A company may need to secure funds for multiple reasons, such as initiating a new venture, amplifying an existing business, or fulfilling working capital requirements. After assessing the current financial standing, a company decides whether to generate funds via debt financing, such as issuing debentures, procuring loans from banks, financial institutions, NBFCs, or issuing bonds, equity shares, or preference shares.
Private placement represents a method used by companies to secure capital by offering securities to a select group of investors via a private placement offer cum application letter, circumventing the need for a public offer. Both public and private companies can utilize this approach.
Nevertheless, it is not mandatory for companies to generate funds through private placement. However, if a company chooses this route, it must comply with the provisions of Section 42 of The Companies Act, 2013, and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
Conditions for private placement:
Private placement shall be made only to a select group of persons who have been identified by the Board, not exceeding 200 in the financial year, excluding Qualified Institutional Buyers and employees of the company being offered securities under ESOP scheme. The restrictions aforesaid would be reckoned individually for each kind of security, i.e., equity share, preference share, and debenture. The limit of the maximum number of select persons and value of private placement does not apply to the following:
- Non-Banking financial companies under the Reserve Bank of India Act, 1934.
- Housing finance companies registered with the National Housing Bank Act, 1987.
A company making private placement shall issue a private placement offer cum application letter to identified persons whose names and addresses are recorded by the company. No person other than the person so addressed in the private placement offer cum application letter shall be allowed to apply through such an application form. Payment for the subscription of securities shall be made through a bank account, and the company shall keep the record of the bank account from where such payment has been received. Subscription money received by the company shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose other than for:
- Adjusting against the allotment of securities.
- For the repayment of monies where the company is unable to allot security.
A fresh offer letter cannot be given until the earlier offer letter has been completed or withdrawn. The company shall not release any public advertisement or utilize any marketing, media, or distribution agents or channels to inform the public about such an offer.
Compliances and Disclosure related to private placement:
The company shall maintain a complete record of private placement offers in Form PAS-5. The company should take the previous approval of the shareholders of the company by passing a special resolution for each of the offers or invitations to subscribe to securities through private placement. The explanatory statement of the EGM notice shall include the following:
- Particulars of the offer.
- Kinds of securities offered and price.
- Basis or justification of price.
- Names and addresses of valuers who performed valuation.
- Amount which the company intends to raise by way of such securities.
- Material terms of raising, proposed time schedule, purpose, and contribution made by promoter or director.
The private placement offer cum application letter shall be in the form of an application in Form PAS-4 and filed the same with ROC along with fees within 30 days of the circulation of the private placement offer letter. When the company is a listed company, it should file the record of private placement offers along with the private placement offer letter with the Securities and Exchange Board of India within 30 days of circulating the private placement offer letter. Private placement offer cum application does not carry the right of renunciation. The company shall issue the private placement offer cum application only after the relevant special resolution or board resolution has been filed with the Registrar of Companies. A company making an invitation or offer of private placement should allot its securities within 60 days from the receipt of the application money. If the company fails to repay the application money within 15 days from the expiry of 60 days, it is liable to repay the subscription money with an interest rate of 12% per annum from the expiry of the 60th day. Return of allotment of securities under Section 42 shall be filed with the Registrar within 15 days of allotment in Form PAS-3 along with fees having the following information:
- Complete list of all security holders.
- Full name, address, PAN, and E-mail of such security holders.
- Class of security held.
- Date of allotment of security.
- Number of securities held, the amount paid, and nominal value of such securities.
- Particulars of the consideration received if the securities were issued for consideration other than cash.
Penalties for non-compliance with provisions related to private placement:
If the offer is advertised or marketed, it will be considered a public offer and not a private placement. If the number of identified persons exceeds the limit prescribed, then it will be deemed to be a public offer, and all the provisions of this Act, Securities Contract (Regulation) Act, 1956, and SEBI Act, 1992 shall be applicable. If the company defaults in filing the return of allotment within the prescribed period, the company, its promoters, and directors shall be liable to a penalty for each default of 1000 rupees for each day during which such default continues but not exceeding 25 lakh rupees. If the company makes an offer or accepts money 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 2 crore rupees, whichever is lower, and the company shall also refund all monies with interest to subscribers within a period of 30 days of the order imposing the penalty.
Conclusion:
By opting for a private placement, companies can maintain confidentiality about their financial information, business plans, and strategic initiatives. This can be advantageous for businesses that wish to keep certain aspects of their operations private. Additionally, private placements allow companies to retain greater control over the ownership and governance structure as they can choose the specific investors to whom they sell securities.
It is important to note that while private placements offer advantages, they also come with certain limitations and risks. Investors in private placements generally have less liquidity, limited information transparency, and reduced regulatory protection compared to publicly traded securities. It is advisable for both companies and investors to conduct thorough due diligence and consult legal and financial professionals before engaging in private placement transactions.
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