Can a Public Company Raise Funds From the Public

Funding is a critical aspect of business growth. It enables a firm to undertake new projects, expand its operations, make asset acquisitions, pay off debts, enter into new territories, and even fulfill working capital needs. The first issue that arises in this context is whether a public company can raise funds from the public.

The simple answer to this question is that yes it can raise funds. Nevertheless, a public company cannot raise funds at any time as and when it pleases to do so. There are certain legal conditions and processes for such fund raising which are laid out in both the Companies Act, 2013 and SEBI regulations (in case of listed and public issuance companies).

This blog attempts to explain the process of public fund raising in simple terms.

What Is a Public Company?

A public company is a company that is not a private company and generally has the ability to raise capital from a wider group of investors, subject to the applicable legal requirements.

A public company may be listed or unlisted. This distinction is important because a listed company is subject to additional SEBI and stock exchange requirements.

Being a public company does not automatically mean that it can freely invite the public to invest. The company must follow the prescribed procedure before making a public offer.

Can a Public Company Raise Funds From the Public?

Yes, a public company is allowed to raise money from the public through the issuance of securities like shares and some other types of securities depending on relevant legislation.

For instance, a firm can choose to sell its shares to investors through IPO. Investors buy shares and thus get to become stockholders of the company.

However, a firm needs to adhere to the provisions concerning approvals, disclosure, offering documents, pricing, allotment, and utilization of money raised.

Ways in Which a Public Company Can Raise Funds

A public company can raise funds through different methods, depending on its requirements and eligibility.

Some common methods are:

Initial Public Offer (IPO)
Further Public Offer (FPO)
Rights Issue
Private Placement
Preferential Issue
Issue of debt securities
Deposits, where permitted under law

Each method has different eligibility conditions and compliance requirements.

Initial Public Offer (IPO)

An Initial Public Offer (Initial Public Offer) is one of the best known means of raising funds from the public.

IPO occurs when a company offers its stocks to the general public for the very first time with the aim of listing the same in a stock exchange.

To illustrate, in case of an unlisted public company, which wishes to expand its business, but requires large sums of money, it might choose to do so through the IPO route.

This involves making necessary offer documents according to SEBI rules and Companies Act, 2013.

Why do companies choose an IPO?

An IPO can help a company:

Raise substantial capital
Expand its business
Improve its visibility and reputation
Provide liquidity to existing shareholders
Access the capital market

However, an IPO also involves significant regulatory, professional, disclosure, and compliance requirements.

Further Public Offer (FPO)

An FPO is a public issue of shares made by a company that is already listed on a stock exchange.

The company may use an FPO to raise additional funds for expansion, repayment of debt, working capital, or other permitted purposes.

Unlike an IPO, the company is already listed before making the FPO.

The issue must comply with the applicable SEBI regulations and other legal requirements

Rights Issue

Rights Issue is an offering by the company to its current shareholders to buy new shares.

For instance, let us assume that a shareholder holds 10% of the shares of a company. Then the company can give the right to this shareholder to buy some more shares, depending on their shareholding.

The difference between rights issue and public issue is that in rights issue the offering is mainly made to existing shareholders.

It helps a company raise money and at the same time keep the same percentage shareholding for their existing shareholders.

Private Placement

Private placement is another method of raising funds, but it is not the same as raising money from the general public.

Under private placement, securities are offered to a selected group of identified persons rather than the public at large.

The Companies Act, 2013 prescribes specific requirements for private placement, including restrictions on the number of persons to whom securities may be offered and requirements relating to offer letters, banking channels, allotment, and filing of prescribed forms.

Therefore, a company should not use private placement as a way of making a general public invitation.

Preferential Issue

A preferential issue involves issuing shares or other securities to selected persons on a preferential basis.

For example, a company may issue shares to a particular investor, promoter, or strategic investor, subject to applicable legal requirements.

Depending on the nature of the company and the issue, provisions of the Companies Act, 2013 and applicable SEBI regulations may apply.

Public Deposits

A public company may also be able to accept deposits, but this is not an unrestricted method of raising funds from the public.

Acceptance of deposits is governed by specific provisions of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014.

There are several conditions relating to eligibility, limits, disclosures, deposit insurance where applicable, creation of security in certain cases, repayment, and filing requirements.

Therefore, a company should carefully check whether it is eligible to accept deposits before doing so.

Important Legal Compliances

When a public company wants to raise funds, it must first determine the appropriate method of fundraising.

Depending on the method, important compliances may include:

Board Approval

The Board of Directors generally needs to approve the proposed issue and related matters.

Shareholder Approval

Certain types of issues may require approval of shareholders through an ordinary or special resolution, depending on the applicable provisions.

Offer Documents

For a public issue, the company must prepare and file the required offer documents containing important information about the company, its business, financial position, risks, management, and the proposed issue.

SEBI Compliance

Where SEBI regulations apply, the company must comply with the relevant SEBI requirements.

Stock Exchange Requirements

A company seeking listing must comply with the requirements of the relevant recognised stock exchange.

ROC Filings

Various forms and documents may have to be filed with the Registrar of Companies within the prescribed timelines.

Allotment and Return of Allotment

After securities are allotted, the company must complete the prescribed allotment and reporting requirements.

Advantages of Raising Funds From the Public

Raising funds from the public can provide several benefits to a company.

Large Amount of Capital

A public issue can help a company raise substantial funds from a large number of investors.

Business Expansion

The funds can be used for expansion, new projects, acquisitions, technology, or other business requirements.

Better Market Visibility

A listed company generally receives greater public visibility and market recognition.

Reduced Dependence on Loans

Equity fundraising can reduce the company’s dependence on traditional bank loans and other borrowings.

Improved Credibility

A company that successfully completes a public issue may gain greater credibility among investors, customers, lenders, and business partners.

Frequently Asked Questions (FAQs)

Q1. Can every public company raise funds from the public?

No. Being a public company alone does not mean that it can freely invite the public to invest. The company must satisfy the applicable legal and regulatory requirements for the particular type of issue.

Q2. Can an unlisted public company raise money from the public?

Yes, an eligible unlisted public company may raise funds through a public issue, subject to the applicable provisions of the Companies Act, 2013, SEBI regulations, and other requirements.

Q3. Is an IPO compulsory for every public company?

No. A public company does not have to conduct an IPO merely because it is a public company. An IPO is required only when the company chooses to offer its securities to the public and seek listing, subject to applicable law.

Q4. What is the difference between an IPO and an FPO?

An IPO is generally the first public issue of shares by an unlisted company seeking listing. An FPO is a further public issue by a company that is already listed.

Q5. Can a public company raise funds through private placement?

Yes, subject to the applicable provisions of the Companies Act, 2013 and, where applicable, SEBI regulations. However, private placement is made to identified persons and is not a public offer.

Q6. Can a public company accept deposits from the public?

A company may accept deposits only if it satisfies the eligibility conditions and complies with the applicable provisions of the Companies Act, 2013 and the relevant rules. It cannot simply accept money from the public as deposits without following the prescribed requirements.

Q7. Does a public issue require shareholder approval?

Depending on the nature and structure of the issue, shareholder approval may be required. The exact approval depends on the applicable provisions and the type of securities being issued.

Q8. What securities can a company issue to raise funds?

Depending on the applicable law and circumstances, a company may raise funds through equity shares, preference shares, debt securities, or other permitted securities.

Q9. Is SEBI approval required for a public issue?

Public issues of securities are subject to the applicable SEBI regulatory framework. The company must comply with the relevant SEBI requirements, along with the Companies Act and other applicable laws.

Q10. Can a private company raise funds from the general public?

Generally, a private company cannot make a public invitation to subscribe to its securities. If a company wants to raise funds from the public, it must consider whether conversion into a public company and compliance with the applicable requirements are necessary.

Conclusion

While a public company has access to funds from the public, it is not possible for it to obtain the funds in a haphazard manner or without going through the due process of law. The company could choose an IPO, FPO, rights issue, private placement, preferential issue, debt instruments, or even deposits, wherever permissible, based on its need.

The key aspect is that all the above methods have their own eligibility criteria and processes to be followed.

It is important for the company to undertake an assessment of its requirement for funds and also make its mind about its objectives. Proper advice regarding this could assist the company in choosing the best fundraising route.