Private placement is a process that involves selling of stocks directly to chosen investors and institutions instead of the open market. Herein, startups and early-stage companies may choose private placement to raise capital, avoiding transparency requirement of a securities registration. Furthermore, buyers in these sales tend to be sophisticated investors with high expectations on return and that allows the company to raise funds quickly without rigorous regulations and requirement of an initial public offering. Private placement involves pre-selected investors and accredited investors which means access to these investments is generally limited to individual or institutions with significant financial resources.
Under Section 42 of the Companies Act, 2013 read with Rule 14 of Companies (Prospectus and Allotment of Shares) Rues, 2014 states that, it means securities (any kind of securities like equity shares, debentures, preference shares) offered to a select group of identified persons. Moreover, securities can be issued on private placement basis by a public, private, listed and unlisted company.
Subsequently, there is a threshold that have been provided for private placement offer –
That is, a company may issue securities by way of private placement to a maximum number of 200 identified person per financial year. Furthermore, this number exclude qualified institutional buyers and securities offered to employee under Employee stock option plan. If the offer is made to more than the prescribed number of persons, it will be deemed to be a public offer and will be governed and more than one issue can be made to the same identified person subject to threshold.
SPECIAL RESOLUTION
General rule for private placement is to pass a special resolution in general meeting for each issue. Moreover, explanatory statement to the notice for such general meeting shall include a date of passing of board resolution, kinds of securities offered, total amount to be raised, justification for the price, details of valuer, contribution of promoters or director to offer and material terms of offer. Exception is present with respect to non-convertible debentures can be issued without passing a special resolution if the amount to be raised is within the limits of section 180(1). In case, the non-convertible debentures are within the limits of section 180(1), a board resolution under section 179(3) would suffice. In case, the issue of non-convertible debentures exceeding the limits of section 180(1), a previous special resolution only once in a year for all the offers or invitations for such debentures during the year is adequate.
In case of allotment of Qualified Institutional buyers, a previous resolution only once in a year for all the offers or invitations for all the allotment to Qualified institutional buyers during the year is adequate and subsequently, a special resolution passed is valid for a year.
VALUATION REPORT
Valuation Report is mandatory in case of issue of securities on private placement basis both for valuation of price at which securities are issued and the valuation of the consideration when securities are issued for consideration other than cash. Valuation needs to be obtained as on Relevant Date i.e a date which is at least 30 days prior to the General Meeting to be held. Valuation Report not required in case of issue of NCDs as it does not involve conversion into shares.
PROCESS
PREREQUISITES that exist:
That no further or fresh issues can be made unless, an allotment for previous offers with respect to any kind of security are done. Moreover, earlier offers are withdrawn or abandoned. Further, it also identifies the persons to whom the securities are to be issued on private placement basis and it is imperative to attain a valuation report.
ISSUE PROCESS
It is important to call for board meeting and pass a board resolution of the following that is, issue of securities is on private placement basis and they have to decide on the type and the quantum of securities to be issued. Moreover, record the names of identified person for issue of securities on private placement basis. It is imperative to call for an Annual general meeting or EGM and approve a notice and explanatory statement for AGM or EGM and such authority will open a separate bank account.
Now, issue of notice of general meeting along with explanatory statement and conduct the general meeting and pass a special resolution and file a board resolution or special resolution in form MGT-14 and issue of offer letter cum application to identified persons. Then, opening of a separate bank account in a scheduled bank and receipt of application money in bank account.
Conducting of board meeting within 60 days of receipt of application money that is, finalising list of allottees, authorising filing of form PAS-3, authorising issue of certificate of securities to the allottee and authorising recording of issue details in FORM PAS-5 and making entries in members register.
POST-ALLOTMENT
Post allotment of securities, the allottee will have to file a return of allotment within 15 days of allotment in form PAS-3. Furthermore, it is imperative to maintain record of all offers under this section in form PAS-5. Then, make a stamp duty payment. Subsequently, issue of certificate within 2 months to 6 months from date of allotment. Lastly, it is important to make necessary entries in the register of securities in the form MGT-1.
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