Meaning, Provisions & Procedure For Issue of Shares Via Private Placement

Section 42 of Companies Act, 2013

Section 42 of the Companies Act, 2013 (‘Act’) provides that a company can make a private placement to the selected group of persons.

Private placement by companies means offering their securities or inviting to subscribe its securities to the selected group of persons other than by the way of a public issue through a private placement offer letter.

The offer of securities by Private Placement, shall be made to not more than 50 persons in a single offer or not more than 200 persons in the aggregate in a financial year (excluding QIBs and employees of the company being offered securities under ESOP). This restriction would be read for all the securities issued via private placement combined together in a Financial Year.

Applicable Sections:

1.     Section 42 of the Companies Act, 2014.

2.     Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

Procedure for Issue of Shares via Private Placement:

1. Check the provisions regarding the Private Placement in AOA.

2. To prepare the Draft Offer Letter and list of identified persons to whom the securities to be allotted.

3. Get Valuation Report from the registered valuer.

4. Conduct Board Meeting for passing the following resolutions u/s 179(3):

• • To approve the list of identified persons to whom the securities are to be allotted.
  • To approve the draft offer letter.
  • To approve the Notice for conducting Extra Ordinary General Meeting.

5. Send Notice for conducting General Meeting.

Explanatory statement along with the Notice, shall mandatorily contain the following disclosures:

(a) particulars of the offer including date of the Board resolution passed;

(b) kinds of securities offered along with the price at which security is being offered:

(c) Justification or basis for the price (including premium, if any) at which the offer or invitation is being made;

(d) name and address of valuer who have given Valuation Report;

(e) amount which the company intends to raise by the way of such securities;

(f) material terms of raising securities, proposed time schedule, objects of offer, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects; principal terms of assets charged as securities:

6. Conduct General Meeting for passing the Special resolution for approving Private Placement & Letter of Offer:

7. Opening of separate Bank Account. However, if having a bank Account already opened for the earlier private placement which is not used in the regular course of business, than one can use that Account as well.

8. File the Special Resolution through Form MGT-14 within 30 days from the date of General Meeting.

9. Circulate PAS-4 (Letter of offer) to the person to whom the offer is made. It shall be sent either in writing or in the electronic mode. (Shall issue PAS-4 within 30 days only after filling MGT-14).

10. Company shall maintain a complete record of private placement offers in Form PAS-5.

11. Receipt of funds from the person who are willing to accept the offer along with the application for subscription of shares.

12. Conduct Board Meeting for Allotment of Shares within 60 days from the receipt of funds. If the company is not able to allot the securities within that period, than Company shall repay the application money to the subscribers within 15 days from the expiry of 60 days and if the company fails to repay the application money within the period, it shall be liable to repay that money with interest at the rate of 12 % per annum from the expiry of the 60^th day.

13. File PAS-3(Return of Allotment) within 15 days of allotment along with a complete list of all the allottees containing-

• • the full name, address, PAN and E-mail ID of such security holder;
  • the class of security held;
  • the date of allotment of security;
  • the number of securities, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash.

14. Issue Share Certificates within 60 days of Allotment of Shares and payment of Stamp Duty on Share Certificates.

15. If foreign funds received, then RBI reporting in Form FCGPR or FIRMS portal within 30 days.

16. Entry in register of members

Points needs to be taken care of at the time of Issue of Shares through Private Placement)

• The person to whom the offer is made can either accept or reject the offer. There is no right for renunciation.
• Monies payable on subscription to securities to be held by joint holders shall be paid from the bank account of the person whose name appears first in the application.
• Company Shall not use the money before filing the Return of Allotment (PAS-3).
  • However, can use the money:
    • for adjustment against the allotment of securities of the Company; or
    • for the repayment of monies, if the company is unable to allot securities.
• No fresh offer or invitation shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.
• The identified person shall make subscription either by cheque or demand draft or other banking channel, but not by cash.
• After the Companies (Amendment) Act, 2017 via notification dated 07.08.2018, offer letter in Form PAS-4 and record of persons to whom the offer letter is issued in Form PAS-5 are required to be maintained by the Company only and are no longer required to be filed with the ROC.
• Companies that issue securities through private placements shall not make public advertisements, marketing through distribution channels, or agencies to notify the general public of such offerings.

Disclaimer: This article is written merely for informational purposes, and it should not be taken as a piece of legal advice.