Public Offer

No business can run without funding. Private companies that seek to raise capital through issuing securities have two options: offering securities to the public or through a private placement. Regulations on publicly traded securities are subject to more scrutiny than those for private placements. Each offers capital but the criteria for issuing, ongoing financial reporting, and availability to investors differ with each type of issue.

An initial public offering, or IPO, is the first issue of security made for sale on the open market. These issues are under regulation by the Securities and Exchange Commission, and require financial reporting on a regular basis to remain available for trade by investors.

Going public provides an opportunity to the companies to raise cash for setting up a project or for diversification/expansion or sometimes for working capital or even to retire debt or for potential acquisitions. This is called the fresh issue of the capital where the proceeds of the issue go to the company1.

Companies also go public to provide a route for some of the existing shareholders including venture capitalists to exit fully or partially from the company's shareholding or for promoters to partially dilute their holding. This is called an offer for sale where the proceeds of the issue go to the selling shareholders and not to the company.

Through a public offering, the issuer makes an offer for new investors to enter its shareholding family.[1] The shares are made available to the investors at the price determined by the promoters of the company in consultation with its investment bankers. The successful completion of an IPO leads to the listing and trading of the company's shares at the designated stock exchanges.

Listing offers several benefits. For one, it increases the company's ability to raise debt at finer rates. The company also gets a continuing window for raising more capital, both from the domestic and overseas equity markets. Acquisitions also become simpler as instead of cash payouts, companies can use shares as a currency. The listing also lends liquidity to the stock, which is very critical for the success of employee stock ownership plans, which help to attract top talent.[2]

The listing also carries a considerable degree of prestige for the company.
IPOs became friendlier to small businesses as a result of the passage of the Jumpstart Our Business Startups Act, which was created to support hiring and lessen the otherwise extensive financial reporting burden on small businesses filing for an IPO.[3]

SEBI'S Role in IPO

Any company making an IPO is required to file a draft offer document with SEBI for its observations.[4] Officials of SEBI at various levels examine the compliance with DIP guidelines and ensure that all necessary material information is disclosed in the draft offer documents. The validity period of SEBI's observation letter is three months only means that the company has to open its issue within three months period. [5]

SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document. Submission of the offer document to SEBI should not in any way be deemed or construed that the same has been cleared or approved by SEBI.7 The Lead manager certifies that the disclosures made in the offer document are generally adequate and are in conformity with SEBI guidelines for disclosures and investor protection in force for the time being. This requirement is to facilitate investors to take an informed decision for making an investment in the proposed issue.7

The investors should make an informed decision purely by themselves based on the contents disclosed in the offer documents.[6] SEBI does not associate itself with any issue/issuer and should in no way be construed as a guarantee for the funds that the investor proposes to invest through the issue. However, the investors are generally advised to study all the
material facts pertaining to the issue including the risk factors before considering any investment. [7]They are strongly warned against any ‘tips' or news through unofficial means.

Eligibility norms for making an IPO[8]

SEBI has stipulated the eligibility norms for companies planning an IPO. which are as follows:

1. Net tangible assets of at least Rs 3 crore for three full years
2. Distributable profits in at least three years
3. Net worth of at least Rs 1 crore in three years
4. The issue size should not exceed 5 times the pre-issue net worth
5. If there has been a change in the company's name, at least 50 percent of the revenue for preceding one year should be from the new activity denoted by the new name.

Advantages of Raising Money through Public Offer

Fundraising
The most often cited advantage of an initial public offering is money. In 2016, the median proceeds received from an initial public offering were $94.5 million, and many offerings bring in hundreds of millions of dollars. For example, in 2016, the largest IPO—ZTO Express— netted $1.4 billion.[9] The proceeds from an IPO provide ample justification for many companies to go public even without looking at the other benefits, especially considering the many investment opportunities available because of the new capital.

These funds can benefit a growing company in countless ways.[10] Companies may use an initial public offering to finance research and development, hire new employees, build buildings, reduce debt, fund capital expenditure, acquire new technology or other companies, or to bankroll any number of other possibilities.13 The money provided by an IPO is significant, and can transform the growth trajectory of a company.13

Exit opportunity
Every company has stakeholders who have contributed significant amounts of time, money, and resources with the hopes of creating a successful company. These founders and investors often go for years without seeing any significant financial return on their contributions. An initial public offering is a significant exit opportunity for stakeholders, whereby they can potentially receive massive amounts of money, or, at the very least, liquefy the capital they currently have tied up in the company.[11]

As stated in the previous paragraph, initial public offerings often raise nearly $100 million (or even more), which makes them very attractive to founders and investors who often feel that it is time to receive financial compensation for years of “sweat equity.” It is, however, important to note that in order for founders and investors to receive liquidity from an IPO, they will have to sell their shares of the now-public company on a secondary exchange[12] (e.g., New York Stock Exchange). Shareholders do not immediately receive liquidity from the proceeds of an IPO.

Publicity and credibility
If a company hopes to continue to grow, it will need increased exposure to potential customers who know about and trust its products; an IPO can provide this exposure as it thrusts a company into the public spotlight.[13] Analysts around the world report on every initial public offering in order to help their clients know whether to invest, and many news agencies bring attention to different companies that are going public.

Not only do companies receive a great deal of attention when they decide to go public, but they also receive credibility.[14] To complete an offering, a company must go through intense scrutiny to ensure what they are reporting about themselves is correct. This scrutiny, combined with many individuals' tendencies to trust public companies more, can lead to increased credibility for a company and its products.

Reduced overall cost of capital
A major obstacle for any company, but especially younger private companies, is their cost of capital. Before an IPO, companies often have to pay higher interest rates to receive loans from banks or give up ownership to receive funds from investors.[15] An IPO can lessen the difficulty of receiving additional capital significantly. Before a company can even begin its formal IPO preparation process, it must be audited according to PCAOB standards; this audit is normally more scrutinizing than any prior audits, and fosters greater confidence that what a company is reporting is accurate.[16] This increased assurance will likely result in lower interest rates on loans received from banks, as the company is perceived as being less risky. On top of lower interest rates, once a company is public, it can raise additional capital through subsequent offerings on the stock exchange, which is usually easier than raising capital through a private funding round.

Stock as a means of payment
Being a public company also allows for the use of publicly traded stock as a means of payment. While a private company has the ability to use its stock as a form of payment, private stock is only valuable if a favorable exit opportunity arises.20 Public stock, on the other hand, is essentially a form of currency that can be bought and sold at a market price at any moment, which can be helpful when compensating employees and acquiring other businesses. For a company to thrive, it must hire the right employees. The ability to pay employees with stock or offer stock options allows a company to be competitive when trying to hire top-tier talent, even if the base monetary salary is lower than what competitors are offering.21 Additionally, acquisitions are often an important way for companies to continue to grow and stay relevant. However, acquiring other companies is normally very expensive. When a company is public, it has the option to issue shares of its stock as a means of payment, rather than using millions of dollars of cash.

Private Placement

Private placement is a cost effective way of raising capital without going public.“Private placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in section 42 of Companies Act, 2013.[17] Private Placement means any offer of securities (Not Only Shares) or invitation to subscribe securities to a select group of persons by a company through issue of a private placement offer letter and which satisfies the conditions specified in section 42 of the Act.

A Company shall need to raise funds for purpose of setting up of projects or new venture / expansion of the existing business or for funding the working capital requirements. The Company has the option to raise funds either by way of raising debt funds such as loan from Banks / Financial Institutions / Non#Banking Finance Companies or by way of issue of Debentures or Bonds, or further issue of Share Capital.[18] It will depend on current financial position of the company to choose, whether to raise further funds by way of debt funding or by way of share capital, after taking into consideration its internal financial dynamics.


Part II of the Chapter III of the Companies Act, 2013, deals with the Private Placement. A private placement is a capital raising event that involves the sale of securities to a relatively small number of selected group of persons (Investors). A private placement is different from a public issue in which securities are made available for sale on the open market to any type of investor.24

The provisions of Section 42 of the Companies Act, 2013, as amended by Companies (Amendment) Act, 2017 read with the Rule 14 of the Companies (Prospectus and
Allotment of Securities) Rules, 2014 deal with the issue of securities by way of Private Placement. The Private Placement means any offer of securities or invitation to subscribe securities to a select group of persons (herein referred to as "identified persons"), by way of issue of securities, then only the proposed issue shall be considered as Private Placement.

A Company shall make any offer or invitation, to subscribe the securities through private placement unless the same has been previously approved by shareholders of the Company, by a Special Resolution, for each of the offers or invitations. The notice calling Extraordinary General Meeting of the shareholders must contain an explanatory statement bearing the particulars of offer, date of passing Board resolution, kinds of securities offered and its price, basis or justification for the price, name and address of valuer who performed valuation, amount which the company intends to raise, material terms 24 of raising such securities, proposed time schedule, purpose or objects of offer, contribution being made by the promotes or directors.

Companies using private placements generally seek a smaller amount of capital from a limited number of investors. If issued under Regulation, these securities are exempt from many of the financial reporting requirements of public offerings, saving the issuing company time and money.[19]A private placement issuer can sell a more complex security to accredited investors who understand the potential risks and rewards, allowing the firm to remain as a privately-owned company and avoiding the need to file annual disclosures with the SEC.

Marketing an issue may be more difficult for private placements, as these investments can be quite risky with lower liquidity than publicly traded securities. Private placements can also be done quicker than IPOs. For a company that values its position as a private entity, they don't have to sacrifice that privacy but can still gain access to liquidity, or cash, from the deal.

Procedure 26

1. Company planning to make Private Placement has to first pass a special resolution in the general meeting of the Company.[20]
2. Next, the Company has to issue a Private Placement letter of offer to the Identified persons by the Board to whom the allotment is to be made. [ Companies Amendment Act, 2017].
3. Once the Company receives the allotment money, the Company shall allot the Securities within 60 days and if it fails to do so then refund the money within the next 15 days. If the Company fails to do so then interest @12% will be charged from the expiry of 60th day.
4. The Company has to file return of allotment within 15 days of allotment .Companycannot utilize the Application money until it has filed Return of allotment with the ROC [Companies Amendment Act, 2017].

Background
The conditions imposed in relation to private placements by companies seem to have been issued after the ruling of the Hon"ble Supreme Court of India in the case of Sahara Group wherein the companies. Sahara India Real Estate Corporation Limited ('SIRECL') and Sahara Housing Investment Corporation Limited ('SHICL') issued unsecured optionally fully-convertible debentures ("OFCDs") amounting to about Rs 24,000 crores to more than 2 crore investors. When Securities Exchange Board of India ('SEBI'), had came to know of the large scalecompanies-act-2013.aspx

collection of money from the public by Sahara through issuance of OFCDs, it issued a show cause notice to SIRECL and SHICL inter alia stating that the issuance of OFCD's are public issue and therefore liable to be listed u/s 73 of Act, 1956 and also directed to refund the money solicited and mobilized through the prospectus issued with respect to the OFCDs, since they had violated various other clauses of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 and also various provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

It was urged by the Sahara Group that OFCDs were issued in the nature of "hybrid instruments" as defined u/s 2(19A) the Act, 1956 and SEBI did not have jurisdiction to administer those securities since Hybrid securities were not included in the definition of 'securities' under the Securities and Exchange Board of India Act, 1992 ("SEBI Act"), or the Securities Contract Regulation Act, 1956 ("SCRA"), but would be governed by the Central Government under section 55A(c) of the Act, 1956.

The Supreme Court held that OFCDs issued by Sahara Group were public issue of debentures, hence securities and once the number 49 is crossed, the proviso to Section 67(3) becomes effective and it is an issue to the public, which attracts Section 73(1) of Act, 1956 and application for listing becomes mandatory which falls under the administration of SEBI u/s 55A(1) (b) of the Act, 1956. The Court upheld the proceedings of the SEBI and Sahara Group was ordered to refund the amount to investors along with interest.

Advantages of raising funds through PRIVATE PLACEMENT29
Small businesses face the constant challenge of raising affordable capital to fund business operations. Equity financing comes in a wide range of forms, including venture capital, an initial public offering, business loans, and private placement. Established companies may choose the route of an initial public offering to raise capital through selling shares of company stock. However, this strategy can be complex and costly, and it may not be suitable for smaller, less established businesses.

As an alternative to an initial public offering, businesses that want to offer shares to investors can complete a private placement investment. This strategy allows a company to sell shares of company stock to a select group of investors privately instead of the public. Private placement has advantages over other equity financing methods, including less burdensome regulatory requirements, reduced cost and time, and the ability to remain a private company.

Regulatory Requirements for Private Placement
When a company decides to issue shares of an initial public offering, the U.S. Securities and Exchange Commission requires the company to meet a lengthy list of requirements. Detailed financial reporting is necessary once an initial public offering is issued, and any shareholder must be able to access the company's financial statements at any time. This information should provide enough disclosure to investors so they can make informed investment decisions.

Private placements are offered to a small group of select investors instead of the public. So, companies employing this type of financing do not need to comply with the same reporting and disclosure regulations. Instead, private placement financing deals are exempt from SEC regulations under Regulation D. There is less concern from the SEC regarding participating investors' level of investment knowledge because more sophisticated investors (such as pension funds, mutual fund companies, and insurance companies) purchase the majority of private placement shares.

Saved Cost and Time
Equity financing deals such as initial public offerings and venture capital often take time to configure and finalize. There are extensive vetting processes in place from the SEC and venture capitalist firms with which companies seeking this type of capital must comply before receiving funds. Completing all the necessary requirements can take up to a year, and the costs associated with doing so can be a burden to the business.

The nature of a private placement makes the funding process much less time-consuming and far less costly for the receiving company. Because no securities registration is necessary, fewer legal fees are associated with this strategy compared to other financing options. Additionally, the smaller number of investors in the deal results in less negotiation before the company receives funding.

Private Means Private
The greatest benefit to a private placement is the company's ability to remain a private company. The exemption under Regulation D allows companies to raise capital while keeping financial records private instead of disclosing information each quarter to the buying public. A business obtaining investment through private placement is also not required to give up a seat on the board of directors or a management position to the group of investors. Instead, control over business operations and financial management remains with the owner, unlike a venture capital deal.

Public Offer v/s. Private PlacementDifference Between Them

1. Public Offering is one of the methods of selling securities to general public where there are large number of investors. While, Private Placement is one of the methods of selling securities privately or directly to a few group of individual investors or institutional investors.
    
2. Large scale companies raises fund through Public Offering. While, Small scale companies prefer raising funds through Private placements.
    
3. In case of Public Offering, Investment Bankers act as Middlemen which hiring together suppliers and users of long term fund in capital market. While, there is no middleman required in case of private placement since direct negotiations take place between the issuing company and the investors.
    
4. In case of Public Offering, Floatation costs are required to be included since underwriters are required. While, in case of Private Placement, Floatation cost is excluded as there is no need of underwriter.

End-Notes:

1. https://blog.ipleaders.in/public-offering-law-india/
2. https://www.nseindia.com/products-services/about-initial-public-offerings
3. https://economictimes.indiatimes.com/marketstats/pid-183,exchange-50,pageno1,sortorder-0,sortby-0.cms
4. https://blog.ipleaders.in/public-offering-law-india/
5. https://economictimes.indiatimes.com/marketstats/pid-183,exchange-50,pageno1,sortorder-0,sortby-0.cms
6. https://blog.ipleaders.in/public-offering-law-india/
7. https://www.nseindia.com/products-services/about-initial-public-offerings
8. https://economictimes.indiatimes.com/marketstats/pid-183,exchange-50,pageno1,sortorder-0,sortby-0.cms
9. https://www.nseindia.com/products-services/about-initial-public-offerings
10. https://blog.ipleaders.in/public-offering-law-india/
11. https://blog.ipleaders.in/public-offering-law-india/
12. https://www.nseindia.com/products-services/about-initial-public-offerings
13. https://blog.ipleaders.in/public-offering-law-india/
14. https://www.nseindia.com/products-services/about-initial-public-offerings
15. https://blog.ipleaders.in/public-offering-law-india/
16. https://economictimes.indiatimes.com/marketstats/pid-183,exchange-50,pageno-
17. https://economictimes.indiatimes.com/marketstats/pid-183,exchange-50,pageno1,sortorder-0,sortby-0.cms
18. https://en.wikipedia.org/wiki/Initial_private_placement
19. https://taxguru.in/company-law/private-placement-securities-companies-act-2013.html 26 https://www.taxmann.com/blogpost/2000001961/private-placement---section-42-ofcompanies-act-2013.aspx
20. https://www.taxmann.com/blogpost/2000001961/private-placement---section-42-of
21. https://blog.ipleaders.in/public-offering-law-india/
22. https://www.nseindia.com/products-services/about-initial-public-offerings
    
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