Private Placement by Private Companies & Unlisted Public Companies

Private Placement by Private Companies and Unlisted Public Companies

Before understanding the Private Placement, we have to understand the different methods and applicable laws according to which the Companies can issue Securities.

On the basis of Section 23 of the Companies Act, 2013, we can divide companies into two parts on the basis of the modes in which they can issue Securities.

1. Private Companies, and

2. Public Companies.

As per Companies Act, 2013 there are different provisions applicable on the Companies for the different modes through which the Companies can issue Securities.

You can understand this Structure by the below illustrated Diagrams.

As you can see in the above-mentioned Diagram that a Private Company can issue Securities either by way of “Private Placement” or by way of “Right Issue” or “Bonus Issue”. A Private Company is Prohibited under Section 2(68) to issue shares to the public by way of Public Issue in addition to that even Section 23 does not allow Private Companies to offer shares by way of Public Issue.

As per Section 23 read with Section 2(71) a Public Company is Allow to issue Securities by any of these methods i.e. “Private Placement” or “Public Issue” or “Right Issue” or “Bonus Issue” by Complying with the provisions of Companies Act, 2013 and Securities and Capital Market Laws as well in addition to the Companies Act, 2013 (in case of Listed Companies). Following diagram will help you to understand this:

As you Can see in the above mentioned Diagram if a Unlisted Company proposes to issue securities by way of “Public Issue” then it has to comply with the Provisions of Securities and Capital market laws (as per SEBI (Issue of Capital and Disclosure requirements) Regulation, 2018 ) in addition to the Companies act, 2013. Further if an Unlisted Public Companies Issue Securities by way of “Private Placement” or “Right Issue” or “Bonus Issue” then it has to Comply with the applicable Provisions of Companies Act, 2013 and related Rules.

If an already listed Company wishes to Issue Securities by any method then it has to Comply the Provisions of Securities and capital market laws in addition to the Companies Act, 2013. Below diagram will help you to understand this:

♦ Now by looking at the above charts and understanding the above-mentioned provisions it must be clear to you that the Provisions of Private Placement is same for the “Private Companies” and “Unlisted Public Companies”.

PRIVATE PLACEMENT OF SECURITIES

Before Understanding the Private Placement, we have to understand these two Sections of Companies Act, 2013, i.e. Section 62(1) (a) and Section 62(1)(c).

> Section 62(1) (a) says that a Company can issue shares to its members, in proportion, as nearly as circumstances admits,by following the Provisions of Section 62(1) (a) and related rules.

> Section 62(1) (c) says that a Company can issue shares to any persons, if it is authorised by a “special resolution”, whether or not those persons include the “members” or “employees” of Company, if the price of such shares is determined by the valuation report of a registered valuer, subject to the compliance with the applicable provisions of Chapter III(Part I for “Public Issue” and Part II for “Private Placement”) and rule 13 of Companies ( Share Capital and Debentures) Rules, 2014.

> By looking the above provisions, you can understand that these two provisions are mutually exclusive. Further You Can say that Section 62(1) (c) is the trigger for Section 42, i.e. “Private Placement”.

> So now we can Conclude it by saying that if a “Private Company”or an “Unlisted Public Company” wish to issue securities on preferential basis by Complying with the provisions of Section 62(1) (c) then it has to follow Section 42 of the Companies Act, 2013 and its related rules as well.

Private Placement

Private Placement is a method of issuing securities to a select group of persons by issuing of “Private placement offer cum application letter”. In this method Securities are offered to a select group of people and no advertisement or any media, marketing channel is used for the advertisement of offer.

Provisions to be followed under Private Placement

• Section 62 (1) (C)
• Section 42
• Rule 13 of Companies (Share Capital and Debentures) Rules, 2014
• Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014

Here are some provisions as per the above-mentioned Sections and Rules which must be followed during Private Placement of Securities by “Private Companies” or “Unlisted Public companies”.

√ The issue should be authorised by Article of Associationof the Company.

√ The Price of securities to be issued shall be determined by “Registered Valuer”

√ The “Special Resolution” passed by the shareholders in duly called General Meeting is required.

√ The Company shall disclose the following details in explanatory statementannexed to the notice of general meeting.

• • The objects of the issue;
  • The total number of shares or other securities to be issued;
  • The price or price band at/within which the allotment is proposed;
  • Basis on which the price has been arrived at along with report of the registered valuer;
  • Relevant date with reference to which the price has been arrived at;
  • The class or classes of persons to whom the allotment is proposed to be made;
  • Intention of promoters, directors or key managerial personnel to subscribe to the offer;
  • The proposed time within which the allotment shall be completed;
  • The names of the proposed allottees and the percentage of post preferential offer capital that may be held by them;
  • The change in control, if any, in the company that would occur consequent to the preferential offer;
  • The number of persons to whom allotment on preferential basis have already been made during the year, in terms of number of securities as well as price;
  • The justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered valuer.
  • The pre issue and post issue shareholding pattern of the company.

√ The allotment of securities on a preferential basis made pursuant to the special resolution passed shall be completed within a period of “twelve months”from the date of passing of the special resolution. If the allotment of securities is not completed within twelve months from the date of passing of the special resolution, another special resolution shall be passed for the company to complete such allotment thereafter.

√ The price of the shares or other securities to be issued on a preferential basis, either for cash or for consideration other than cash, shall be determined on the basis of valuation report of a Registered valuer.

√ A Private Placement shall be made only to a select group of Persons identified by the Board whose Numbers shall not be more than 200 personsin a Financial Year.

√ A Company making private placement shall issue Private Placement offer and application in “Form PAS 4” to identified Persons, whose name and addresses are recorded by the company.

√ Every Identified Person willing to subscribe to the Private Placement issue shall apply in the private placement along with subscription money, subscription money shall be paid either by cheque or demand draft or other banking channel and not by cash.

√ No fresh offer or invitation under this section shall be made unless the allotment with respect to any offer or invitation earlier have been completed or that offer has been withdrawn or abandoned by the Company.

√ The Securities shall be allotted within 60daysfrom the date of receipt of money for such securities

√ Company shall not release any public advertisement or utilise any media, marketing channel or agent to inform the public at large about such an issue.

√ The Company shall file the return of allotment in “Form PAS 3” within 15 daysfrom the allotment.

√ The Company shall maintain a complete record of Private Placement offers in “Form PAS 5”

Kunal Madhukar