Private Placement of Securities to 50 or more persons amounts to a Public Issue

In the year 2000, Section 67 of the Companies Act, 1956 [the Act] was amended to introduce a proviso prohibiting a company from issuing shares to 50 [Fifty] or more persons otherwise than through a public issue. A public issue of shares is a cumbersome and costly process with enormous disclosure requirements. It is not possible to proceed with an issue of shares to public unless Securities and Exchange Board of India [SEBI], which is the capital market regulator, clears the offer document. The aforesaid amendment was not made as clearly as we have mentioned in the opening sentence.


As you may be aware, lawmakers in India have always had the sadistic pleasure of saying something indirectly testing even the ability of persons with professional qualifications such as company secretaries and lawyers.

Prior to the above amendment, promoters of companies have issued shares to thousands and thousands of persons to raise equity capital. Such share issues were popularly known as private placement of shares and many such companies have vanished soon after the issue of shares. When this law was introduced, private placement of shares to people stopped for a while. However companies resorted to issuing shares to 50 [Fifty] or more people in tranches ensuring that each time the issue is made only to less than 50 [Fifty] persons.

Recently in a leading case, SEBI had issued an order against one such issue of shares by private placement. The aggrieved company termed the order of SEBI as “imprudent and inappropriate”. SEBI vide its order dated 24th November, 2010 held that the issue of Optionally Fully Convertible Debentures (OFCDs) by certain companies to persons who are allegedly friends, relatives, associates, employees and other individuals who are associated / affiliated or connected in any manner with those companies. SEBI held that an issue of securities to 50 [Fifty] or more persons is a ‘Public Issue” and consequently the issue ought to have been made after complying with the relevant provisions of the Act, the SEBI (ICDR) Regulations, 2009 and other Regulations.