Monisha Jain

As per section 23(2) of Companies Act, 2013 (‘the Act’), a private company can issue securities in either of the following manners-

– by way of a private placement (section 42); or

by way of a rights/ bonus issue

In order to allot securities by way of a private placement offer, a company has to comply with the regulations as prescribed under section 42 of the Act. These regulations have been summarized below-

Private placement

  • Private placement means issue of securities by a company to a selective group of persons who shall be identified by the members/ directors of such company making the offer prior to such offer.
  • In order to issue securities by way of private placement, the Company is required to circulate an offer letter to the selected group of people to whom the Company proposes to issue its shares.
  • The private placement can be made to a maximum of 50 persons excluding QFIs and employees holding shares under the ESOP scheme
  • The Company shall issue the offer letter as per the prescribed rules and in the format as prescribed by the MCA under the Companies (Prospectus and Allotment of securities) Rules, 2014 (‘the Rules’). As per the Rules, the offer letter is required to be in line with PAS – 4 and should contain all the information about the Company making the offer – general details, financial details, status of litigations and other representations, default in compliance with any regulation or requirement under any law etc. The offer letter should also contain particulars of the issue ie number of securities being offered, duration of offer period, type of securities offered, maturity date(if any), issue price etc.
  • There is no specific time period for which the offer is required to be kept open by the Company. Therefore, it is at the discretion of the Company to determine the offer period.
  • The offer letter would need to be approved by the Board members of the Company before being circulated. The Board/ shareholders of the Company would also be required to record in writing the group of persons to whom the securities shall be offered
  • The offer letter so circulated needs to be filed with the ROC within 30 days of being circulated.
  • Upon receipt of confirmation from the group of persons to whom the offer letter was circulated, the Company can proceed with allotment of securities.
  • The money payable on subscription of securities needs to be paid by way of a DD or other banking channels and not through cash.
  • The Company is required to allot securities within a period of 60 days of receiving the subscription money else the same is refundable within a period of 15 days. In case of default in refunding the amount by the Company, it shall be liable to pay interest at the rate of 12 percent from the expiry of 60 days.
  • A record is to be kept of all the offers made by the Company in accordance with section 42 of the Act. Such record (PAS -5) is to be maintained and updated upon making of such offer and is to be filed with the ROC within a period of 30 days from the date of circulation of the offer letter.
  • On allotment of securities, the Company is required to make a return of allotment in PAS-3 giving the details of all the securities allotted and the details of the security holders within a period of 30 days from the allotment of securities.
  • In case the Company fails to comply with the provisions of section 42, the offer made by it shall be considered as a public offer and the compliances as may be applicable to a public offer would need to be complied with.

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Category : Company Law (3347)
Type : Articles (13953)

0 responses to “Section 42- Issue of Shares / securities by a private company – Private placement”

  1. CS Sneha Chinchli says:

    Dear Mr. Sohrabh ,

    As explained to me by a senior member, preferential allotment us 62(1)(c) has to be complied for issue of equity shares or other securities which are convertible to equity shares ,else the issue has to be done through section 42, wherein section 42 the words Securities has been used not just equity shares

  2. Sushil says:

    Dear Monisha,

    Could you please let me know if the Company proposes to make a rights issue, is it requried to comply with the requirements as prescribed in Section 42. Is there any restriction on utilisation of funds

  3. monisha jain says:

    The provisions of section 62(1)(c) will be applicable for any issue of securities made by the company on a preferential basis i.e to selected group of persons. The preferential allotment of securities should comply with the provisions of section 42. Rule 13 of Companies(Share capital and Debentures) Rules, 2014 governs the preferential allotment of securities

  4. CA SOHRABH JINDAL says:

    Dear Monisha g,

    i m unable to understand, what is the difference between allotment u/s 42 and allotment u/s 62(1)(c).

    if possible, kindly make clear this concept if possible through some example showing differences.

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