a private company, as per section 23 of the Companies Act 2013, either company may issue shares to its existing shareholders by way of

  1. Rights issue or Bonus issue or
  2. Through Private Placement

The most popular form of raising funds for a Private Limited Company is through the issue of shares.  The Companies Act 2013 offers the legal norms associated with the business operations performed in the country. It does not only impact the composition of the financial system in a firm but also describes the allocation of ownership rights in the shareholders.

Know about the Private Limited Company

A private limited company is one of the business structures with limited liability that any person can form and run a business. The owners of a company are the shareholders, and it is an individual legal person.

The term ‘limited’ in this connection relates to the legal provision which ensure that the responsibility of the company to its finances is limited at the value of shares.  That is, the owners cannot be held liable to pay the debt the company may run into. Since their personal assets will never be used to offset the company’s debt, they save costs.

The limited companies may be public or private. Both companies have limited liability protection. Still, they are different. A public company’s shares get traded in the stock exchange market publicly, while on the other side, shares of a private limited company do not trade publicly. Also, it has a limit of a maximum of 200 shareholders. The directors or officers are the people who are involved in the management of the business organization’s affairs. A private limited company would normally have at least one director; however, the owner, most of the time, acts as a director for the company.

Types of Shares

The Private Limited Company incorporated in India can issue such types of shares as equity shares and preference shares with reference to the objective of organization and the expectation of shareholders.

  • Equity Shares- These are actually the owner of the company. Shareholders have the rights to vote as well as they shall be able to participate in the share of profits earned the company via dividends, and bear the risk at their highest level.
  • Preference Shares- These shareholders have the privileged right, which allows them to claim dividends and be paid back in case of liquidation. They, however, do not exercise their right to vote unless under circumstances allowed, as is in the Companies Act of 2013.

Issuing Shares in Private Limited Company

According to section 62 of the Companies Act of 2013, if a company having share capital decides to issue more shares in order to enhance its subscribed capital, such shares may be offered-

  1. To its existing shareholders.
  2. To employees under a scheme of employees’ stock options, subject to a special resolution passed by the company.
  3. To any person if a special resolution authorizes it.

Rights issue of shares

The rights issue of shares is covered by Section 62(1)(a) of the Companies Act of 2013. Regulation requires that the offer to be made to the existing shareholders should be on proportionate to their current stake.

Companies can also raise funds from rights issues. The existing shareholders can buy more shares at the discounted price in right issue of shares.  To some extent this method helps in that major ownership of the company is not drastically transferred to external shareholders.

Reason For Rights Issue

  • The management of the company is still with the shareholders, who are already in place.
  • The Company is unable to borrow money from outsiders, but it has to meet its capital requirement.
  • The Company can raise more Debt as the DE ratio reduces.

Issue of bonus shares

However, the securities premium account, free reserves account or capital redemption reserve account newly created, may be utilized for issuing fully paid-up bonus shares to members of the company.

Before the introduction of the 2013 Act, a private limited company could offer shares by a passing a board meeting. Now a company can offer share only through those mechanisms that are provided under the Act.

Bonus issue provided in Section 63 of Companies Act of 2013 is a process of issuing additional shares to the shareholder of the company at no cost. This means the shareholders are rewarded extra shares as a reward.

Issue of sweat equity shares

According to Section 54 of the Companies Act, a company can issue sweat equity shares of a class of shares that are already issued to directors or officials by passing a special resolution.

Conversion of loans or debentures into shares

Under Section 62(3) of the Companies Act of 2013, if there is a term that the debentures or loans contain that permits debentures or loans to be converted to shares in the company, a private company may do so by passing a special resolution.

Issue of share on a preferential basis

If a special resolution made at a general meeting approves it, a company may issue shares in any form, including through a preferential offer, to anyone, whether or not those people are the ones mentioned in clauses (a) or (b) of sub-section (l) of section 62 of the Companies Act, 2013.

Such issue on preferential basis should also comply with conditions prescribed in section 42 of the Act (i.e. Private placement). A valuation report of registered valuer determining the price of shares also mandatory.

Private placement

The Private placement is a system through which the company sells shares to particular people like institutions, VIPS etc without coming out in the market. This one is commonly used to raise a huge amount of money within a short time; and to get cash quietly without the conditions governing a public offering.

Section 42 in the Companies Act, 2013 is the requisite law for private placement of shares. It sets out the procedure that must be complied with; this comprises a special resolution, an offer letter, and return of allotment.

Conditions and procedure for private placement

  1. In a financial year, a maximum of two hundred persons may be invited to subscribe for shares or be offered securities.
  2. Within thirty days, the application form and a private placement offer letter must be sent to the person to whom the offer is being made.
  • No new offer or invitation may be issued until the corporation has finished, withdrawn, or abandoned the allocations related to any previous offer or invitation.  For instance, a company issuing equity shares cannot issue preference shares or debentures until the procedure of equity shares is completed.
  1. Within sixty days after the application money for the shares is received, the securities will be allocated. If it is not allotted within that period, company shall repay the application money to the subscribers within fifteen days.
  2. If the company fails to repay within the aforesaid period, it shall be liable to pay with interest at the rate of 12% per annum from the expiry of the 60th day.
  3. The company will not publish any public advertisements or use any marketing, distribution, or media channels or agents to notify such offer to general public.
  • The company shall maintain a full record of private placement offers. And a return of allotment of securities under section 42 shall be filed with the ROC within 30 days.

What is the process of issuing new shares in a private limited company?

In the formation of a Pvt Ltd company, the main founder has the discretion of determining the number of shares to be offered by the private company. Still, according to government laws, there is a minimum limit; the company has to issue at least one share of the company. There are no restrictions on the number of shares that can be issued, and shareholders may decide to expand these numbers at the time of creation of the company. Therefore, when you register with a new company, you can decide on the number of shares you wish to be issued to you.

In order to know about the step-by-step process of issuing shares in a Pvt. Ltd. Company, the following points should be referred to

  • Get permission from the board of directors to issue new shares.
  • Obtain permission from the shareholders if one is needed based on a company’s articles or the laws in operation.
  • Other papers which are required should be prepared these include, the resolutions, share subscription, and share certificate.
  • Determine the price at which the company is to offer the new shares.
  • Issue share certificates to shareholders when you wish to indicate ownership of the shareholder.
  • Record current details of members and allotments in the company’s registers.
  • Documents which may be in form of a particular format or papers that are needed have to be filed to the regulatory authorities.
  • Notify present shareholders of the issuance of shares.
  • In all the processes, ensure that they follow the legal and regulations that govern the procedure.

Non-Compliance of Tax and Filing Requirements

After allotment of shares, companies have to comply with tax legislations and file all such documents before government authority. The company shall submit return of allotment (Form PAS-3) before the ROC within a period of 30 days from the date of allotment.

The penalty for violating Section 42 of the Companies Act 2013 is two crore rupees, or the amount of the offer or invitation, whichever is lower. The company must also return all subscriber funds within thirty days of the penalty order issued under Section 42(10).

From a taxation point of view, any amount of premium received on shares is one thing that may invite attention under the Income Tax Act, 1961. If is issued to a price higher than its fair market value, the excess can be referred to as income from other source and could therefore trigger the correct tax.

Conclusion

In India, The Companies Act, 2013 has the proper mechanism to issue shares by private limited company. Compliance with the legal formalities is mandatory in most of the cases starting from the Board approval and up to filing with Registrar of Companies. It is pertinent to mention here that appropriate documentation, without delayed filings, and proper conformity to the impending valuation norms attain the goal efficiently while serving the cause of the company as well as its shareholders.

Other ways of issuance of shares include rights issues, private placing, and bonus issue. All have their preconditions and requirements before the share can be issued. Ventures should get the necessary resources through correct channels and forms, legally to finance their expansion.

Bibliography

The Companies Act, 2013 (Act No. 18 of 2013)

The Companies (Prospectus and Allotment of Securities) Rules, 2014

The Companies (Share Capital and Debentures) Rules, 2014

https://www.sebi.gov.in/

https://www.mca.gov.in/

https://www.icsi.edu/home/

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Advocate by profession, currently pursuing an LL.M. from the University of Delhi, and an experienced legal writer. I have contributed to the publication of books, magazines, and online platforms, delivering high-quality, well-researched legal content. My expertise lies in simplifying complex legal concepts and crafting clear, engaging content for diverse audiences.
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