A company may make an offer or invitation of securities by way of private placement. Coming as it does right after high controversial litigation on the subject of private placement, this is very important provision that would determine when offering securities offering would become a public offer, and therefore will have to comply with a range of statutory requirements that would become applicable to a prospectus and public offers. Under section 42 of Companies Act, 2013 private placement itself will have statutory requirements for compliances and the regulatory obligations to discharge.
Meaning of Private Placement:-
As per the Companies Act, 2013 private placement means any offer or invitation to subscribe or issue of securities to a selected group of persons by a company (other than by way of public offer) through private placement offer-cum-application form, which satisfies the conditions specified in section 42 of the Companies Act, 2013.
To whom the offer shall be made:-
A private placement shall be made only to a selected group of persons who have been identified by the board of the company whose number shall not be more than 200 in a financial year.
Further for calculating the number of identified persons during the financial year following shall not be considered:-
i. Offer or invitation made to qualified institutional buyers, and
ii. Offers made to employees of the company under a scheme of employees stock option as per section 62(1)(b).
Restriction of 200 persons would be reckoned individually for each kind of securities that is equity shares, preference shares or debentures.
Process of issue of shares in the private placement:-
Company shall issue private placement offer and application in form PAS-4 to identified persons, whose names and address are recorded by the company.
Further the private placement offer and application shall not carry any right of renunciation.
Further note that if a company whether listed or unlisted makes an offer to allot or invites subscription, or allots, or enter into an agreement to allot, securities to more than 200 members in a financial year, whether payment for the securities have been received or not or whether the company intends to list its securities on any stock exchanges in India or outside the India or not, the offer shall be deemed to be as public offer and shall be governed by the provision of public offer.
Sending of offer:-
Application should be in the form of PAS-4 serially numbered and addressed specifically to the person to whom the offer is made and sent to him in writing or in electronics mode within 30 days of recording the name of such person pursuant to section 42.
Procedure for apply in Private Placement:-
Every Identified Person willing to subscribe the offer letter shall apply in the application form issued to such person along with subscription money.
Subscription money can be paid either by cheque or demand draft or by any Banking Channel but it can’t be paid by way of cash.
Restriction on Utilization of Money received against the Application:-
Company shall not utilize the money raised by way of private placement unless the allotment is made to the subscribers and Return of Allotment is filed with Registrar of Companies in the form PAS-3 within 15 days from the date of allotment including complete list of all allottees with their full name, address, number of securities allotted.
Restriction on Issue of securities in private placement:-
Company shall not make any fresh offer or invitation unless the allotment in respect of previous offer or invitation has been completed or that offer or invitation has been withdrawn or abandoned.
Company may, at any time, make more than one issue of securities to the identified persons subject to the maximum number of identified person under section 42 of the Companies Act, 2013.
Allotment of Securities under Private Placement:-
Company shall allot its securities within 60 days from the date of receipts of subscription money.
Company shall maintain a complete list of all the allottees of private placement containing the following:-
i. Full name, address, PAN and E-mail ID of such security holder
ii. Class of security held
iii. Date of allotment of security
iv. Number of security held, nominal value and amount paid on such securities and particulars of consideration received if any.
Further if the company fails to allot its securities within the specified timeline then the company shall repay the application money to the subscribers of offer within 15 days from the expiry of said 60 days.
Furthermore if the company also fails to repay the application money within 15 days then the company shall be liable to repay that money with interest of @ 12% per annum from the expiry of 60 days.
Opening of Separate Bank Account:-
Money received against application or offer from the subscribers shall be kept in a separate bank account and shall not be utilized for any purpose other than below mentioned:-
i. Adjustment against allotment of securities
ii. Repayment of money where company fails to allot its securities.
Offer should not be advertised:-
Company shall not utilize any public advertisement, media, marketing, distribution channel or agents to inform the public at large about issue of securities in private placement.
Defaults in filing of Return of Allotment (PAS-3):-
If a company defaults in filing return of allotment in the form PAS-3 within 15 days from the date of allotment then the company, its promoters and directors shall be liable to a penalty for each default of Rs. 1,000 for each day during such defaults continue but not exceeding Rs. 25 Lakhs.
Contravention of Section 43 of Companies Act, 2013:-
If a company fails to comply the provision of private placement then the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or Rs. 2 Crore, whichever is lower.
Further the company shall also refund all money with interest @ 12% to subscribers within a period of 30 days of the order imposing the penalty.
When the private placement becomes the public offer:-
Any private placement not made in compliances of the provision of sub-section 2 of section 42, shall be deemed to be a public offer and all the provision of Companies Act, 2013 and SEBI Act, 2013 and SCRA Act, 1956 shall be applicable on the company.
Prior approval of shareholders:-
Company shall not make an offer or invitation to subscribers of securities through private placement unless the special resolution has been passed by the company in meeting of the members of the company for each of the offer or invitation.
Explanatory Statement for Special Resolution:-
Following information shall be disclosed in the explanatory statement by the company:-
i. Details of the offer including the date of passing of Board resolution
ii. Type and price of securities
iii. Name and address of valuer
iv. Amount which the company intends to raise by of such offer
v. Basis or justification for the price
vi. Principal terms of assets charged for issuing securities
vii. Materials terms of raising such securities, time schedule, purpose and objects of offer, contribution being made by the promoters or directors of the company
Issue of Non- Convertible debenture through Private Placement:-
Requirement of passing of special resolution shall not apply in case of offer or invitation for non-convertible debenture, when the proposed amount to be raised through does not exceeds the limit specified in section 180(1)(c) i.e. equal to its paid-up share capital, free reserve and securities premium, and in such cases relevant board resolution under section 179(3)(c) would be adequate.
Further in case the proposed amount to be raised through private placement exceeds the limit specified in section 180(1)(c) then it shall be sufficient if the company passes a pervious special resolution only one in a year for all the offers or invitation for debentures during the year.
Payment of subscription money:-
Subscription money shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the bank account from where such payment have been received.
Further in case of the joint holders subscription money shall be paid from the bank account of the person whose name appears first in the application form.
Limits of 200 persons shall not applicable on the following companies:-
i. NBFC which are registered with RBI
ii. Housing finance companies which are registered with national housing bank
If these companies are complying with regulation made by RBI and National Housing Bank in respect of offer or invitation to be issued on private placement basis.
If the RBI or National Housing Bank have not specified similar regulation then these companies are bound to comply with provision of section 42 and rules made thereunder.