Different Ways of Introducing Capital Into Companies.

Different Ways of Introducing Capital Into Companies

In common parlance, Capital can be defined as wealth in the form of money or other assets owned by a person or organization or available for a purpose such as starting a company or investing. As per Section 2 (84) of the companies Act, 2013 shares mean a share in the share capital of a company and includes stock. It is clear that for carrying on the business capital is an essential item. Capital is the money of shareholders invested in the business to earn revenue and make a profit.

If a company is already in existence and wants to expand or grow its business then it will require money. Money can be brought into the business in two ways one is capital and the other is the loan. Here we will discuss the ways in which further capital could be introduced into the company.

The Companies Act, 2013 states that

A public company may issue securities to the public:-

• through prospectus (herein referred to as “public offer”)
• through private placement
• through a rights issue or a bonus issue

A private company may issue securities:-

• by way of rights issue or bonus issue
• through private placement

It is important to understand the difference between the word offer and Issue.

Offer means present or proffer (something) for (someone) to accept or reject as desired. (Here acceptance is required or pending)

Issue supply or distribute (something) for use or sale (Issue is the step after acceptance of the offer).

The genuine term for these words shall be a Public Offer, Private Placement Offer, and Right Offer.

The basic difference between Public Offer, Private Placement, Preferential Offer, Right offer, and Bonus Issue is as follows.

Public Offer:-

It is basically a method to raise capital from the public at large by offering a prospectus through Initial Pubic Offer or Further Public Offer. Prospectus can be offered only by a public limited company because Section 2 (68) (iii) prohibits the private limited company from inviting the public to subscribe for any securities of the company. In general, when the offer is not domestic, it is a public affair. There is no definition of the public given in the Companies Act, 2013. In popular parlance, a public means the general body of mankind, or of the nation.

Section 27 of the Companies Act, 2013 states that matters relating to the issue (offer), transfer of securities and non-payment of dividend related to listed companies and companies intended to list their securities in Stock Exchanges shall be administered by the regulations of Securities Exchange Board of India.

Private Placement:-

The private placement is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors. Generally, these investors include friends and family, accredited investors, and institutional investors.

Private placements have less interest rate risk, as companies generally offer them at a fixed rate. This grants much-needed reassurance in the event of rising interest rates. Between regulatory issues, legal documentation, underwriting expenses, and bank fees, issuing a public offering can quickly become expensive.

Preferential Offer:-

Preference shares, more commonly referred to as preferred stock, are shares of a company's stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders.

Preferential Offer does not include the following

1) An offer of specified securities made through a public issue,

2) A rights issue,

3) A bonus issue,

4) An employee stock option scheme,

3) An employee stock purchase scheme,

4) Qualified institutions placement,

5) An issue of sweat equity shares,

6) Depository receipts issued in a country outside India, or

7) Foreign securities

Private Placement deals with securities but preferential offer deals with shares only. Private placement includes the issue of shares to the Qualified Institutional Buyers whereas preferential offer does not include it.

Right Offer:-

Where a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to persons who are the holders of equity shares of the company in proportion to the paid-up share capital. The right issue is a wholly separate way of further issue of capital. It is different from the public issue, private placement, and preferential offer. In case of the rights issue, a Board Resolution is required to issue further shares to the existing shareholders of the Company. A right of renunciation exists with the shareholders who are eligible to get the share.

Bonus Issue:-

A bonus issue refers to the further issue of shares to the existing shareholders of the Company in the proportion of existing share they have with them without any consideration. The bonus shares are issued by capitalizing the amount from the reserve and surplus.