PRIVATE PLACEMENT SHARES,
Section – 42 read with rule 14(1) of Companies
(Prospectus and Allotment of Securities) Rules, 2014
Any business cannot run without funds. In case of an incorporated company, initial capital always comes from subscribers to the memorandum. After that company can raise funds by Loans/borrowings or issue of securities. Hereafter I will discuss the way to raise funds by issue of securities.
In my earlier article I discussed how to issue share on right basis. In this article I will discussed the process of issue on share by private placement.
Private placement means: Any offer of securities or invitation to a selected group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in section-42.
Section 42 of the Companies Act, 2013 allows any company, whether private or public, to make private placement of securities through issue of a “Private Placement Offer Letter” (PPOL).
‘Private Placement’ can be said in consonance with the interpretation of the Supreme Court as “any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section including the condition that he offer or invitation is made to not more than 200 persons (excluding QIB’s and employees offered securities under ESOP) in a financial year”. In a single invitation company can’t invite more than 50 persons for private placement.
A Private Company may issue its securities-
A Public Company may issue securities-
CONDITIONS FOR PRIVATE PLACEMENT OF ISSUE OF SHARES
If offer is made to more than 200 peoples:
If a company, whether listed or unlisted makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than 200 persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognized stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of Chapter III.[ Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with]
Offer counted separately for each kind of security: The restriction under sub-clause (b) would be reckoned individually for each kind of security that is equity share, preference share or debenture.
No further offer till completion of earlier offer: The requirements or provision of sub-section (3) of Section-42 shall apply in respect of offer or invitation of each kind of security and no offer or invitation of another kind of security shall be made unless allotments with respect to offer or invitation made earlier in respect of any other kind of security in completed.
Separate Bank Account:
Where jointly, the money from the bank account first person: 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.
Minimum amount of offer for an individual: The value of the Offer per person shall not be less than INR 20,000 of ‘face value’ of securities.
Persons to whom offer will make: All offers shall be made only to those persons whose names are recorded by the company prior to the invitation to subscribe. Allotments can be made only to such persons addressed specifically to the persons whom the offer is made along with the Offer letter.
No advertisement of offer: No company offering securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.
Condition for application form: The Company can allot share to only persons decided by Board of Directors. The company will issue application to such persons. The application form has to be numbered and addressed specifically to the person to whom the offer is made along with the Offer Letter. Allotments can be made only to such persons.
Mode to issue offer letter: The offer letter shall be sent to persons, either in writing or in electronic mode.
Valuation report: The price of the security has to be justified and the inference is that, it requires a valuation report by a Registered Valuer (can be a company secretary, chartered accountant or a cost accountant).
Days in which share should be issued: Allotment has to be carried out within 60 days of receiving of money.
14. If not allotted within 60 days: If allotment is not made within 60 days then from the 75th day the monies have to be repaid. Failure to repay has a liability of interest at 12%pa. If there is a Foreign Direct Investment, RBI has provided for 180 days for allotment. It is not clear which regulation over-rides wrt timeline for allotment. [As per my view we should allot share within 60 days].
15. Non-compliance: If conditions of Section-42 read with rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 has not been complied with than that can lead to a penalty of INR 2 crores or the amount involved in the offer, whichever is higher.
16. Minimum gap between two offers. There is no condition in the Act or rule regarding minimum gap between two offers. A company can come with new offer after completion of earlier offer.
17. Maximum no. of offers in a Financial year: There is no condition in the Act or rule regarding maximum Number of Private Placement offers in a financial year. According to this company can come with private placement offer in a financial year any no. of times. But remember an offer can’t be made more than 200 peoples in a financial year.
STEPS INVOLVED IN PRIVATE PLACEMENT
Call Meeting of Board Director:
Hold the Board Meeting:
Hold Extra Ordinary general Meeting:
Circulate Letter of Offer in form PAS-4:
File Form with Registrar:
Open Separate Bank Account:
File Form with Registrar:
Call Board Meeting after receiving of allotment of money.
Hold the Board Meeting:
File form with ROC:
Issue Share Certificate:
Since the requirements for raising the funds by way of private placement have been made more stringent, it will significantly increase the compliance burden on private companies looking to raise funds through private placement. It is also to be noted that as no specific exemption has been provided for private companies or small companies, it will lead to reduce flexibility available to private companies and the companies operated by closely held people for the raising funds. However, the better governance of all companies is expected which will lead to the transparency in the affairs of the Company and accountability of the directors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES is a Company Secretary in Practice from Delhi and can be contacted at firstname.lastname@example.org, Mob: +91-8130757966)