Offering of Securities: Public or Private?

Today's Economic Times carries a newsreport about a company that has 2.6 million shareholders, but nevertheless continues to be unlisted. If true, this oddity of circumstances calls into question section 67 of the Companies Act. That section provides any offer of shares or debentures made to 50 persons or more will be considered a public offering, which will require listing of the securities on a recognized stock exchange. The only way a company can stay out of the purview of this provision is if it makes distinct offerings, with each such offering being made to less than 50 persons. In a company with millions of shareholders, it is unlikely that such an approach is practicable, given the enormous number of separate offerings the company would have to make to invoke the private placement provision. The only other possibility is where the company is a non-banking finance company, as the 50-offeree restriction does not apply so long as the offer is made in accordance with guidelines prescribed by SEBI for the purpose in consultation with the RBI. In order to prevent abuse of section 67, it may be necessary to consider the inclusion of an absolute limit on number of shareholders in order that a company may continue to be unlisted. This would be in addition to the limit on number of offerees per securities offering. The overall limit on number of shareholders would be akin to requirements in the US where a company with 500 shareholders becomes subject to reporting obligations, which would lead to companies to list anyway. Google went down the path of listing for this reason, and Facebook is expected to follow soon. Such a limit on number of shareholders would be clearer to companies to follow and easier for regulators to implement that the current provisions of section 67 which continue to reveal uncertainties and loopholes.

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