Updated by Nidhi Kapoor and Pooja Dhiman as on September 25, 2020
Rights issue and private placement are the two ways to issue further shares, other than initial public offers.
When a company issues shares to a selected group of investors, instead of inviting public at large, it is called private placement of shares. It falls neither in the category of a public issue, nor a rights issue. It is a faster way of raising capital, as a company has to comply with fewer requirements. An issue of shares offered at a special price by a company to its existing shareholders in proportion to their holding of old shares is called right issue.
Cited below is a glimpse of basic differences between private placement & rights issue:-
|Basis of difference
It means any offer of securities or invitation to subscribe securities to a selected group of persons by a company (other than by way of public offer) through private placement offer-cum-application letter.
It means offering shares to the existing equity shareholders of the company in proportion to their existing shareholding as on the date of offer.
Section 42 read with rule 14 Companies (Prospectus and allotment of securities) Rules,2014.
Section 62(1)(a) read with Rules.
|Restriction on Number of person to whom the offer is made
An Offer or invitation to subscribe to the securities shall not be made to more than two hundred* people, in aggregate in one financial year.
*The aforesaid limit would be reckoned for each kind of security i.e. equity share, preferential share or debenture.
In case the limit is exceeded, it shall be deemed as public offer.
No such restriction in case of the right issue.
|Separate Bank Account
Company is mandated to open a separate bank account in a scheduled bank, exclusively for the purpose of receipt of Share application money under the said offer.
No need to open a separate Bank Account in this case.
A valuation report from registered valuer is mandatory and the offer letter shall prescribe the basis on which the price of the security has been derived.
A valuation report is not required since the Companies Act does not restrict issuance of shares at a value less than Market Value to existing shareholders.
However, the report is mandatory in case of issue of shares to existing non-resident shareholders.
Prior Shareholders’ approval is required by way of Special Resolution.
No need to take the approval of shareholders of the Company. Approval of the Board is sufficient for the right issue.
Offer cum application letter shall require to be given in form PAS 4 and the company shall maintain the complete record of the issue in the form PAS 5.
No fixed format is be prescribed for the offer letter as per Companies Act. However, the offer letter must contain the number of securities offered and the period for which the offer shall remain open.
No specific minimum/ maximum offer period is prescribed.
Offer shall be open for subscription for a minimum period of 15 days and a maximum of up to 30 days. However, in the case of Private Company, if consent of at least 90% of members is received, the offer period can be reduced from above specified days.
Further, the offer letter must be dispatched (e-mail/ registered or speed post/courier/ by hand) to the shareholders at least 3 days before the date of opening of the issue.
|Renounce the offer letter
No such right is available to the persons receiving the private placement offer. However, the right to accept/reject the offer letter is available to such persons.
Unless the Articles of the Company specify otherwise, the offer shall include a renunciation right i.e shareholders have right to Renounce/accept/reject the offer letter within a minimum period of 15 days subject to the maximum of 30 days.
|Mode of receipt of Subscription Money
Subscription money shall be paid either through cheque, demand draft, or any other banking channel but not by cash.
No such specific provisions prescribed in case of right issue.
|Utilisation of Money
The Company shall not utilise monies raised through private placement offer unless allotment is made and return of allotment is filed with the Registrar.
Further, such money shall be utilised in manner specified in the relevant section.
No such restriction in case of the right issue.
|Refund of share application money
If the allotment is not made within a period of 60 days from the receipt of application money then, the company shall repay the application money within next 15 days.
Further, if the Company fails to repay that amount within the aforesaid period then it shall be liable to repay the amount with an interest @ 12% per annum from the expiry of 60 days.
This application money will be treated as a deposit after the expiry of 60 days.
If allotment is not made within a period of 60 days from the receipt of application money, the amount shall be treated as a deposit after the expiry of 60 days.
However, there is no provision relating payment of interest.
|Return of allotment
A return of allotment shall be filed with the Registrar within the 15 days from the date of allotment.
A return of allotment shall be filed with the Registrar within the 30 days from the date of allotment.
|Subsequent offer / issue of shares
No fresh offer can be made unless the previous offer stands completed i.e. either the allotment has been completed or the Company has withdrawn the offer.
Provided that subject to the maximum two hundred members, a company may, at any time, may make more than one offer of securities to such members.
There is no such provision in section 62(1)(a).
The Company issuing securities under private placement shall not release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.
No such restriction under the right issue since the issue involves only existing shareholders.
Since this process involves Shareholders meeting, Valuation Report, etc., it is relatively longer.
The rights issue process involves lesser approvals and documentations, hence less time consuming.