Sec-42 of Companies Act, 2013 and Rule-14 of Companies (Prospectus and Allotment of Securities) Rules, 2014: An Overview

♦ Procedure in brief for issue of securities on Private Placement basis:

1. Convene Board Meeting:

    • To issue approval for issue of securities
    • To identify persons to whom securities be allotted
    • To approve the Draft and record of private placement offer letter
    • To open separate bank account in scheduled commercial bank for receiving money
    • To approve notice for holding shareholders meeting for taking approval

2. Prepare the list of allottees along with the prescribed details as per Form PAS-5.

3. Hold shareholders meeting and pass special resolution to approve the offer letter and authorize an officer to perform and give necessary effects.

4. Form MGT-14 along with special resolution and explanatory statement.

5. Dispatch the offer letter along with application form to the proposed allottees.

6. Receive the money of subscription in bank account opened in scheduled bank for the issue.

7. Convene Board Meeting for Allotment of securities and make the allotment within 60 days of receiving application money.

8. File PAS – 3 within 15 days of the allotment along with Special Resolution and List of allottees.

♦ Detailed Analysis of the section:

√ Section – 42: Offer or Invitation for Subscription of Securities on Private Placement:

Sec – 42(1): A company may make a private placement of securities as per this provision.

Sec – 42(2): Offer or Invitation to Maximum number of persons:

A private placement shall be made only to:

  • select group of persons who have been identified by the Board,
  • number of persons shall not exceed 50 or such higher number as may be prescribed [excluding QIB and ESOPS in terms of provisions of sec – 62(1)(b)], in a financial year subject to such conditions as may be prescribed[Maximum 200 persons as per Rules].

Sec – 42(3): Offer and Invitation to identified persons recorded by company:

A company making private placement shall issue:

  • private placement offer and application to identified persons,
  • whose names and addresses are recorded by the company in such manner as may be prescribed:

Provided that the private placement offer and application shall not carry any right of renunciation:

Explanation I: “private placement” means

  • any offer or invitation to subscribe or issue of securities
  • to a select group of persons by a company (other than by way of public offer)

through private placement offer-cum-application, which satisfies the conditions specified in this section.

Explanation II: “qualified institutional buyer” means

  • the qualified institutional buyer as defined in the Securities and Exchange Board of India (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.

Explanation III: If a company, listed or unlisted, makes an offer

  • to allot or invites subscription, or allots, or enters into an agreement to allot, securities
  • to more than the prescribed number of persons,
  • whether the payment has been received or not or
  • whether the company intends to list its securities or not on any recognised 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 this Chapter.

Sec – 42(4): Every identified person willing to subscribe to the private placement issue

  • shall apply in the private placement and
  • application issued to such person along with subscription money paid by banking channel and
  • not by cash:

Provided that a 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 sec – 42(8)

Sec – 42(5): No fresh offer or invitation shall be made unless:

  • the earlier allotments with respect to any offer or invitation have been completed or
  • has been withdrawn or abandoned by the company:

Provided that, subject to the maximum number of identified persons under sec – 42(2),

  • a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.

Sec – 42(6): A company making an offer or invitation:

  • shall allot its securities within 60 days from the date of receipt of the application money for such securities and
  • if the company is not able to allot the securities within that period,
  • it 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 aforesaid period,
  • it shall be liable to repay that money with interest at the rate of 12% p.a. from the expiry of the 60th day:

Provided that monies received on application:

  • shall be kept in a separate bank account in a scheduled bank and
  • shall not be utilised for any purpose other than:

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.

Sec – 42(7): No company issuing securities shall:

  • release any public advertisements or
  • utilise any media, marketing or distribution channels or agents to inform the public at large.

Sec – 42(8): A company making any allotment of securities:

  • shall file with the Registrar a return of allotment within 15 days from the date of the allotment,
  • including a complete list of all allottees,
  • with their full names, addresses, number of securities allotted and
  • such other relevant information as may be prescribed

Sec – 42(9): Defaults in filing of Return of Allotment by Company within the period prescribed U/s. 42(8):

  • the company, its promoters and directors shall be liable to
  • Penalty: for each default of 1000 for each day during which such default continues but not exceeding Rs. 25 lakhs rupees.

Sec – 42(10): Penalty for the Contravention of the provision:

Subject to sec – 42(11), if a company makes an offer or accepts monies in contravention of this section,

  • the company, its promoters and directors
  • shall be liable for a penalty which may extend to the amount raised through the private placement or
  • two crore rupees,

whichever is lower,

and

  • the company shall also refund all monies with interest as specified in sec – 42(6) to subscribers
  • within a period of 30 days of the order imposing the penalty.

Sec – 42(11): Non-Compliance of Sec – 42(2):

Notwithstanding anything contained in sec – (9) and (10),

  • any private placement issue not made in compliance of the provisions of sec – 42(2)
  • shall be deemed to be a public offer and
  • all the provisions of this Act and the SCRA Act, 1956 and the SEBI Act, 1992 shall be applicable.

Rule 14: Private placement.

Rule 14 (1): Prior Approval of shareholders and Disclosure in Explanatory statement:

For the purposes of section 42(2) and (3),

  • a 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:

Provided that in the explanatory statement annexed to the notice for shareholders’ approval, the following disclosure shall be made:

(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 further that this rule – 14(1) shall not apply:

  • in case of offer or invitation for non-convertible debentures,
  • where the proposed amount to be raised does not exceed the limit as specified in sec – 180(1)(c) and
  • in such cases, Board resolution U/s. 179(3)(c) 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 sec – 180(1)(c),
  • 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.

Rule 14 (2): For the purpose of sec – 42(2), an offer or invitation to subscribe securities under private placement shall not be made:

  • to persons more than 200 in the aggregate in a financial year:

Provided that any offer or invitation made

  • to qualified institutional buyers, or
  • to employees of the company under ESOP scheme as per provisions of sec – 62(1)(c)
  • shall not be considered while calculating the limit of 200 persons.

Explanation: For the purposes of this rule- 14(2) it is hereby clarified that:

  • the restrictions aforesaid would be reckoned individually for each kind of security that is equity share, preference share or debenture.

Rule 14 (3): a private placement offer cum application letter shall be:

  • in the form of an application in Form PAS-4 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 30 days of recording the name of such person pursuant to sec – 42(3):

Provided that no person other than the person so addressed:

  • in the private placement offer cum application letter
  • shall be allowed to apply through such application form and
  • any application not conforming to this condition shall be treated as invalid

Rule 14 (4): The company shall maintain a complete record of private placement offers in Form PAS-5.

Rule 14 (5): The payment to be made for subscription to bank account of the person subscribing to such keep the record of the bank account from where been received:

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.

Rule 14 (6): A return of allotment of securities U/s. 42 shall be filed with the Registrar

  • within 15 days of allotment in Form PAS-3 and
  • with the fee as provided in the Companies (Registration offices and Fees) Rules, 2014
  • along with a complete list of all the allottees 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 herd, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash.

Rule 14 (7): Non – Applicability of Rule – 14(2):

The provisions of rule – 14(2) shall not be applicable to –

(a) non-banking financial companies which are registered with the Reserve Bank of India under the Reserve Bank of India Act,1934 (2 of 1934) and

(b) housing finance companies which are registered with the National Housing Bank under the National Housing Bank Act, 1987 (53 of 1987),

if they complying with regulations made by the Reserve Bank of India or the National Housing Bank in respect of offer or invitation to be issued on private placement basis:

Provided that such companies shall comply with rule – 14(2) in case the Reserve Bank of India or the National Housing Bank have not specified similar regulations

Rule 14 (8):a company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the Registry:

Provided that private companies shall file with the Registry:

  • copy of the Board resolution or special resolution
  • with respect to approval U/s. sec – 179(3)(c)

Disclaimer: The entire content of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, Author assumes no responsibility thereof. The user of the information agrees that the information is not a professional advice and is subject to change without notice. In no event, we shall be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of information.

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