Private Placement of Shares / Securities

PRIVATE PLACEMENT OF SECURITIES

Brief and Purpose of Private Placement of Securities:

In today’s scenario, mostly all the Corporates irrespective of size, require capital in order to expand, diversify and grow their business. The start-up trend in the country can be seen at a peak with creative minds trying to bring new products and services in the market. Majorly all the startups require funding for expansion and to meet their working capital requirements for the initial 4-5 years. The funding can be by way of seed funding, angel investors and series funding to name a few. Mostly all the startups will prefer issuing Securities to the investors rather than borrowing from Banks and NBFC’s and paying high interest rates.

Private Placement of Securities is a mean by which funds can be raised by the Corporates in a compliant manner. In this article, we have tried to cover practical and procedural aspects of Private Placement of Securities under the Companies Act in force and rules amended and modified therof.

Statutory Provisions for Private Placement of Securities:

Private Placement of Securities is covered under Section 42 of the Companies Act, 2013 and Companies (Prospectus and Allotment of Securities) Rules, 2014. Private Placement is defined as 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 Private Placement Offer-cum-Application.

To whom can a Private Placement offer be made:

Private Placement Offer can be made to a prospective investor or any person who intends to invest a specific amount of funds in the Company against issue of securities. Offer to subscribe for the securities of a Company under Private Placement cannot be made to more than 200 persons in a Financial Year. If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, same shall be deemed to be an offer to the public.

Exclusions:

While computing the above 200 persons, Qualified Institutional Buyers (QIBs) as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 and employees of the company being offered securities under a scheme of employees stock option are to be excluded.

Shareholder’s Approval:

Special resolution in the meeting of the shareholders of the Company has to be passed before shares are issued under private placement. The notice calling Extra-Ordinary General Meeting of the shareholders must contain an explanatory statement bearing the particulars of offer, date of passing board resolution, kinds of securities offered and its price, basis or justification for the price, name and address of valuer who performed valuation, amount which the company intends to raise, material terms of raising such securities, proposed time schedule, purpose or objects of offer, contribution being made by the promotes or directors.

Subscription of Shares:

Every person to whom Private Placement offer has been made and who is willing to subscribe to the shares of the Company may do so by filling the application form attached with the offer cum application letter alongwith subscription money.

Mode of payment of Subscription Money:

Subscription money can be paid in any of the following modes:

• Cheque
• Demand draft
• Or other banking channels except cash

Separate Bank Account with Scheduled Bank:

Monies received must be kept in a separate bank account and shall not be utilized for any purpose other than:

1. For adjustment against allotment of securities or
2. Repayment of monies where the company is unable to allot securities
3. After completion of allotment process, the Company will be allowed to move the funds in regular Bank account used for day to day transactions.

Utilization of Monies:

Company cannot utilize the funds so raised from a Private Placement unless it has allotted shares to the subscribers and it has filed a return of allotment with the Registrar of Companies in Form PAS-3.

Allotment of Shares:

Company must allot shares under Private Placement within 60 days from the date of receipt of application monies. In case the Company is unable to allot the shares within 60 days it shall refund the application monies so collected within 15 days from the expiry of 60 days failing which the same shall be repaid with interest at 12% p.a from the expiry of 60^th day.

Advertisement:

No advertisements, media marketing or distribution channels or agents to be used by the company to inform the public at large about such an issue.

Procedure:

Following procedure should be followed by the Company intending to issue securities under Private Placement:

• Calling for the meeting of the Board of Directors of the Company to offer securities on Private Placement Basis.

• Passing of Board Resolution for issue of shares under Private Placement to specified persons and calling for Extra-Ordinary General Meeting of the Company to take members approval.

• Filing form MGT-14- Board Resolution for issue of shares under Private Placement.

• Issuing notices to the shareholders for Extra-Ordinary General Meeting of the Company as per timelines or with shorter consents.

• Passing Special Resolution in the Shareholders meeting for issue and allotment of shares under Private Placement.

• Sending Offer cum Application Letters in form PAS-4 to identified persons within 30 days of recording the names of the identified persons. Such Offer cum Application Letters can be sent in electronic mode (emails) or by post.

• Receiving allotment amount in a separate bank account within the offer period as mentioned in the Offer cum Application Letter.

• The Company shall allot shares to the applicants who has subscribed for the same through application letter and deposited the subscription amount within the offer period.

• After Closure of Offer Period call a Board Meeting and pass Resolution for Allotment of Securities to the entitled subscribers.

• Filing of return of allotment in Form PAS-3 within 15 days from the date of the allotment i.e. After passing Board Resolution for allotment

• Make sure the securities are allotted within 60 days of the receipt of Application amount by the Company.

• Stamp Duty on allotment shall be paid @ 0.10% through channels as available in respective states. e.g. In Mumbai it can be paid to ESBTR or GRASS MAHAKOSH site

• The Company will be allowed to utilize the money raised through Private Placement only after Return of Allotment in Form PAS-3 is filed with the Registrar of Companies.

• Record of Private Placement should be maintained by the Company in prescribed Form PAS-5.

• The Company should update its Registrar of Members in a proper manner upon completion of allotment.

Conclusion:

Through this brief article we have tried to cover mostly all the aspects of the subject. Any observations, comments and views are most welcome. This article is for informative and knowledge sharing purposes only.

Prepared by:-  Simit S Parekh & Associates, PCS, Mumbai, Email id: csparekhsimit@gmail.com