Modes of Capital Introduction into the Business

Capital is the residual interest in the assets of an enterprise after deducting all its liabilities. Also known as owner’s equity, it is the access of the aggregate assets of an enterprise over its aggregate liabilities. In other words, equity represents owner’s claim consisting of items like capital and reserve which are clearly distinct from liabilities, i.e. claims of parties other than owners. The value of equity may change either through contribution from / distribution to equity participants or due to income earned / expenses incurred.

Any company would require funds for expansion and growth of its business. Funds can be acquired into the business in two ways i.e. through capital or loan. Here we will discuss the ways in which further capital could be introduced into the company.

Issuance of Securities

In case of Public Company

Through Public Offer.
Through Private Placement.
Through a Right Issue or a Bonus Issue.

In case of Private Company

Through Private Placement.
By way of Right Issue and Bonus Issue.

Let us discuss these options into detail:

Public Offer:

It is a method to raise capital from the public at large by offering a prospectus through Initial Public 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.
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.

Private Placement:

A private placement shall be made only to a selected group of persons who have been identified by the Board, whose number shall not exceed two hundred in a financial year.
The number of members mentioned here shall exclude the qualified institutional buyers and employees of the company those who have been offered securities under a scheme of employee’s stock option.
A company shall not make an offer or invitation to subscribe to securities through private placement unless the proposal has been previously approved by the shareholders of the company, by a special resolution for each of the offers or invitations.
Private placement shall include all types of securities.

Preferential Offer:

The expression ‘Preferential Offer’ means an issue of shares or other securities, by a company to any selected person or group of persons on a preferential basis by passing a special resolution.
Such an offer on a preferential basis should also comply with the conditions of the private placement.
The preferential placement includes equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.

Preferential Offer excludes:

An offer of specified securities made through a public issue,
A rights issue,
A bonus issue,
An employee stock option scheme,
An employee stock purchase scheme,
Qualified institutions placement,
An issue of sweat equity shares,
Depository receipts issued in a country outside India, or
Foreign securities.

Right Offer:

In case of right offer, a company having share capital proposes to increase its subscribed capital by the issue of further shares, to the existing equity share holders 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 right 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.