Private Placement procedure under Companies Act, 2013 with FAQs

PRIVATE PLACEMENT (PP) UNDER COMPANIES ACT, 2013

Introduction:

We all know Companies Act, 2013 provides various options to issue Securities (Shares, Debentures or any other type of Securities). One of these options is Private Placement. The definition of Private Placement explains when the Companies have to follow the provisions. Let’s look into the Definition and the Provisions.

List of Sections and Rules Applicable to Private Placement:

Before go to the Provisions of Private Placement, it is apt to make the list of Sections and Rules which are applicable while issuing securities under Private Placement. Below is the list:

• Section 42 of the Companies Act, 2013
• Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014

Definition of Private Placement procedure under Companies Act, 2013:

Explanation -I to Section 42(3) defines the Private Placement;

“Private Placement” means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in this section.

Let us split the definition and make it easy to understand

Private Placement is:

– any offer or invitation by a company

– to subscribe or issue of securities

– to a select group of persons,

– other than by way of public offer,

– which satisfies the conditions specified in Sec 42

Provisions:

Now we understood what is the definition, but what are the provisions to be followed while issuing securities under Private placement (PP)?

FAQs on Private Placement Provisions under Companies Act, 2013:

i. To whom securities can be issued under PP??

The securities under PP can be issued /offered only to a select group of persons who have been identified by the Board.

ii. Private Placement offer can be given to how may persons? 

The offer of securities or invitation to subscribe securities, shall be made to not more than 50 persons in a single offer or not more than 200 persons in the aggregate in a financial year (excluding qualified institutional buyers and employees of the company being offered securities under ESOP). This restriction would be read for all the securities combined together in a Financial Year.

iii. What kind of Approval/Resolution to be passed for offer under Private Placement?

Each Private Placement offer should be previously approved by the shareholders of the company, by a Special Resolution.

In case of offer or invitation for non-convertible debentures, it shall be sufficient if the company passes the Board Resolution each time if such issue is within the borrowing limit specified under Section 180(1)(c) of the Companies Act. However, borrowing limits are to be approved by the shareholders of the issuer company first.

For Private Companies issuing NCDs no need of Shareholder Resolution as there is an exemption granted for Section 180. 

iv. Is there any prescribed format for Offer Letter?

The PP offer letter shall be in form of PAS-4 serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the name of such person.

A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in form MGT-14 to the ROC. 

v. Is there any minimum Offer size per person?

Earlier there was a requirement of minimum offer size of Rs. 20,000 face value of the Security. However the same was dispensed off by Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 with effect from 7th August, 2018. So there is no minimum offer size for Private Placement.

vi. Whether Separate Bank Account in scheduled Bank to be opened for each offer?

There is always confusion regarding this question from the beginning of Commencement of Section 42.

The provision reads as “the monies received on application under this section shall be kept in a separate bank account in a scheduled bank”.

Hence there is no need of opening of Separate Bank account every time, it is sufficient  if the Company maintains a Separate account with scheduled Bank,  which is not used for regular or any other purpose.

vii. When to make the payment for subscription?

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.

viii. Whether the person to whom the offer has been made can renounce the offer to other person?

The proviso to sub-section 3 of Section 42 explicitly provides that the private placement offer and application shall not carry any right of renunciation.

The person to whom the offer is made can either accept or reject the offer. There is no right for renunciation.

ix. What are the acceptable payment modes?

The subscription money shall be paid either by cheque or demand draft or other banking channel or not by cash.

x. Whether application money can be utilized by the Company before allotting the securities??

No. the Application money received shall not be utilised 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.

xi. Within how many days the Allotment of Securities to be completed?

Issuer Company shall allot its securities within 60 days from the date of receipt of the application money; and

if the Company is not able to allot the securities within that period, it shall repay the application money to the subscribers within 15 days from the date of completion of 60 days; and

if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of 12% per annum from the expiry of the sixtieth day.

xii. Is there any record of Private Placement to be maintained?

The Company shall maintain a complete record of private placement offers in Form PAS-5.

xiii. When to file Return of Allotment for Private Placement of Shares / Securities?

A return of allotment of securities shall be filed with the Registrar within 15 days of allotment in Form PAS-3 along with a complete list of all the allottees.

The amount should not be utilised before filing Form PAS-3 (Return of Allotment)

xiv. Whether the Company can make fresh offer under PP when one PP offer is pending?

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

xv. What are the consequenses of non-compliane?

Any private placement issue not made in compliance of the provisions of section 42 shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act and Regulations will apply.

Contravention of Section 42 attracts penalty which may extend to the amount involved in the offer or invitation or Rs. 2 Crore whichever is higher, and the company shall also refund all monies to subscribers within a period of 30 days of the order imposing the penalty.

If a company defaults in filing the return of allotment within15 days, 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

Step By Step Procedure For Private Placement

1.   Hold Board Meeting	2.   Hold General Meeting	3.   File form MGT-14
To approve the list of identified persons To approve the draft offer letter To call GM	To pass special resolution approving PP and approving offer letter	File the Special Resolution in Form MGT-14 within 30 days from the date of EGM
4.   Circulate the Offer Letter (PAS-4)	5.   Receive the Application money	6.   Allotment
PAS-4 to be circulated to the identified persons. It can be circulated only after filing MGT-14	The Application money to be received and kept in a Separate Bank Account	Allotment to be done within 60 days from the date of receipt of Application Money
7.   File Return of Allotment	8.   Utilization of amount	9.   Other incidental matters
The Return of Allotment in Form PAS-3 to be filed within 15 days from the date of allotment	The amount can be utilised only after filing PAS-3	Issue of Share Certificates within 2 months fromt he date of allotment Updating the Register of Members

Shrinath Bhat –  Practicing Company Secretary – +91 8971408308 –  shrinath@charteredassociates.com

Disclaimer: The Views expressed are solely of the Author and the contents of this article is to share the Knowledge on subject matter. Expert advice should be sought for your specific circumstances.