Can a Company Make Two Private Placement Offers Simultaneously under Section 42(5)?

Can a Company Make Two Private Placement Offers Simultaneously under Section 42(5)? Equity–Equity and Equity–Preference Offers Explained

Brief: A private placement under Section 42 of the Companies Act, 2013 follows a prescribed process involving identification of investors, approval, issue of the offer-cum-application, receipt of money, allotment and filing of the return of allotment. Section 42(5) generally prevents a company from making a fresh offer until allotment under an earlier offer is complete or the earlier offer has been withdrawn or abandoned. Its wording does not distinguish between two equity offers and an equity offer followed by a preference share offer. Although the proviso contemplates more than one issue to a prescribed class of identified persons, no applicable prescription of that class has been identified for this article. The prudent course is to complete or withdraw the first offer before making the next. A proposed transaction involving both equity and preference shares needs specific review of its approvals and offer documents; merely calling two offers a single combined offer does not resolve a Section 42(5) issue.

Short Answer

Section 42(5) bars a fresh private placement offer until allotment under an earlier offer is complete or that offer is withdrawn or abandoned. The words “any offer or invitation made earlier” do not distinguish between kinds of securities. The restriction therefore applies both to a second equity offer and to a preference share offer proposed while an equity offer remains pending. The separate numerical limit for each kind of security does not itself permit simultaneous offers. The ROC Punjab and Chandigarh has penalised an overlap involving equity shares and debentures.

Applicable Legal Provisions

• Section 42(2): Private placement may be made to persons identified by the Board, subject to the prescribed limit and conditions.
• Section 42(5): No fresh offer or invitation may be made until allotments under an earlier offer are completed or that offer is withdrawn or abandoned.
• Proviso to Section 42(5): More than one issue may be made to such class of identified persons as may be prescribed, subject to the Section 42(2) limit.
• Sections 42(4), 42(6) and 42(8): Subscription money cannot be used before allotment and filing of the return of allotment; allotment is required within 60 days of receiving application money; and Form PAS-3 must be filed within 15 days of allotment.
• Section 42(10): A contravention can attract penalties for the company, its promoters and directors, as well as a refund obligation.
• Section 62(1)(c): A preferential issue of shares is subject to Chapter III of the Act, including Section 42 where the issue is made through private placement.
• Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014: Prescribes requirements for private placement, including approval and the numerical limit. The limit is reckoned separately for equity shares, preference shares and debentures.

Relevant Extract

Section 42(5): “No fresh offer or invitation under this section 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: 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.”

Legal Position

When is there a fresh offer?

The restriction concerns the making of a fresh offer or invitation. A resolution approving a proposed issue and the subsequent communication of an offer are distinct steps. The company should examine when the private placement offer-cum-application in Form PAS-4 was issued to identified persons. Describing a separately made invitation as a “second tranche” does not, by itself, remove it from Section 42(5).

The basic rule: complete or withdraw the earlier offer

Under Section 42(5), a fresh offer must wait until allotments relating to the earlier offer have been completed or that earlier offer has been withdrawn or abandoned. Filing Form PAS-3 is a separate statutory obligation due within 15 days of allotment. Prompt filing gives the company a clearer compliance record, but the text of Section 42(5) refers to completion of allotments rather than PAS-3 filing as the sequencing condition.

The proviso concerning more than one issue

The proviso allows more than one issue to “such class of identified persons as may be prescribed”, subject to the Section 42(2) limit. No applicable rule prescribing that class has been identified for the purpose of this article. The prudent interpretation is therefore not to treat the proviso as a general permission to run simultaneous private placement offers. Its application to a particular structure should be examined on the current law and facts; the point has not been conclusively settled by a court ruling identified here.

Situation 1: Two equity offers

Suppose a company offers equity shares to one group of investors and, before completing allotment or withdrawing that offer, wishes to offer equity shares to another investor at a different price. If the later invitation is a fresh private placement offer, Section 42(5) restricts it. Different investors or prices do not create an exception.

Situation 2: An equity offer followed by a preference share offer

The explanation to Rule 14 counts the numerical restriction separately for equity shares, preference shares and debentures. That separate counting does not answer when a fresh offer can be made. Section 42(5) refers to any earlier offer or invitation, without limiting its operation to an earlier offer of the same security.

An earlier explanation in Rule 14 that expressly addressed offers of different kinds of securities was omitted by the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018. Its omission must be read alongside the substituted Section 42(5), which contains the general restriction on fresh offers. On that reading, the company should complete or withdraw the equity offer before making a separate preference share offer.

Can both kinds of securities be planned together?

A company can plan a financing round involving equity and preference shares at the outset. It should not, however, assume that one special resolution, one set of offer documents or one allotment meeting automatically converts two distinct issues into one offer for Section 42(5). The terms of each security, identified offerees, resolutions, Form PAS-4 documentation and filing requirements must be examined. If the proposed structure involves separate offers, sequencing them is the prudent route.

Transactions outside private placement

Section 42(5) addresses fresh offers or invitations under Section 42. A genuine rights issue, bonus issue or employee stock option under its respective statutory route is not made subject to this restriction merely because a private placement is pending. Each transaction must still comply with its own requirements. A preferential allotment made through the private placement route remains subject to Section 42.

Exemptions and Relaxations

Certain provisions permit an annual special resolution for specified non-convertible debenture offers and offers to qualified institutional buyers. That relaxation in the approval process does not itself displace the sequencing condition in Section 42(5). Rule 14 also contains specific treatment of the numerical ceiling for eligible NBFCs and housing finance companies. Separately, Section 446B provides reduced penalties for qualifying companies and persons. None should be assumed to confer a general right to keep two private placement offers open.

Regulatory Illustration: Ambium Finserve

In In re Ambium Finserve Pvt. Ltd., Order No. ROC-CHD/148 dated 27 May 2024, an equity private placement and an NCD private placement overlapped before completion of the equity allotment. The company made a suo motu application. The Registrar of Companies, Punjab and Chandigarh, found a contravention of Section 42(5) and imposed a penalty of ₹10 lakh on the company and ₹1 lakh on each of five directors. The order shows the regulator’s approach to overlapping offers of different securities. It is an adjudication order, not a binding court precedent.

Practical Steps

• Complete the first offer: Record the allotment and treatment of any unsubscribed portion in the Board proceedings. File PAS-3 within 15 days of allotment and retain evidence that the earlier allotments were completed before making a fresh offer.
• Withdraw an offer that will not proceed: Document the withdrawal or abandonment through an appropriate Board decision, communicate it to offerees, address application money received in accordance with law and maintain the private placement records.
• Plan multiple securities early: Determine the proposed investors, terms and approvals before circulating PAS-4. Obtain transaction-specific advice where a financing round includes different kinds of securities.
• Address an existing overlap: Establish when each offer was actually made, examine the allotments and amounts received, and consider corrective steps and adjudication under Section 454. A penalty contravention under Section 42(10) should not simply be described as a compoundable offence.

Penalty and Refund Exposure

Subject to Section 42(11), Section 42(10) provides that where a company makes an offer or accepts money in contravention of Section 42, the company, its promoters and directors may be liable to a penalty extending to the amount raised through the private placement or ₹2 crore, whichever is lower. The company must also refund monies with the interest specified in Section 42(6) within 30 days of the order imposing the penalty. The actual penalty depends on adjudication and the applicable facts. Section 446B may apply to a qualifying company.

Example

ABC Pvt. Ltd. issues PAS-4 to twelve identified investors for equity shares on 15 July. On 25 July, a fund proposes to invest through compulsorily convertible preference shares and a strategic investor proposes another equity investment. If the first offer remains pending, making either fresh private placement offer presents a Section 42(5) risk. ABC should first complete allotment under the earlier offer or formally withdraw or abandon it and address any application money received. It can then make the new offer or offers in a compliant sequence.

Conclusion

Section 42(5) generally requires completion of allotment under an earlier private placement offer, or withdrawal or abandonment of that offer, before a company makes a fresh one. Its wording covers an earlier offer of any kind of security. The prescribed-class proviso should not be treated as unrestricted permission for simultaneous offers. Companies planning equity and preference share financing should settle the structure and sequence before issuing offer documents.

So the author of the article opines that two separately made private placement offers should not run simultaneously, whether both concern equity shares or one concerns equity shares and the other preference shares. A proposed combined transaction requires specific review before it can properly be treated as a single offer.

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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES, Company Secretary in Practice, Delhi. Email: [email protected].