Think of Section 23 as the traffic signal for how a company can raise money from investors. Before a company knocks on the public's door asking for money, the law wants to know: what kind of company are you, and which route are you taking?
The section draws a sharp line between public companies and private companies and lays out the permitted routes for each. A public company has three options: (1) a public offer — going to the general public via a prospectus (think IPO or FPO); (2) a private placement — offering securities to a select group of people (max 200 per financial year, governed by Part II of Chapter III); or (3) a rights issue or bonus issue — offering shares to existing shareholders. If the company is listed, it must also comply with SEBI Act, 1992 and SEBI regulations. A private company, on the other hand, is NOT allowed to invite the public — so it only gets two routes: rights/bonus issue (to existing shareholders) or private placement.
The Explanation clause at the end is exam gold. It defines 'public offer' to include three things: (a) an IPO (Initial Public Offer — first time a company offers shares to public), (b) a FPO (Further Public Offer — subsequent public offering by an already-listed company), and (c) an offer for sale — where an existing shareholder (not the company) sells their shares to the public through a prospectus. This last one trips up students because the company isn't issuing new shares — a promoter or investor is exiting. Sub-sections (3) and (4) deal with a niche situation: certain public companies can list on foreign stock exchanges and the Central Government can exempt them from certain provisions — not frequently tested but good to know exists.
This section is asked frequently as a 4–5 mark question in the theory paper, usually testing the difference between public and private company routes, or asking you to identify which route applies in a given scenario.
📊 Worked example
Example 1: Classifying the Route
Question: Rajesh & Co. Pvt. Ltd. wants to raise ₹50 lakh from 150 high-net-worth individuals by offering them convertible debentures. Which route under Section 23 is available to it, and can it issue a prospectus?
Working:
- Rajesh & Co. is a private company → Section 23(2) applies.
- Private companies CANNOT make a public offer (no prospectus route).
- 150 individuals → within the 200-person limit → qualifies as private placement under Section 23(2)(b).
- Issuing a prospectus is NOT permitted for a private company.
Answer: Rajesh & Co. must use the private placement route. It cannot issue a prospectus.
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Example 2: Offer for Sale — Is it a Public Offer?
Question: Mr. Sharma, a promoter of Infra Build Ltd. (a listed public company), sells 10,000 of his own shares to the general public through a prospectus document at ₹200 per share (total value ₹20 lakh). Is this a 'public offer' under Section 23?
Working:
- Infra Build Ltd. is a public company → Section 23(1) applies.
- The shares being sold belong to Mr. Sharma (existing shareholder), NOT newly issued by the company.
- The Explanation to Section 23 explicitly includes offer for sale by an existing shareholder through a prospectus within the definition of 'public offer'.
- This transaction is done via a prospectus → it falls under Section 23(1)(a).
Answer: Yes, this is a public offer under Section 23. The ₹20 lakh offer for sale by Mr. Sharma through a prospectus is governed by the public offer provisions.
⚠️ Common exam mistakes
- Students assume a private company can issue a prospectus if the amount is small — wrong. Section 23(2) gives private companies ONLY two routes: rights/bonus issue and private placement. No prospectus, no exceptions based on amount.
- Confusing IPO and FPO: Don't write 'IPO' whenever the question says 'public offer.' An IPO is the first time; an FPO is a subsequent offering. The Explanation covers both — know the difference.
- Missing the 'offer for sale' angle: Many students think a public offer always means the company is issuing new shares. Remember: when a promoter or existing shareholder sells shares to the public via prospectus, that too is a public offer under Section 23.
- Forgetting SEBI compliance for listed companies: For a listed public company doing a rights issue or bonus issue, compliance with the SEBI Act 1992 and SEBI regulations is ALSO required — not just the Companies Act. Don't leave this out in theory answers.
- Ignoring sub-section (3) entirely: While rarely tested numerically, MCQs sometimes ask about foreign listing of public companies. Remember: only prescribed classes of public companies can list on permitted foreign stock exchanges, and the Central Government can grant exemptions via notification.
📖 Bare Act text — Section 23, Companies Act 2013
(click to expand)
(1) A public company may issue securities—(a) to public through prospectus (herein referred to as "public offer") by complying with the provisions of this Part; or(b) through private placement by complying with the provisions of Part II of this Chapter; or(c) through a rights issue or a bonus issue in accordance with the provisions of this Act and in case of a listed company or a company which intends to get its securities listed also with the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the rules and regulations made thereunder.(2) A private company may issue securities—(a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or(b) through private placement by complying with the provisions of Part II of this Chapter.(3) Such class of public companies may issue such class of securities for the purposes of listing on permitted stock exchanges in permissible foreign jurisdictions or such other jurisdictions, as may be prescribed.(4) The Central Government may, by notification, exempt any class or classes of public companies referred to in sub-section (3) from any of the provisions of this Chapter, Chapter IV, section 89, section 90 or section 127 and a copy of every such notification shall, as soon as may be after it is issued, be laid before both Houses of Parliament.Explanation.—For the purposes of this Chapter, "public offer" includes initial public offer or further public offer of securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder, through issue of a prospectus.
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