Issue of Securities through Private Placement

Introduction of Private Placement:

A Company shall go for issue of securities to fulfill their needs of funds for their business. Reason for issue is to have sufficient cash to run the operations and the day to day affairs of the company. For the companies in finance sector, achieving debt equity ratio also plays vital role to bring the funds in the company.

Private Placement is different from the other issue of securities. In this, the company intends to issue their shares to selected group of persons, we can call them as Investors of the company. Though it is a Private Placement, one cannot consider it as public issue of securities.

Following provisions of the Companies Act, 2013 deal with the issue of securities by way of Private Placement

1. Part II of the Chapter III of the Companies Act, 2013

2. The provisions of Section 42 of the Companies Act, 2013,

3. The Companies (Amendment) Act, 2017;

4. Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

Section 42,  A private placement shall be made only to a selected group of persons who have been identified by the Board (herein referred to as “Identified Persons”), whose number shall not exceed fifty or such higher number as may be prescribed in a financial year subject to such conditions prescribed under Rule 14 of the companies (prospectus and Allotment of Securities) Rules, 2014  

[NOTE: excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employee stock option in terms of provisions of clause (b) of sub-section (1) of section 62]

Major points for issuing shares under Private Placement:

1. Invitation to subscribe securities only to the selected group of persons (Identified Persons)

2. Maximum number of Identified Persons to whom offer shall be made does not exceed 50 or such higher number as may be prescribed [Higher will be 200 in aggregate for each kind of securities being offered by company, if company allot shares to more the 200 will deemed to be consider as public issue] as per rule 14(2) of the companies (prospectus and Allotment of Securities) Rules, 2014

Note: any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62 shall not be considered while calculating the limit of two hundred persons.

3. Form of application will be made in PAS-4 (Letter of Offer) and records of the offers to be maintain in PAS-5 as per Rule 14(4) of the companies (prospectus and Allotment of Securities) Rules, 2014

Note:  the private placement offer and application shall not carry any right of renunciation.

4. Company shall make an offer or invitation to subscribe in the securities through private placement only after getting it approved by the Shareholders in the general meeting by passing special resolution.

5. 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, which is to be paid;

i by cheque or

ii Demand draft or

iii Other banking channel and not by cash

1. a company shall not utilize monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in form PAS-3.

2. Company can allot its securities under private placement within sixty days from the receipt of money for such securities, in case the company is not able to allot the securities within time than it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days and if the company fails to repay the application money, it shall be repay that money with interest at the rate of twelve per cent (12% p.a.) per annum from the expiry of the sixtieth day (Section 42(6) of the Companies Act, 2013).

3. Monies received on application must be kept in a separate bank account held with scheduled bank and shall not be utilized 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.

4. If fund has been brought up through the foreign remittance, the company have to file form FC-GPR, as prescribed in the Master Direction issued by RBI on Reporting as amended from time to time, is filed by the Indian company within thirty days from the date of issue of capital instruments as per FEMA regulations

Note: FC-GPR shall be file on FIRMS portal (for Capital Instruments)

5. Company shall file return of allotment with Registrar of Companies in Form PAS-3 within 15 days from the date of allotment, including complete list of allottees, with their names, address & number of securities allotted

Note: If a company defaults in filing the return of allotment within the prescribed time, the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees

6. If a company makes an offer or accepts monies in contravention of the act, the company, its promoters and directors shall be liable for a penalty

i. which may extend to the amount raised through the private placement or

ii. two crore rupees,

whichever is lower,

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

Process of Private Placement:

1. Circulate Notice & Agenda for conducting the Board meeting at least 7 days prior to the Meeting [Section 173(3) of the Companies Act, 2013]

Note: Meeting of the Board may be called at shorter notice to transact urgent business subject to condition prescribed under the provision [proviso to section 173(3)]

2. Hold Board Meeting:

• To consider and approve of offer and issuance of security to the investor through Private Placement
• To approve the draft Letter of Offer [PAS-4] in relation to the issuance of security
• To Take note of valuation report and decide the Value of security.
• To fix day, date, time and venue for Extraordinary General Meeting of the shareholders of the company and to approve the notice convening said meeting.
• To open separate bank account for receiving the application money

3. File Form MGT-14 within 30 days of passing of Board Resolution except in case of private company [section 179(3)(c) of Companies Act, 2013]

4. Send the notice of General Meeting to the Members of the company not less than clear twenty-one days notice either in writing or through electronic mode in such manner prescribed under the act [section 101 of the Companies Act, 2013]

5. Convene General Meeting of the company for following purposes:

• Approval for offer of security on a Private Placement by passing special resolution
• Approval for the terms of the offer letter

6. File Form MGT-14 with registrar of Companies within 30 days of passing of Special resolution for Private placement.

7. Send offer cum application letter to identified persons in PAS 4 within period of 30 days from recording names of identified persons.

8. Prepare the record of Private Placement in Form PAS-5

9. Open the offer period as specified in offer letter and receive the money in specified bank account within offer period

10. After closing of offer period, conduct Board Meeting for passing of resolution for allotment of securities and issuing share certificates

11. File return of allotment in Form PAS-3 within 15 days from the date of passing Board Resolution for Allotment

12. Within thirty days of issuing share certificates, the company shall pay stamp duty as per the respective stamp act of the state.

13. Company should file form FC-GPR within period of thirty days from the date of issuing capital instrument.

Note: Foreign participation in India’s debt market is regulated and must be routed through one of three main routes: Foreign Portfolio Investment (‘FPI’), Foreign Venture Capital Investment (‘FVCI’), or External Commercial Borrowings (‘ECB’). If company brought up funds through ECB, then company should file return in form ECB-2 with RBI.

14. Update Register of members for issuing securities.

FORM PAS 5

(RULE 14(4) OF THE COMPANIES (PROSPECTUS AND ALLOTMENT OF SECURITIES) RULES, 2014
RECORD OF A PRIVATE PLACEMENT OFFER TO BE KEPT BY THE COMPANY

> Details of Private Placement Offer:

> Following Details of the persons to whom Private Placement Offer Letter has been circulated:

FOR AND ON BEHALF OF
XYZ LIMITED

____________________________
NAME:
DESIGNATION:
DIN:

Download FORM NO. PAS-4 in Word Format