Legal Provision and Obligations for a company with respect to Securities issues by Private Placement
Summary: This Article outlines the legal framework governing private placement under Section 42 of the Companies Act, 2013 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. It defines private placement as an offer of securities to a select group of persons, with the number of offerees generally not exceeding 200 for each kind of security, excluding qualified institutional buyers and eligible employees under ESOPs. It specifies eligible securities, subscription procedures, banking requirements, maintenance of records, and the requirement to keep subscription money in a separate scheduled commercial bank account until allotment or refund. It states that funds raised through private placement cannot be utilised until allotment is made and Form PAS-3 is filed with the Registrar. The content also covers restrictions on fresh offers, timelines for allotment, refund and interest, penalties for failure to file the return of allotment, the requirement of a special resolution and explanatory statement in specified cases, exemptions for certain non-convertible debenture issues and QIB allotments, and procedural requirements relating to PAS-4, PAS-5, MGT-14, and filing of board or special resolutions.
Legal Framework: Section 42 read with Rule 14 of the Companies Act 2013.
1. Private Placement” means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through a private placement offer-cum-application.
2. Person shall not exceed 200 {excluding QIBs and Employees of the company under the scheme, of the employee stock option under section 62 (1) (b)}.
Restrictions aforesaid would be reckoned individually for each kind of security.
Not applicable to the below companies, if they are complying with regulations made by the Reserve Bank of India or the National Housing Bank in respect of offer or invitation to be issued on a private placement basis:
1. NBFC registered with RBI.
2. Housing Finance Company registered under the National Housing Bank Act.
2. Definition: Securities” include
1. Shares, scrips, stocks, bonds, debentures, debenture stock, or other marketable securities of a like nature in or of any incorporated company or other body corporate
2. Derivative
3. Units or any other instrument issued by any collective investment scheme to the investors in such schemes
4. Security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
5. Units or any other such instrument issued to the investors under any mutual fund scheme
6. Government securities
7. Rights or interest in securities
8. The Board of Directors decides the identified persons who are eligible to subscribe to the security, and only such persons may apply in the private placement offer-cum-application, along with subscription money
9. Subscription money paid either by cheque, demand draft, or other banking channel, and not by cash
In case of subscription money through a bank account:
Subscription money shall be received from the subscriber’s bank account, and the company shall maintain the records of the same.
Note: in case the subscriber has a joint bank account, the person whose name appears first in the application.
Subscription money shall be kept in a separate bank account in schedule commercial bank and not utilised for purposes other than
1. adjust against allotment
2. refund, if unable to allot
3. General Mistake that influences the attraction of non-compliance.
The company generally uses the funds transferred by investors and, after that, files the return with the registrar to allot the security to that person, but this is not legally correct.
Section 42 (4) clearly says that the Company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in Form PAS-3.
1. No fresh offer or invitation for private placement unless allotment of the earlier offer and invitation is completed or withdrawn.
2. The company shall allot security within 60 days from receipt of money from the subscriber under private placement, and if not allotted within 60 days, the entire money shall be refunded within 15 days from completion of 60 days; otherwise, repay the money along with interest of 12 % per annum from the expiry of 60 days from receiving money.
3. A Company shall file a Return of allotent with in 15 days from allotment; otherwise, promoters and directors are liable for a penalty which may extend to the amount raised or 2 Crore, whichever is lower, and the company shall also refund all monies with interest within a period of thirty days of the order imposing the penalty.
Additional legal requirement under Companies (Prospectus and Allotment of Securities) Rules,2014
1. The company shall pass a special resolution in the general meeting.
2. The explanatory statement shall be enclosed with the notice of the general meeting and mention all the details as mentioned under the rule.
Note:
1. All the 2 points do not apply in case of non-convertible debentures, and the amount does not exceed the prescribed amount under section 180, and only a board resolution under section 179 is adequate.
2. If the limit exceeds under section 180 for non-convertible debentures, then in that case, only by passing one special resolution can issue for the entire year; no other special resolution is required.
3. For allotment to QIB, only one special resolution is required for one year
4. Private placement offer cum application letter shall be satisfied with the following conditions
5. In the form of PAS 4
6. shall be serially numbered.
7. Addressed specifically to the person to whom the offer is made.
8. Either in writing or in electronic mode
9. Such an offer does not carry any right of renunciation.
10. The offer letter shall be issued only after filing the special resolution with the Registrar of Companies in Form MGT 14
11. The company shall maintain records of the private placement offer in PAS 5.
12. Private companies shall file with the Registry a copy of the Board resolution or special resolution with respect to approval under clause (c) of sub-section (3) of section 179.
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I hope the provisions relating to private placement are now clear. If you have any questions or need further clarification, feel free to leave a comment or reach out to me. I will do my best to resolve your queries as early as possible. Mobile: 9266278641 | Email: ayushsinghal9266@gmail.com
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