Chapter III Part II: Section 42 of Companies Act, 2013 read with Rule 14 of Companies (Prospectus & Allotment of Shares) Rules, 2014
Companies require funds for various activities like expansion plans, purchase of equipment and machinery or even for meeting working capital requirements. A Company may use the funds generated from its operations for this purpose or it may raise funds through banking channels or by issuing securities like shares, debentures, convertible securities, etc. Such securities can be issued to known or identified persons or to the public at large.
Private Placement means securities (any kind of securities- equity shares, debentures, preference shares, etc.) offered to a select group of identified persons.
Issuer-
Securities can be issued on private placement basis by-
- Private Company
- Public Company
- Listed Company
- Unlisted Company
Threshold for private placement offer-
- A company may issue securities by way of private placement to a maximum number of 200 Identified Persons per financial year.
- This number excludes Qualified Institutional Buyers (QIB) & securities offered to employees under Employee Stock Option Plan (ESOP).
- It is further clarified that this number is to be reckoned separately for different types of securities.
- If the offer is made to more than the prescribed number of persons (whether the application money against which is received or not; whether the securities are intended to be listed or not), it will be deemed to be a public offer and will be governed under Chapter III Part I of this Act.
- More than one issue can be made to the same Identified Persons subject to the threshold.
Special Resolution-
- General Rule for private placement is to pass a Special Resolution in General Meeting for each issue/ invitation.
- The Explanatory statement to the notice for such General meeting shall include date of passing of Board resolution, kinds of securities offered, total amount be raised, price, justification for the price, details of valuer, contribution of promoters or directors to the offer, material terms of offer.
- Exception- Non-Convertible Debentures (NCDs) can be issued without passing a Special Resolution if the amount to be raised is within the limits of Section 180(1)(c).
- In case of issue of NCD within limits of Section 180(1)(c), a Board Resolution under section 179(3)(c) shall suffice.
- In case of issue of NCD exceeding limits of Section 180(1)(c), a previous special resolution only once in a year for all the offers or invitations for such debentures during the year is adequate.
- In case of allotment to Qualified Institutional Buyers (QIBs), a previous special resolution only once in a year for all the offers or invitations for all the allotments to QIBs during the year is adequate.
- The Special Resolution passed is valid for 1 year.
- Board Resolution/ Special Resolution to be filed with ROC within 30 days of passing in Form MGT-14.
Valuation Report
- Valuation Report is mandatory in case of issue of securities on private placement basis both for valuation of price at which securities are issued and the valuation of the consideration when securities are issued for consideration other than cash.
- Valuation needs to be obtained as on Relevant Date i.e a date which is atleast 30 days prior to the General Meeting to be held.
- Valuation Report not required in case of issue of NCDs as it does not involve conversion into shares.
Offer cum Application-
- Should be in the Form PAS-4.
- Can be either in writing or in electronic mode.
- Should be serially numbered and addressed specifically to the person to whom an offer is made.
- Not required to be filed with ROC.
- Should be sent to Identified Persons only after filing of Board Resolution/ Special Resolution with ROC in Form MGT-14.
- Should be sent within thirty days of recording the person’s name in the Board Meeting/ General Meeting.
- If the application is not made by the Identified Persons, then such application will be treated as invalid.
Application money & Utilization-
- Only the persons to whom the Offer Letter is addressed can apply for the securities offered.
- Payment towards subscription of securities (where issued for cash) shall be made only from the bank account of such Identified Person subscribing to such securities.
- In case of where securities are subscribed by Joint Holders, the payment towards subscription shall be made from the bank account of the person whose name appears first in the application.
- There is no right of renunciation in private placement.
- Company shall open a separate bank account with a scheduled bank for such issues.
- Money in this account can only be used for allotment of securities or refund where allotment is not possible.
- The application money can be utilised by the company only after return of allotment is filed in Form PAS-3 within 15 days of allotment.
Allotment-
- By way of Board Resolution for allotment within 60 days of receipt of application money.
- If not allotted within 60 days, refund in next 15 days.
- If failed to refund within the next 15 days, an interest @12% p.a. will apply from the 61th day.
- New securities cannot be issued on private placement unless the securities in the earlier issue are allotted.
Process-
Prerequisites-
- No further/fresh issue can be made unless-
– Allotment for previous offers (w.r.t. any kind of security) are done, or
– Earlier offer is withdrawn, or
– Earlier offer is abandoned.
- Identify the persons to whom the securities are to be issued on private placement basis.
- Get Valuation Report.
Issue Process-
1. Call Board Meeting and pass a Board Resolution for the following,
- Issue of securities on private placement basis.
- Deciding on the type and quantum of securities to be issued.
- Recording names of identified persons for issue of securities on private placement basis.
- Calling of AGM / EGM.
- Approving notice and Explanatory statement for AGM / EGM.
- Authorising filing of Form MGT-14.
- Authority for opening of separate bank account
2. Issue notice of General Meeting along with explanatory statement.
3. Conduct the General Meeting and pass a Special Resolution.
4. File the Board Resolution/ Special Resolution, as the case may be, in Form MGT-14.
5. Issue Offer Letter cum Application to identified persons.
6. Open a separate bank account in a scheduled bank.
7. Receipt of application money in the bank account.
8. Conduct Board Meeting, within 60 days of receipt of application money, for the following,
- Finalising list of allottees.
- Authorising filing of Form PAS-3.
- Authorising issue of certificate of securities to the allottees.
- Authorising recording of issue details in Form PAS-5 and making entries in Members Register.
Post-Allotment-
- File Return of Allotment with 15 days of allotment in Form PAS-3.
- Maintain record of all offers under this section in Form PAS-5 (not required to be filed with ROC)
- Make stamp duty payment.
- Issue certificates with 2 months/ 6 months of allotment, as the case may be.
- Make necessary entries in the Register of Securities in Form MGT-1 or Form MGT-2.
Dos and Don’ts-
- Subscription money can be paid through cheque/demand draft or other banking channels only.
- No cash payment.
- No media advertisement to the public for private placement.
- No right to renounce the offer in favour of another person.
- Securities under private placement cannot be allotted to any person other than the ‘identified persons’.
Contravention & penalty-
| What | Who | How much |
| Contravention of Section 42 | Company, Directors and Promoters | Penalty upto amount raised or 2 crores whichever is lower.
(+) Refund of money with interest within 30 days of imposing of penalty. |
| Default in filing of Return of Allotment | Company, Directors and Promoters | Penalty of Rs. 1,000/- per day of delay to maximum of Rs. 25 lacs. |
Forms Summary-
| Form Name | Purpose | Remarks |
| Form PAS-3 | Return of allotment | To be filed with ROC within 15 days of allotment along with-
(a) a list of allottees (b) Board resolution (c) Special resolution (d) Copy of contract/complete particulars of contract duly stamped is mandatory in case securities are issued for consideration other than cash (e) Valuation Report |
| Form PAS-4 | Private Placement Offer Letter cum application | Format in which a private placement offer is made to seek application. Only the ones it is addressed to can apply for the allotment. Not required to be filed with ROC. |
| Form PAS-5 | Record of Private Placements | Record of Private Placements offers to be maintained by the company. Not required to be filed with ROC. |
| Form MGT-14 | Filing of Resolutions and Agreements with ROC | File Board Resolution/ Special Resolution with 30 days of Passing. To be filed before issuing Private Placement Offer Letter cum application. |
| Form MGT-1 | Register of Members | To be updated post allotment of shares. |
| Form MGT-2 | Register of Debenture Holders | To be updated post allotment of debentures. |
Conclusion: In summary, private placement under Section 42 of the Companies Act, 2013, presents a strategic avenue for companies to raise funds by offering securities to a select group of identified persons. The process involves stringent adherence to legal provisions, including the passing of special resolutions, obtaining valuation reports, and meticulous record-keeping through prescribed forms. Understanding the dos and don’ts, coupled with potential penalties for non-compliance, underscores the importance of a well-informed and compliant approach. The outlined forms, such as PAS-3, PAS-4, PAS-5, MGT-14, MGT-1, and MGT-2, serve as vital instruments in ensuring regulatory conformity. This concise guide aims to equip companies with essential knowledge to navigate the complexities of private placement while emphasizing the need for professional advice in specific cases.
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Disclaimer: The information provided is for educational purposes and should not be considered as professional advice. The author shall not be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.
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can you please share a draft copy of board and egm resolutions