Private Placement of Securities: A Wider Perspective (Including relevant compliance in case shares allotted to NRI Entity)

The purpose of this article is to get an overlook about the applicable provisions, process to be complied along with requirements of law where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares to selected group of person (including to NRI Entity).

Company have an option to issue shares to specified persons, if it is authorized by a special resolution, either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribed.

A company shall not make an offer or invitation to subscribe to securities through private placement unless the proposal has been previously approved by the shareholders of the company, by a special resolution for each of the offers or invitations:

Provided that in the explanatory statement annexed to the notice for shareholders’ approval, the following disclosure shall be made:-

(a) particulars of the offer including date of passing of Board resolution;

(b) kinds of securities offered and the price at which security is being offered;

(c) basis or justification for the price (including premium, if any) at which the offer or invitation is being made;

(d) name and address of valuer who performed valuation;

(e) amount which the company intends to raise by way of such securities;

(f) material terms of raising such securities, proposed time schedule, purposes or objects of offer, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects; principle terms of assets charged as securities.

“Private Placement” means any offer or invitation to subscribe or issue of Shares to a selected group of persons by a company through private placement offer-cum-application, subject to specific conditions.

A private placement shall be made only to a select group of persons who have been identified by the Board of Directors of the Investee Company. Such number of persons must not exceeding two hundred in a financial year and it excludes qualified institutional buyers and employees of the company who are offered securities under ESOP. The restrictions aforesaid would be reckoned individually for each kind of security that is equity share, preference share or debenture

Amount of Investment for Private Placement of Equity Shares

√ 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 payment for subscription has been received.

√ Monies payable on subscription to securities to be held by joint holders shall be paid from the bank account of the person whose name appears first in the application.

√ Application money shall be deposited from Bank account of the applicant either by cheque or demand draft or other banking channel but not by cash.

√ Also, the monies received on application shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose other than for adjustment against allotment of securities; or for the repayment of monies where the company is unable to allot securities.

Allotment of Securities under Private Placement

√ The company issuing the shares through private placement shall allot its securities within sixty days from the date of receipt of the application money against such securities and if the company is not able to allot the securities within 60 days, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days.

√ Further, 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% p.a. from the expiry of the sixtieth day.

√ All private placement offers should be made only to persons whose names are recorded by the company prior to the invitation to subscribe. Company is required to maintain a complete record of private placement offers in form PAS-5.

√ A private placement offer cum application letter shall be in the form of an application in Form 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.

√ No person other than the person so addressed in the private placement offer cum application letter shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid.

√ Offer Letter in Form PAS-4 and record of persons to whom the Offer Letter is issued in Form PAS-5 are required to be maintained by the Company and are no longer required to be filed with the ROC. The requirement of filing of the Offer Letter with the Securities and Exchange Board of India by listed issuers has also been dispensed with.

√ A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the Registry.

√ A return of allotment of securities under section 42 shall be filed with the Registrar within fifteen days of allotment in Form PAS-3 and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 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 held, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash.

Simultaneous issue of different securities permitted

As a general rule, no fresh issue of securities can be undertaken unless the previous offer of securities has been withdrawn or securities have been allotted pursuant to the said offer. It has been clarified that there can be simultaneous issue of more than one security if they are different securities – e.g., issue of debentures and issue of equity shares can take place simultaneously. The 200 person limit is to be reckoned for each kind of security, individually.

Relevant Date for valuation

The price of the securities should be arrived at as of a date which is at least 30 days prior to the scheduled date of the general meeting approving the issuance.

Detailed Procedure for Private Placement of Equity Shares

1. Hold Board Meeting to approve the Notice of Holding General Meeting of Shareholders for the following purposes:

  • To Hold General meeting and approve the Notice along with the Offer Letter.
  • To alter AOA should it be required to give effect to Private Placement
  • To Issue of Equity shares at Face Value along with premium (if any) to Investors on Private Placement Basis.
  • To open Separate Bank Account in the name of for depositing the money against allotment of Shares.

2. Providing Instructions to specified Bank for opening of separate Bank Account and depositing the money against allotment Shares.

3. Confirm whether Letters from all proposed allotees giving consent to subscribe the issue are received or not.

4. Prepare the List of Allotees along with all the required details as per the format prescribed under the Form PAS-5

5. 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. File MGT-14 within 30 days of passing of special resolution.

6. A company may make an offer or invitation to subscribe to securities through issue of a private placement offer letter in Form PAS-4.

A private placement offer letter 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 thirty days of recording the names of such persons.

Provided that no person other than the person so addressed in the application form shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid.

7. Hold Board Meeting for Allotment of Securities.

8. File Form PAS-3 within 15 days of the allotment. There shall be attached to the Form PAS-3 a list of allottees stating their names, address, occupation, if any, and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the Form PAS-3 as being complete and correct as per the records of the company. Also attach Special Resolution and Valuation Report in Form PAS-3

9. Intimate the Investors about the Outcome of the Board Meeting.

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.

List of Document required for Private Placement of Equity Shares

  • Outcome of Board Meeting along with the Draft Notice of General Meeting and Explanatory Statement, Draft Offer Letter, Proposed List of allotees
  • Consent letters from all the proposed allotees PAS-5 including detailed list of allotees.
  • Certified Copy of the Resolution Passed by the Members of the Company along with an Explanatory Statement and approved Offer Letter.
  • Valuation Report as on the date of Allotment by a Chartered Accountant or a SEBI registered Merchant Banker.
  • Copy of Outcome of the Board Meeting for the Allotment of shares.

Additional Procedure for Private Placement of Equity Shares to NRI Entity

In case if the applicant under the private placement is an NRI entity, to whom the shares are to be allotted, in such cases the following additional procedure is to be followed in addition to the above mentioned procedure:

1. Once the amount of Application money is remitted by the Applicant, request the AD-category bank for providing the FIRC and KYC with respect to the amount deposited by the applicant/remitter.

2. File ARF (Advance Remittance Form) with RBI within 30 days of receipt of such application money from outside India.

3. On Approval of ARF, a UIN shall be generated and in case there is any surplus amount received due to the variation in currency exchange, file Form A-2 for refund of such surplus amount.

4. File Form FC-GPR with RBI within 30 days of Allotment of the Shares to the Foreign Investor.

5. In case there is a delay in filing the above mentioned format RBI, a Clarification letter is also required to be submitted along with the corresponding form. No additional documents other than mentioned earlier are required to be filed for the prescribed forms.

Eligibility for Register Valuer:

A person shall be eligible to be a registered valuer if he-

(a) is a valuer member of a registered valuers organization;

(b) is recommended by the registered valuers organization of which he is a valuer member for registration as a valuer;

(c) has passed the valuation examination within three years preceding the date of making an application for registration;

(d) possesses the qualifications and experience;

(e) is not a minor;

(f) has not been declared to be of unsound mind;

(g) is not an undercharged bankrupt, or has not applied to be adjudicated as a bankrupt;

(h) is a person resident in India;

(i) has not been convicted by any competent court for an offence punishable with imprisonment for a term exceeding six months or for an offence involving moral turpitude, and a period of five years has not elapsed from the date of expiry of the sentence:

Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be registered;

(j) has not been levied a penalty under section 271J of Income-tax Act, 1961 (43 of 1961) and time limit for filing appeal before Commissioner of Income-tax (Appeals) or Income-tax Appellate Tribunal, as the case may be has expired, or such penalty has been confirmed by Income-tax Appellate Tribunal, and five years have not elapsed after levy of such penalty; and

(k) is a fit and proper person

Qualifications and experience

An individual shall have the following qualifications and experience to be eligible for registration as register valuer, namely:

(a) post-graduate degree or post-graduate diploma, in the specified discipline, from a University or Institute established, recognized or incorporated by law in India and at least three years of experience in the specified discipline thereafter; or

(b) a Bachelor’s degree or equivalent, in the specified discipline, from a University or Institute established, recognized or incorporated by law in India and at least five years of experience in the specified discipline thereafter; or

(c) Membership of a professional institute set up under an Act of Parliament and at least five years’ experience after such membership.

It is mandatory for all eligible persons to pass the Valuation examination for being registered as a Valuer.

Application for certificate of registration

(1) An individual eligible for registration as a registered valuer, may make an application to the Registration Authority in Form A of Schedule II, along with a non-refundable application fee of ten thousand rupees in favour of the Registration Authority.

(2) A partnership entity eligible for registration as a registered valuer may make an application to the Registration Authority in Form B of Schedule II, along with a non-refundable application fee of ten thousand rupees in favour of the Registration Authority or partnership entity

(3) The Registration Authority shall examine the application, and give an opportunity to the applicant to remove the deficiencies, if any, in the application.

(4) The Registration Authority may require the applicant to submit, within reasonable time, additional documents or clarification that it deems fit.

(5) The Registration Authority may require the applicant to appear, within reasonable time, before the Authority in person, or through its authorized representative for explanation or clarifications required for processing the application.

(6) If the Registration Authority is satisfied, after such scrutiny, inspection or inquiry as it deems necessary, that the applicant is eligible under these Rules, it may grant a certificate of registration to the applicant to carry on the activities of a registered valuer for the relevant class of assets in Form C of the Schedule II, within sixty days of receipt of the application, excluding the time given by the Registration Authority for presenting additional documents, information or clarification, or appearing in person, as the case may be.

Conditions of Registration.

The registration granted shall be subject to the conditions that the valuer shall –

(a) at all times comply with the provisions of the Act and these Rules;

(b) at all times comply with the Valuation Standards;

(c) in his/ its capacity as a registered valuer, not conduct valuation of the assets or class of assets other than for which he/it has been registered by the Registration Authority;

(d) take prior permission of the Registration Authority for shifting his/ its membership from one valuation professional organization to another, after receiving no objection from both the concerned valuation professional organizations;

(e) take adequate steps for redressal of grievances;

(f) maintain records of all assignments undertaken by him/it under the Act and these Rules for at least three years from the completion of such assignment;

(g) comply with the Code of Conduct of the valuation professional organization of which he/it is a member;

(h) allow only the partner who is a registered valuer for the class of assets that are being valued to sign and act on behalf of it, where it is a partnership entity;

(i) be jointly and severally liable with the partnership entity which is a registered valuer, of which he is a partner, and on whose behalf he signs and acts in respect of a valuation assignment; and

(j) comply with such other conditions as may be imposed by the Registration Authority.

“A valuer member” is a member of a registered valuers organization who possesses the requisite educational qualifications and experience for being registered as a valuer.

‘Person resident in India’ shall have the same meaning as defined in clause (v) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999) as far as it is applicable to an individual.

Whether an individual is a fit and proper person, the authority may take account of any relevant consideration, including but not limited to the following criteria- (i) integrity, reputation and character, (ii) absence of convictions and restraint orders, and (iii) competence and financial solvency.

‘Specified discipline’ shall mean the specific discipline which is relevant for valuation of an asset class for which the registration as a valuer or recognition as a registered valuers organization is sought under these rules.

“There’s no shortage of remarkable ideas, what’s missing is the will to execute them.” – Seth Godin

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DISCLAIMER: Views expressed are that of the author based on the information/data as on the date of compilation by author for general informational use of the reader and should not be basis for action. For any actions expert opinion must be sought separately, author shan’t be liable for any actions/omission opinions framed by the user on the basis of this article in any circumstances.

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