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Corporate and Other Laws · Prospectus and Allotment of Securities

Public Offer, Issue of Securities and Private Placement

Updated 4 October 2026 · Fact-checked

Section 23 lists how a company may issue securities: public offer by prospectus, private placement, rights issue or bonus issue. A private company cannot make a public offer. Private placement under Section 42 is an offer to identified persons, not above fifty or the prescribed higher number, in a financial year. Solve questions by applying provision, facts, conclusion.

Understand Public Offer, Issue of Securities and Private Placement

A company raises capital by issuing securities. The Companies Act, 2013 lets it do this only in set ways. Section 23 lists them, and the list depends on whether the company is public or private.

A public company may issue securities (a) to the public through a prospectus, called a public offer, (b) through private placement, or (c) through a rights issue or bonus issue. For a listed company, or one that intends to list, SEBI law also applies. A private company has only two routes: rights or bonus issue, or private placement. It cannot go to the public.

The Explanation to Section 23 says a public offer includes an initial public offer (IPO), a further public offer (FPO), and an offer for sale by an existing shareholder, all through a prospectus. An IPO is the first offer to the public by a company. An FPO is a later offer by a company already listed or already having issued to the public. In an offer for sale, existing shareholders sell their shares, so the company does not issue fresh shares.

Section 62 governs a further issue of shares. New shares are offered first to existing equity shareholders in proportion to their paid-up capital (a rights issue). The notice must give a time of not less than fifteen days (or a lesser prescribed number) and not more than thirty days. Unless the articles say otherwise, the offer includes a right to renounce the shares in favour of another person. Shares can also be offered to employees under an ESOP scheme, or to any persons if a special resolution authorises it and the price is fixed by a registered valuer's report.

Section 42 governs private placement. It is an offer or invitation to subscribe, or an issue of securities, to a select group of persons through a private placement offer-cum-application. It is not a public offer. The key tests are who is offered, how many, how the money is paid and how the offer is made. If the numbers are breached, the issue is treated as a public offer.

Key rules to remember

Modes of issue by a public company (Section 23(1))
Public offer by prospectus | Private placement | Rights issue | Bonus issue
A listed company, or one intending to list, must also follow SEBI law for rights and bonus issues.
Modes of issue by a private company (Section 23(2))
Rights issue or bonus issue | Private placement
No public offer is allowed.
Number of persons in private placement (Section 42(2))
Identified persons ≤ 50 (or higher number prescribed) in a financial year
Qualified institutional buyers and employees under an ESOP under Section 62(1)(b) are excluded from the count.
Breach of Section 42(2) (Section 42(11))
Private placement not complying with Section 42(2) = deemed public offer
Then all the provisions of the Companies Act, the SCRA 1956 and the SEBI Act apply.
Offer to more than the prescribed number of persons (Explanation III to Section 42)
Offer, invitation or allotment to more than the prescribed number of persons = deemed offer to the public
It is governed by Part I of Chapter III (the prospectus provisions). This applies whether or not payment is received and whether or not the company intends to list.
Rights offer period (Section 62(1)(a)(i))
Not less than 15 days (or lesser prescribed number) and not more than 30 days
Counted from the date of the offer. If not accepted within the time, the offer is deemed declined.
Notice of rights issue (Section 62(2))
Dispatch at least 3 days before the issue opens
Mode must have proof of delivery, such as registered post, speed post, electronic mode or courier.
Allotment and refund (Section 42(6))
Allot within 60 days of receiving application money; else refund within 15 days after those 60 days
If refund is late, interest at 12% per annum runs from the 60th day.
Return of allotment (Section 42(8))
File with Registrar within 15 days of allotment
It must include a complete list of allottees with full names, addresses and number of securities.
Penalty for late return (Section 42(9))
₹1,000 per day of default, maximum ₹25 lakh
Liable: the company, its promoters and directors.
Penalty for contravention (Section 42(10))
Lower of amount raised or ₹2 crore
The company also refunds all monies with interest within 30 days of the penalty order.

How to solve Public Offer, Issue of Securities and Private Placement questions

Use this method for any question on modes of issue or private placement. Write it in provision, facts, conclusion format.

  1. 1Identify the company type: public or private, listed or unlisted. This decides which modes of issue are open under Section 23.
  2. 2Identify the mode in the facts: public offer, private placement, rights issue or bonus issue.
  3. 3State the governing section: Section 23 for the list of modes, Section 42 for private placement, Section 62 for rights and further issue.
  4. 4Test each condition in the facts: number of persons, identified persons, offer-cum-application, payment mode, renunciation, advertisement, time limits.
  5. 5Check the numbers carefully: 50 persons, 15 and 30 days, 60 days, 15 days, 12%, 3 days.
  6. 6Apply the rule to the facts and spot the breach, if any.
  7. 7State the consequence: deemed public offer, penalty, refund with interest.
  8. 8Conclude in one clear line that answers what was asked.

Quickest way: Count, Channel, Cash, Clock

When to use it: Use this for MCQs and for short case-study answers on private placement.

  1. Count: are the identified persons within 50 (or the prescribed higher number)? QIBs and ESOP employees are excluded from the count.
  2. Channel: was the offer sent only to identified persons, with no public advertisement, media or agents? Is there no right of renunciation?
  3. Cash: was money paid by cheque, demand draft or other banking channel and not by cash? Under the proviso to Section 42(6), is application money kept in a separate scheduled bank account and used only for adjustment against allotment or for refund if the company cannot allot? Under the proviso to Section 42(4), the company cannot use the money until allotment is made and the return of allotment is filed.
  4. Clock: allotment within 60 days, refund within 15 days after that, return of allotment within 15 days of allotment.
  5. For MCQs, eliminate options with the wrong period or wrong number first. In written answers, write the section number, the rule, the facts and a one-line conclusion to earn step marks.

Common mistakes in Public Offer, Issue of Securities and Private Placement

  • Saying a private company can make a public offer or issue through a prospectus.

    Students remember the list for public companies and apply it to all companies.

    Fix: Remember Section 23(2): a private company has only rights or bonus issue and private placement.

  • Counting QIBs and ESOP employees within the 50-person limit.

    Students read the limit but skip the exclusion in the same sub-section.

    Fix: Write the limit as 50 (or the prescribed higher number) excluding QIBs and employees under an ESOP, per financial year.

  • Treating a breach of the number limit as only a penalty.

    Students stop at the penalty in Section 42(10).

    Fix: Section 42(11) says an issue not complying with Section 42(2) is deemed a public offer, and then the Act, SCRA and SEBI Act apply.

  • Mixing up the time periods: 60 days, 15 days and 30 days.

    Several periods in different sections look alike.

    Fix: Link each to its action: allot in 60 days, refund in 15 days after that, return in 15 days of allotment, rights offer open 15 to 30 days.

  • Allowing renunciation in a private placement offer.

    Students carry over the rights issue rule from Section 62.

    Fix: Section 42(3) proviso says the private placement offer and application carry no right of renunciation. In a rights issue, renunciation is allowed unless the articles say otherwise.

  • Quoting rule details such as the form PAS-4 as if they appear in the Act text.

    Students mix the Act with the Rules.

    Fix: Say the offer must be in the prescribed form and manner, per the Rules. Use PAS-4 only if you are sure of the question's context.

Worked examples

Example 1

Alpha Ltd, an unlisted public company, offers equity shares by private placement to 70 persons in a financial year. This total of 70 includes 15 qualified institutional buyers and 5 employees under an ESOP. Assume the limit is 50. Is the issue valid on the number test?

Show the solution
  1. Provision: Section 42(2) limits identified persons to 50 (or the prescribed higher number) in a financial year, excluding QIBs and employees under an ESOP under Section 62(1)(b).
  2. Facts: The total of 70 persons already includes the excluded categories: 15 QIBs and 5 ESOP employees, which is 20 persons.
  3. Count for the limit: 70 − 20 = 50 identified persons remain.
  4. Compare: 50 does not exceed 50, so the limit is met.
  5. Conclusion: The issue satisfies the number condition. It remains valid if the other conditions of Section 42 are also met.

Answer: The issue is valid on the number test, because the 50 identified persons left after excluding the 15 QIBs and 5 ESOP employees do not exceed the assumed limit of 50.

Example 2

Beta Pvt Ltd, a private company, offered shares to 60 identified persons, none of them QIBs or ESOP employees. Assume the limit is 50. State the consequence. (The amount raised does not affect the number test.)

Show the solution
  1. Provision: Section 42(2) allows not more than 50 identified persons, excluding QIBs and ESOP employees.
  2. Facts: 60 persons are counted, which is more than 50. The amount raised is irrelevant to this test.
  3. Rule on breach: Section 42(11) says a private placement not made in compliance with Section 42(2) is deemed a public offer, and all the provisions of the Companies Act, the SCRA 1956 and the SEBI Act apply.
  4. Support: Explanation III to Section 42 also says an offer or allotment to more than the prescribed number of persons is deemed an offer to the public, governed by Part I of Chapter III.
  5. Note on company type: Section 23(2) allows a private company only a rights issue, a bonus issue or a private placement. It does not allow a public offer. So a deemed public offer by Beta is an irregular issue.
  6. Conclusion: The issue does not comply with Section 42(2), so it is deemed a public offer under Section 42(11). The Companies Act, the SCRA 1956 and the SEBI Act apply to it.

Answer: Beta Pvt Ltd's issue to 60 persons does not comply with Section 42(2), so under Section 42(11) it is deemed a public offer, and the Companies Act, the SCRA 1956 and the SEBI Act apply. Explanation III to Section 42 also treats an offer to more than the prescribed number of persons as an offer to the public, governed by Part I of Chapter III. Since a private company cannot make a public offer under Section 23(2), the deemed public offer is an irregular issue.

Exam tips

  • Learn Section 23(1) and (2) as two short lists. Examiners often test which company can use which mode.
  • Memorise the numbers in Section 42: 50, 60 days, 15 days, 15 days, 12%, ₹1,000 per day, ₹25 lakh, ₹2 crore, 30 days.
  • In case studies, always check the person count, the payment mode and any advertisement before concluding.
  • Keep private placement (no renunciation) and rights issue (renunciation allowed unless articles say otherwise) separate in your answer.
  • Write the section number with each rule. It earns step marks in the 70-mark written part.

Practice questions from Prospectus and Allotment of Securities

Public Offer, Issue of Securities and Private Placement in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Public Offer, Issue of Securities and Private Placement: frequently asked questions

What is the maximum number of persons in a private placement?

Section 42(2) says the number of identified persons must not exceed fifty, or such higher number as may be prescribed, in a financial year. Qualified institutional buyers and employees under an ESOP are excluded from the count.

What is the difference between a public offer and private placement?

A public offer is made to the public through a prospectus, and includes an IPO, an FPO and an offer for sale. A private placement goes only to identified persons through a private placement offer-cum-application, and no public advertisement is allowed. Private placement offers carry no right of renunciation.

What are IPO and FPO under the Companies Act, 2013?

Section 23 Explanation says a public offer includes an initial public offer or further public offer of securities to the public by a company, or an offer for sale by an existing shareholder, through a prospectus. In simple terms, an IPO is the first such offer and an FPO is a later one.

Can money raised by private placement be used immediately?

No. Under the proviso to Section 42(4), the company cannot use the money until allotment is made and the return of allotment is filed with the Registrar. Under the proviso to Section 42(6), application money must be kept in a separate account in a scheduled bank and used only for adjustment against allotment of securities, or for repayment if the company cannot allot.