Section 42 of the Companies Act, 2013 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 contains provisions of private placements of securities. Recently, both Section 42 and Rule 14 have undergone amendments by way of the Companies (Amendment) Act, 2017 and the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018.
“Private Placement” means any offer of securities (Not Only Shares) or invitation to subscribe securities to a select group of persons by a company through issue of a private placement offer letter and which satisfies the conditions specified in section 42 of the Act.
A. IMPORTANT PROVISIONS OF PRIVATE PLACEMENT
- A. IMPORTANT PROVISIONS OF PRIVATE PLACEMENT
- i. Private Placement To How Many People?
- ii. Special Resolution for Private Placement
- iii. Private Placement Offer Letter (PPOL)
- iv. Payment through Banking Channel
- v. Separate Bank Account in scheduled Bank
- vi. No Advertisement for Private Placement of Shares / Securities
- vii. Allotment of Shares / Securities must be within 60 days
- viii. Return of Allotment for Private Placement of Shares / Securities
- ix. ROC filing must before utilization
- x. Record of Private Placement
- xi. Non-compliance
- B. PRIVATE PLACEMENT – IN NUTSHELL
- C. CHANGES DONE THROUGH COMPANIES (AMENDMENT) ACT, 2017
- i. Dispensation with minimum investment size requirement
- ii. No Renunciation right
- iii. Relaxation in passing of shareholders’ resolution in case of private placement of non-convertible debentures (NCDs)
- iv. Discontinuation of filing GNL-2
- v. Reduced timeline for filing Return of Allotment in PAS-3
- vi. No utilization of money received from private placement unless PAS-3 filed
- D. PROCEDURAL ASPECT OF PRIVATE PLACEMENT
i. Private Placement To How Many People?
The offer of securities or invitation to subscribe securities, shall be made to 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 reckoned individually for each kind of security that is equity share, preference share or debenture.
ii. Special Resolution for Private Placement
The offer should be previously approved by the shareholders of the company, by a Special Resolution, for each of the offers or invitations.
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.
A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the ROC.
iii. Private Placement Offer Letter (PPOL)
A PPOL in form of PAS-4 shall be accompanied by an application form 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 30 days of recording the names of such persons. PPOL shall not contain any right to renunciation.
iv. Payment through Banking Channel
The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the Bank account from where such payments for subscriptions have been received.
v. Separate Bank Account in scheduled Bank
Issuer Company must open a separate bank account in a scheduled bank for receiving amount against issuance of securities under private placement.
No Company offering securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.
Issuer Company shall allot its securities within 60 days from the date of receipt of the application money for such securities 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 sixty 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.
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 containing-
i. The full name, address, permanent Account Number and E-mail ID of such security holder;
ii. The class of security held;
iii. The date of allotment of security ;
iv. The number of securities herd, nominal value and amount paid on such securities; and particulars of consideration received if securities were issued for consideration other than cash.
ix. ROC filing must before utilization
The Companies Amendment Act, 2017 refrain issuers from utilizing monies raised through private placement until allotment is made and the return of allotment is filed with the ROC. So, Return of Allotment in form PAS-3 needs to be filled immediately after allotment for an issuer to be able to utilize proceeds from the private placement.
x. Record of Private Placement
The Company shall maintain a complete record of private placement offers in Form PAS-5.
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.
B. PRIVATE PLACEMENT – IN NUTSHELL
- It shall be made only to the selected group of persons who are identified by board first and such number of persons must not 200 in a financial year.
- Issuer Company must issue Private Placement Offer Letter (PPOL) to identified persons. Such PPOL shall not contain any right to renunciation.
- PPOL must be issued only after filing of Special Resolution or Board Resolution as the case may be.
- Application money shall require to be paid through banking channel only.
- Issuer Company must open separate bank account in a scheduled bank for receiving money against allotment of securities.
- 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 within 60 days, it shall repay the application money within 15 days from the expiry of 60 days.
- Issuer Company must file form PAS-3 for return of allotment within 15 days.
- Issuer Company can’t utilize the money till return of allotment is filled with ROC.
- Issuer Company must maintain complete record of private placement in PAS-5.
- No fresh offer or invitation shall be made unless the allotments with respect to any previous offer or invitation have been completed.
C. CHANGES DONE THROUGH COMPANIES (AMENDMENT) ACT, 2017
i. Dispensation with minimum investment size requirement
The CAA, 2017 have dispensed with the earlier requirement of the value of offer or invitation per person to be of an investment size of not less than Rs. 20,000 of the face value of the securities.
ii. No Renunciation right
Where earlier the Act was silent on the right of renunciation in the hands of the investor, the CAA 2017, explicitly provides clarity on the fact that the private placement offer letter and the application shall not carry any renunciation rights. Private placement being an issuance of securities to a specific pre-identified person only, this was implied that the offer would not carry the right of renunciation unlike rights shares which are offered to the existing shareholders.
Earlier, a shareholders’ resolution was required to be passed once a year for private placement of NCDs during that year. The Recent Amendments permit private placement of NCDs pursuant to board resolution without obtaining shareholders’ resolution so long as the proposed amount to be raised does not exceed the borrowing limit specified under Section 180(1)(c) of the Companies Act, 2013. However, borrowing limits are to be approved by the shareholders of the issuer company.
iv. Discontinuation of filing GNL-2
Earlier the Company was required to file private placement offer letter and complete record of private placement with the Registrar within 30 days of circulation of the offer letter. However, the requirement of the same has been done away with. This will surely reduce the compliance burden of the companies.
v. Reduced timeline for filing Return of Allotment in PAS-3
The Amendment Act 2017 provides for filing the return of allotment within 15 days from the date of allotment compared to earlier 30 days.
vi. No utilization of money received from private placement unless PAS-3 filed
A very significant change in CAA, 2017 is that the company making the offer or invitation for subscription of securities through private placement is not allowed to utilize the money raised through private placement unless the return of allotment is filled with ROC.
D. PROCEDURAL ASPECT OF PRIVATE PLACEMENT
1) Hold Board Meeting:
- To grant in-principle approval for issue of securities on private placement basis;
- To identify persons to whom securities be allotted;
- To approve draft private placement offer letter and record of private placement;
- To open separate bank account for receiving money;
- To approve notice of GM for approval of members;
2) Confirm whether Letters from all proposed allotees giving consent to subscribe the issue are received or not.
3) Prepare the List of allotees along with all the required details as per the format prescribed under the Form PAS-5.
4) Hold General Meeting and pass special resolution along with resolutions to approve the offer letter and authorize an officer of the company to give effect to the Private Placement.
5) File MGT-14 alongwith special resolution and explanatory statement.
6) Dispatch private placement offer letter alongwith application form to the proposed allotees.
7) Receive application money against issue of securities in bank account opened in scheduled bank.
8) Hold Board Meeting for Allotment of Securities and allot securities within 60 days of receiving application money.
9) File Form PAS-3 within 15 days of the allotment of securities alongwith Special Resolution and List of allotees.
10) Issue corresponding Share Certificates; make respective entries in Register of Members along with confirming the Distinctive numbers and Certificate Numbers of the Shares allotted.