CS Devesh Maheshwari
Summary: Private placement under the Companies Act, 2013 allows private and unlisted public companies to raise funds by offering securities to a select group of identified persons, limited to 200 in a financial year per type of security, excluding Qualified Institutional Buyers (QIBs) and employees under ESOP. This process requires issuing a serially numbered private placement offer cum application (PAS-4) only to identified persons, and payments must be made via banking channels from the subscriber’s bank account. Funds received cannot be used until allotment is complete and the return of allotment is filed. A company cannot issue a new offer until any previous offer is allotted, withdrawn, or abandoned. Securities must be allotted within 60 days of receiving application money; failure to do so necessitates a refund within 15 days thereafter with interest at 12% p.a. Public advertising of the issue is prohibited. A return of allotment (PAS-3) with allottee details must be filed within 15 days of allotment. A special resolution is generally required for each offer, though exceptions exist for certain NCDs and offers to QIBs. Offers to entities or nationals from countries sharing a land border with India require prior government approval.
PRIVATE PLACEMENT UNDER COMPANIES ACT, 2013
(By Private Limited & Unlisted Public Companies)
Applicable Provisions: Section 42 of the Companies Act, 2013
Rule 14 of Companies (Prospectus and Allotment of Securities) Rules,2014
Regulation 2(1)(zd) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 Section 2(81) of the Companies Act, 2013
Section 2(h) of the Securities Contracts (Regulation) Act, 1956
Private Placement: Private Placement is a popular method of raising funds by Indian Companies whether they are Private Limited Company or Unlisted Public Limited Company. Raising fund through private placement requires certain provision to be complied with. The detailed provision of Section 42 is given below for your easy understanding:
Important Definitions:
1. Private Placement: Private Placement is a type of offer or invitation which is made to a selected group of persons by a Company to subscribe or issue its securities through Private Placement offer cum application which satisfies the conditions specified in Section 42 of the Companies Act, 2013. 9 [Explanation I of Section 42(3)]
2. Qualified Institutional Buyer: means the qualified institutional buyer as defined in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended from time to time, made under the Securities and Exchange Board of India Act, 1992. [ As per Explanation II of Section 42(3)]
Qualified Institutional Buyer as per Regulation 2(1)(zd) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 qualified institutional buyer” means:
(i) a mutual fund, venture capital fund, Alternative Investment Fund and foreign venture capital investor registered with the Board;
(ii) foreign portfolio investor other than Category III foreign portfolio investor, registered with the Board;
(iii) a public financial institution as defined in section 4A of the Companies Act, 1956;
(iv) a scheduled commercial bank;
(v) a multilateral and bilateral development financial institution;
(vi) a state industrial development corporation;
(vii) an insurance company registered with the Insurance Regulatory and Development Authority;
(viii)a provident fund with minimum corpus of twenty-five crore rupees;
(ix) a pension fund with minimum corpus of twenty-five crore rupees;
(x) National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated November 23, 2005 of the Government of India published in the Gazette of India;
(xi) insurance funds set up and managed by army, navy or air force of the Union of India;
(xii) insurance funds set up and managed by the Department of Posts, India;
(xiii) systemically important non-banking financial companies.
3. Securities: Securities means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. [Section 2(81) of the Companies Act, 2013].
Securities as per section 2(h) of the Securities Contracts (Regulation) Act, 1956
“securities” ³ includes
- shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or a pooled investment vehicle or other body corporate
- derivative;
- units or any other instrument issued by any collective investment scheme to the investors in such schemes
- 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 - units or any other such instrument issued to the investors under any mutual fund scheme;
[Explanation: For the removal of doubts, it is hereby declared that “securities” shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a combined benefit risk on the life of the persons and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938.
- units or any other instrument issued by any pooled investment vehicle
- any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case may be
- Government securities
- such other instruments as may be declared by the Central Government to be securities; and
- rights or interest in securities
Section 42(1): A company may subject to the provision of this section may make private placement of securities
Section 42(2) Private Placement shall be made only to a select group of persons identified by the Board (herein referred to as “identified persons”), whose number shall not exceed 50 (200 as per Rule 14(2) of Companies (Prospectus and Allotment of Securities) Rules,2014 [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of 62(1)(b) in a financial year.
Aforesaid restrictions of 200 person would be reckoned individually for each kind of security that is equity share, preference share or debenture.
Section 42(3): A company making private placement shall issue private placement offer and application in form PAS-4 (Rule 14(3) of Companies (Prospectus and Allotment of Securities) Rules,2014) to identified persons, whose names and addresses are recorded by the company in form PAS-5 (Rule 14(4) of Companies (Prospectus and Allotment of Securities) Rules,2014)
Form PAS-4 shall be serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the name of such person pursuant to sub-section (3) of section 42
No person other than to whom Private Placement offer letter is sent is allowed to apply in Private Placement
Private Placement offer and application shall not carry any right of renunciation.
Section 42(4): Every identified person willing to subscribe shall apply and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash:
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 accordance with sub-section (8).
The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the bank account from where such payment for subscription has been received: (Rule 14(5) of Companies (Prospectus and Allotment of Securities) Rules,2014)
Provided that 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:
Provided further that the provisions of this sub-rule shall not apply in case of issue of shares for consideration other than cash.
Section 42(5): The company shall not make any fresh offer or invitation unless allotment in respect to earlier offer is completed or that offer is withdrawn or abandoned.
Provided that, subject to the maximum number of identified persons under sub-section (2), a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.
Section 42(6): The Company shall allot securities within 60 days from the date of receiving application money.
If the Company is not able to allot securities under aforesaid period of 60 days than the company shall return the application money within 15 days from the expiry of 60 days and if the company fails to repay the money in aforesaid period than it shall be liable to pay interest at a rate of 12% p.a. from the expiry of 60 day.
Provided that the Company shall keep money received for allotment of securities in a separate bank account opened in Schedule bank and shall not be utilised other than:
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities.
Section 42(7) The Company shall not release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.
Section 42(8): The Company shall file return of allotment in form PAS-3 within 15 days from the date of allotment and shall attach a complete list of allottee containing:
(i) the full name, address, permanent Account Number and E-mail ID of such security holder;
(ii) the class of security held;
(iii) the date of allotment of security;
(iv) the number of securities held, nominal value and amount paid on such securities; and particulars of consideration received if tire securities were issued for consideration other than (Rule 14(6) of Companies (Prospectus and Allotment of Securities) Rules, 2014.
Rule 1 of Companies (Prospectus and Allotment of Securities) Rules,2014
A company shall before making an offer or invitation to subscriber its securities through private placement pass a special resolution in the GM for each offer.
Content of Explanatory Statement:
(a) particulars of the offer including date of passing of Board resolution;
(b) kinds of securities offered and the price at which security is being offered:
(c) basis or justification for the price (including premium, if any) at which the offer or invitation is being made;
(d) name and address of valuer who performed valuation;
(e) amount which the company intends to raise by way of such securities;
(f) material terms of raising such securities, proposed time schedule, purposes or objects of offer, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects; principle terms of assets charged as securities:
Provided If the offer or invitation is for NCD and proposed amount to be raised through such offer or invitation:
- does not exceed the limit specified in Section 180(1)(c).
in such cases relevant Board resolution under section 179(3)(c) would be adequate.
- exceed the limit specified in Section 180(1)(c).
In such case, it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitations for such debentures during the year.
Provided also that in case of offer or invitation of any securities to qualified institutional buyers, it shall be sufficient if the company passes a previous special resolution only once in a year for all the allotments to such buyers during the year.
Provided also that no offer or invitation of any securities under this rule shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with the private placement offer cum application letter.
