Curious Case of Section 42 – Private Placement: Companies Act, 2013!

Well, like Harvey Specter says, “What are your choices when someone holds a gun to your head? You do what they say or they shoot you, right? Wrong! You take the gun. You pull out a bigger gun or you call their bluff or do one of a hundred and forty six other things.”

You must be thinking why am I quoting Suits when my heading clearly says about Section 42 of the Companies Act, 2013.

The answer to the abovementioned is simply that I wanted to engage you into reading this, however, the underlying answer is that, since all of us have been waiting patiently for this section to be enforced since its notification dated back in February, the government has finally answered our prayers and blessed us with the all new Section 42 (private placement) itself.

Now, the question arises again. Is it revamped altogether or just sugar coated?

I would say that yes, there are certain changes in this section and clarifactory changes altogether. The main changes are mentioned below:

Earlier, section 42, that is private placement offer was to be only to select group of persons not being more than 50 except in case of Qualified Institutional Investors and employees covered under Employee Stock Option Scheme. The new amendment, Rules 14 of Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 states that this number shall now stand increased from 50 to 200 in any financial year. A clarification exists in both the cases saying the calculation of such limit shall be done individually for each class of shares being Preferance, Equity and Debenture.

Previously, once the allotment of these securities was successfully carried out, a return of allotment in PAS 3 was to be filed by the company with the registrar within 30 days of such allotment which, with this amendment stands corrected at 15 days, putting the company in a rather delicate position due to considerable shortage of time.

As we all are aware by now that Private Placement covers all kinds of securities being Equity, Preferance and Debentures however, excluding Rights and Bonus Issues, the company should make sure the provision that is applicable to each class is used accurately to avoid any confusion.

Things which still continue to have an impact on this Section are as follows

• Private placement offer letter cannot be renunciated in favor of any other third party unlike in case of Rights issue.
• The acceptance of money against these allotments shall be only via bank or demand draft and not by cash in case of consideration payable in cash.
• The company shall have a separate bank account with an authorized dealer for operating in the Private Placement.
• The company should also keep a record of bank details of the proposed shareholders applying for such shares.
• The company shall not make an offer or invitation. to subscribe to securities through private placement unless the proposal  has been previously approved by the shareholders of the company, by a special resolution for each of the offers or invitations
• The abovementioned sub-rule shall not apply in case of offer or invitation for. non-convertible debentures, where the proposed amount to be raised through such offer or invitation does not exceed the limit as specified in clause (c) of sub section (1) of section 180 and in such cases relevant Board resolution under  clause (c) of subsection (3) of section 179 would be adequate:
• Provided also that in case of offer or invitation for non-convertible debentures, where the proposed amount to be raised through such offer or invitation exceeds the limit as specified in clause (c) of sub-section (1) of section 180, 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
• The company shall have to offer such securities in placement cum offer letter also known as PAS 4.
• A complete record of such placement shall be maintained in PAS 5
• The company shall not advertise anything related to such placement to the public, in case the company defaults in complying the said clause, the offer for such securities shall be considered as a public offer.
• The offer cum application letter shall be issues once the same has been approved by the Board vide a Special Resolution.

Concluding this article, we can say that yes the government did try to clear up the air around it, however apart from some drastic changes like filing of return of allotment in 15  days, there is no major change in this amended act and rules.

Notifications Related to Section 42 of Companies Act, 2013 as amended by Companies (Amendment) Act, 2017-