Funding is crucial for corporates, not only to invest and expand but also to operate their daily business.
Companies have 3 alternatives to fulfill their funding requirements, that is by using
1. Debt
2. Issue Equity
3. Using money earned from Operations
Equity and Debt are the most common way of funding.
Equity would mean selling off a portion of equity for money provided by the investors. There is no obligation of the Company to repay the money acquired through this mode and returns (dividend) is provided on Company’s will
Debt would come along with repayment clauses and regular interest payments, however, there is no dilution of ownership here.
Some of the prominent methods of Corporate Funding are:
- IPO where shares are allotted to the public in Open Market
- FPO- here shares are offered to existing shareholders (offer for sale, Right issue, Bonus issue)
- Private Placement – for Private Companies and even for Publicly traded Companies; Private Placement, Preferential allotment may be the ways of acquiring Funding
- Borrowing or Issue of Debentures etc.
What is private placement?
Private placement is a tool for raising additional capital, where an offer is made for the issue of securities to a selected group of people by the Company (other than by way of a public offer) (Section 42, Companies Act, 2013)
Securities here shall mean “shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate” as defined in section 2(h) of SCRA, 1956.
That is, we can issue equity (shares) as well as take debt (Debentures) under Private Placement.
Why Private Placement?
As the word implies, Private placement is an offer made to selected people shortlisted by the Board, it saves the Company from the hassle of public issue and associate expenses and time-consuming procedures for the requirement of funds.
Who cannot participate in Private Placement?
No person other than the ones identified by the Board can participate in the issue.
Legal aspects of Private Placement
Private placement is covered under
- Sec 42- offer or invitation for subscription of securities on private placement
- Sec 62(1)(c) – Preferential Issue
- Sec 71- Debentures
- Chapter III, Part-2- The Companies (Private Placement), Rule 14.
- Chapter IV- The Companies (Share Capital and Debentures) rule 13.
| 1. | Securities under Private Placement can only be issued to a group of maximum 200 people in aggregate in a financial year, excluding QIP & ESOP.
It is to be noted that the limit of 200 people is per security. (i.e., 200 for equity shares, 200 for preference shares, 200 for debentures, etc.) For instance, if a company issues equity shares under private placement to 170 people, in the next offer of private placement of equity shares, it can only issue to 30 people. But the Company has the option to issue other kinds of securities The limit mentioned in for one “Financial year”. For instance, if a company has issued equity shares under private placement to 200 people as of 10th August 2021. It will have to wait till the end of Financial 2021-22 to issue equity shares under Private Placement to other investors |
| 2. | Private Placement offers and Invitations shall be only made to Identified persons, whose names and addresses are recorded. No person other than the one addressed in the application shall be allowed to apply |
| 3. | No public advertisement/ marketing shall be done to inform the public about issue of securities |
| 4. | No right of Renunciation shall be provided by the Company |
| 5. | The value of offer or invitation per person shall be with an investment size of not less than Rs. 20,000 of face value of securities |
| 6. | The identified person shall make payment towards the application by way of cheque, demand draft, or any other banking channels but not by cash.
Payment towards subscription of securities shall be made from the bank account of
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| 7. | Money received shall be kept in a different bank account and it shall only be utilized for
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| 8. | Allotment of the securities shall be made within 60days from receipt of money. If the Company is not able to allot, then the Company shall repay money within 15 days of the expiry of 60 days. If the company fails to repay the money, it shall be liable to repay with interest @12% p.a
(This proposal will curb a common practice under which companies would accept funds as application money without adequately complying with regulations for accepting deposits. These companies would accept application money from any person, use the money for various purposes and then refund them, as there was no time-table for allotment of shares or refund of funds raised.) |
| 9. | The company cannot make a fresh offer or invitation unless the previous allotment with respect to any securities is completed/ withdrawn/abandoned by the Company.
(for Instance, If allotment of equity shares is not completed, the Company cannot make a fresh offer of ANY kind of securities) |
| 10. | The company cannot utilize money unless allotment is done and PAS-3 is filed. PAS-3 to be filed within 15 days of allotment. |
| 11. | If a listed or unlisted company,
IT IS DEEMED AS AN OPEN OFFER |
| 12. | A complete record of Private placement to be done in PAS-5 |
Procedure
| 1. | Convene Board Meeting and take approval for
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| 2. | File MGT-14 within 30days of the Board Meeting under section 117 and section 179(3)(c) |
| 3. | The board of directors may identify the persons to whom the offer is to be made either before or after the shareholders’ approval and record the same in PAS-5 |
| 4. | Pass Special Resolution to issue securities under private placement in the General Meeting. |
| 5. | File MGT-14 for the special resolution passed |
| 6. | Within 30 days of recording the name in PAS-5, the company shall send the offer letter to the identified persons in form PAS-4. |
| 7. | File PAS-5 and PAS-4 with ROC in form GNL-2 within 30days of the date of circulation of the offer letter. (Date of sending Private placement offer letter shall be considered the date of circulation) |
| 8. | The private placement offer document can only be filed if board Resolution and special resolution have been filed with ROC |
| 9. | Open a separate Bank account for deposit of Money received towards Private Placement.
(If foreign Investors are involved- once the money is received from foreign investors
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| 10. | Convene Board meeting no.2 and pass Resolution for Allotment of securities |
| 11. | The allotment shall be completed within 60days of receipt of the money |
Post allotment compliance
| 1. | File PAS-3 within 15days of allotment of securities |
| 2. | In the case of foreign investors:
File FC-GPR within 30days of allotment. There are times when due to fluctuation in currency rate, the foreign currency that is received in share application money when converted into Indian rupees is more than the application money required. The company needs to file RBI form A2 in such a case within 30 days of allotment and return the excess money received. |
| 3. | Pay Stamp Duty within 30days of issue of securities certificate |
Issue of Debentures in Private Placement:
As mentioned above, Special Resolution is mandatory for the issue of securities through Private Placement mode, however, if the Company is
- issuing Non-Convertible Debentures (i.e. borrowing money) through Private Placement mode
AND
- The amount of issue does not exceed section 180(1)(c) limits [ i.e. Money borrowed + to be borrowed does not exceed the aggregate of Paid-up capital + securities premium + Free Reserves, apart from temporary loans]
Board Resolution passed u/s 179(3)(c) is enough.
However, if the amount to be borrowed exceeds the limits mentioned u/s 180, a single Special Resolution can be passed for the whole financial year.
Preferential allotment VS Private Placement
There are many similarities between Preferential Allotment and Private Placement, but some distinctive points are as follows
| Private Placement | Preferential Allotment |
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Formal definition |
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| “Private placement” means any offer of securities or invitation to subscribe securities to a selected group of persons by a company (other than by way of public offer) through issue of a private placement offer letter” | Preferential Offer’ means an issue of shares or other securities, by a company to any selected person or group of persons on a preferential basis. |
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Does not include |
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| shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities | |
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What are “securities” |
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| Here, securities shall mean securities covered under section 2(h) of SCRA, 1956.
That is, it contains equity shares, Non-Convertible Debentures, convertible Debentures, Preference shares, etc. (Any kind of securities can be issued) |
Here, securities shall mean Equity Shares, fully Convertible Debentures, partly convertible debentures or any securities which would be convertible in later date.
(Only equity shares or securities which ultimately converts into equity can be issued) |
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Allotment |
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| Allotment shall be done within 60days of receipt of Application money. | Allotment has to be done within 12 months from the date of Special Resolution. |
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Mode/Situation |
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| Just like Public Issue, Private placement is a “mode” of issuing securities. | Preferential Allotment is a “situation” in which shares are issued by the “mode” of Private Placement. |
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Cash Payment |
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| Payment in cash is not allowed | Payment may be made in cash |
Private Placement is one of the common ways of acquiring funding in Private Companies as it needs lesser compliance, time, capital, and resources compared to Public Issue.
Author Bio
Hello ma’am
please clear one doubt, since the limit of 200 is security wise so can we do this –
issue 200 equity shares in 2021-22
again issue 200 debentures 2021-22
waiting for your reply..
you have consolidated it so well, thanks for sharing….
So well-articulated! Loved it, keep writing! ☺
So well-articulated! Keep writing, we love it.
such a good article @Shraddha Kotiya. You have explained very minutely. Really Appreciable.