Govt to formulate rules to govern pvt placement of shares

Amid controversy over raising of funds by companies, the government today said it will soon come out with new rules to regulate private placement of shares by unlisted firms.

"Something is being worked out. By June-end, we will be coming out with formal draft rule or set of guidelines for unlisted companies raising money through private placements of shares," Ministry of Corporate Affairs Joint Secretary Avinash Srivastav told reporters here today.

He was responding to a query on whether the government has taken up a study or is working out modalities to ensure that unlisted companies do not misuse funds raised through private placements.

The forthcoming draft rules assume significance against the backdrop of the controversy surrounding the Sahara group of firms raising funds through similar instrument, with market regulator Sebi objecting to the move.

According to the Companies Act 1956, an unlisted company can issue shares in a private placement to only 49 entities. Beyond that, the company needs to go for public offer.

The government already has in place Unlisted Public Companies (Preferential Allotment) Rules, 2003.

These rules govern the way unlisted companies can carry out preferential issue of equity shares, fully convertible debentures, partly convertible debentures or other financial instruments, which would be converted into or exchanged with equity shares at a later date.

MCA, meanwhile, did not divulge details on what could be the new additions to the rules.