106. Commission to private placements.

In normal case a company cannot pay any commission to any person for subscribing for its shares or debentures. But Section 76 of the Companies Act, 1956 permits companies to pay underwriting Commission in consideration of subscribing or agreeing to subscribe any shares or debentures subjected to certain conditions. Such commission is payable to individuals and financial institutions. The following are the conditions to be satisfied by the company for the payment of commission: 1.   Articles of Association of the company  should allow such payment of commission; 2.   Rate commission for shares should not exceed 5% of the face value and 2.5% of the price of the debentures subjected to a maximum rate as may be mentioned in the Articles of Association; 3.   The rate of commission/amount should be given in the prospectus; 4.   The number of shares/debentures on which commission is to be paid should be mentioned in the prospectus; 5.   A copy of the agreement for the payment of commission should be delivered to Registrar of Companies along with prospectus .

Companies Act, 1956 does not prevent companies from giving brokerage. Section 76(3) allows companies to pay brokerage on the sale of its shares or debentures. A broker is a middle man, who on the payment of brokerage brings a contract between the company and the purchasers of the shares or debentures. He himself not purchases shares or debentures. Here broker is a professional person carrying on the business of broker and not an individual. If a company pays to a person who casually induced others to subscribe, such a payment is not brokerage.

Brokerage and underwriting commission are different. Underwriter agrees to subscribe shares, if public do not subscribe. But broker has no obligations.

Private placement is a method of rising capital by issuing shares to a limited number of subscribers including individuals and institutions. It is just opposite of public issue. In case of private placement also there is no restriction in the payment of underwriting commission provided necessary disclosure should be made in the offer document.

In the new companies Bill, a new provision is added to introduce private placement for rising capital through Clause 42. There is no such provision in the new companies bill corresponding to Section 76 of the Companies Act, 1956.