Private placement involves the issuance of securities to a select group of identified investors, distinct from public offerings, governed primarily by Section 42 of the Companies Act, 2013, and the Companies (Prospectus and Allotment of Securities) Rules, 2014. This method allows companies to raise capital, typically through equity or preference shares, and can also involve debentures. A key regulatory aspect is the limitation on the number of “identified persons” to whom an offer can be made, which generally cannot exceed 200 in a financial year, excluding Qualified Institutional Buyers (QIBs) and employees under an ESOP scheme. Offers must be made through a serially numbered Private Placement Offer-cum-Application Letter (PPOAL) in Form PAS-4, which must contain specific disclosures including the basis of the offer price, a valuation report from a Registered Valuer, and details of any change in control. Importantly, the offer letter can only be issued after the relevant special resolution or board resolution has been filed with the Registrar of Companies (ROC) in Form MGT-14.
The Companies Act mandates that payment for subscription must be received through banking channels into a separate bank account, strictly prohibiting cash transactions. Furthermore, the money received cannot be utilized until Form PAS-3 (return of allotment) is filed with the ROC. Another critical point is that generally, no fresh offer can be made unless the allotment from a previous offer has been completed, withdrawn, or abandoned. However, a recent amendment allows for multiple issues of different types of securities simultaneously to the same class of identified persons, provided the 200-person limit is not exceeded for each security type. Special conditions also apply to companies incorporated in, or nationals of, countries sharing a land border with India, requiring prior government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019. Non-compliance with these provisions can lead to severe penalties for the company, its promoters, and directors, potentially resulting in fines up to the amount raised or ₹2 crore, whichever is lower, along with a refund of the money with interest. The law emphasizes that even an offer to more than 200 persons, irrespective of actual allotment, will be deemed a public offer, triggering a much more stringent regulatory framework.
I. Kind of Shares:
A business cannot run without funds. In case of an incorporated company, initial capital always comes from subscribers to the memorandum. After that company can raise funds by Loans/borrowings or issue of further securities.
As Per Section-43 of Companies Act, 2013 Share capital of Company limited by shares shall be of two kinds:
1. Equity Shares
2. Preference Share
II. Ways of Issue of Securities: –
As Per Section-23 of Companies Act, 2013 a Company can issue securities:
1. By way of Public Issue (IPO/ FPO)
2. By way of Right issue of Shares
3. By Bonus Issue of Shares
4. By Private Placement/ Preferential Allotment of Shares
In This Article We will discuss about Private Placement of Shares.
III. Corresponding Provisions of Law:
Section 42 of the Companies Act 2013 (This section has been fully substituted from 07th August, 2018) read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (Rules)
- Section 71 of the Act, 2013 in case of private placement of debentures and
- Section 62 of the Act, 2013 in case of private placement of convertible debentures
- Section 180(1)(c) of the Act, 2013 w.r.t limits upto which NCDs can be raised
IV. Provisions of section 42 shall not applicable on following Companies
- NBFC Companies
- Housing Finance Companies
V. Condition for Person Sharing Land Boarder with India:
“As per Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022 Dated 05th May, 2022.” W.e.f. May 05, 2022 no offer or invitation of any securities under private placement shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with the private placement offer cum application letter.
List of Countries sharing land border with India: China, Pakistan, Bhutan, Myanmar, Nepal and Bangladesh.
VI. Maximum No. of persons to whom offer can be made:
A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”) Whose number shall not exceed 200 (Two Hundred) people in a financial year.
The 200 people limit excludes Qualified Institutional Buyers and Employees of the Company being offered securities under a scheme of employee stock option in terms of provision of clause (b) of sub section 62(1)
VII. Offer to Select Group of Person:
The offer shall be made only to a Select Group of persons, who has been identified by the Board.
A. Whether Board can select group of persons and issue securities by Circular resolution?
As per Section persons should be identified by the Board. As per Section 179(3) Company have to hold Meeting of Board of Directors for issue of securities.
Note: one can opine that board of Director should hold a meeting of Board of Directors to identify the persons and issue of securities.
VIII. Content of Letter of Offer (PAS-4)
Section 42 prescribed that Private Placement Offer Letter (PPOAL) shall be in form PAS-4. The offer letter should contain the following important information:
- It shall be serially numbered and addressed specifically to the person to whom offer is made.
- It prescribes the disclosures that are required to be made by the company doing private placement.
Some of the additional disclosures that are now required to be made include:
- Any default in annual filing under Act, 2013
- Number of share/securities to be issued
- Basis on which price has been arrived at along with report of the registered valuer
- Change of control, if any, consequent to private placement
- Mode of payment for subscription
- Personal details of the applicant to be filled in the form
IX. Time Period Validation of Letter of Offer:
The Letter of offer is limiting a time not being less than 1 (one) days and not exceeding 365 (Three Sixty Five) days. That means,
X. Person Eligible for Offer Letter:
All the persons identified by Board of Director are eligible to receive Letter of Offer for Private Placement of Shares.
XI. Modes of issue of Letter of Offer:
Letter of offer can be issue through any of following mode:
- Registered Post or
- Speed Post or
- Electronic Mode or
- Courier or
- Any other mode having proof of delivery
Note: Letter of offer can be delivered through hand Delivery. One thing is important that, Company have to keep maintain proof of delivery of letter of offer to the shareholders.
XII. Right of Renunciation:
As per sub section 2, the private placement offer application can not carry any right of renunciation. As per rule 3, 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.
Note: One can opine that, it is clear that right of private placement of shares can’t be renounced.
XIII. Offer to be previously approved by Special Resolution:
As per rule, 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 and invitations.
Company has to file e-form MGT-14 within 30 days of passing of special Resolution.
**NOTE:
Company shall issue private placement offer cum application letter only after the relevant special resolution or board resolution has been filed with ROC in e-form MGT-14. (rule 8)
B. Whether Company can issue Private Placement offer letter before filing of e-form MGT-14?
As per rule 14(8), Company can’t issue private placement offer letter before filing of e-form MGT-14. If Company issue private placement offer letter before filing of MGT-14 then it shall be noncompliance of Rule 14(8).
XIV. Offer counted separately for each kind of security:
The restriction under Rule 2 would be reckoned individually for each kind of security that is equity share, preference share or debenture.
XV. No further offer till completion of earlier offer:
As per Sub section 5, No fresh offer or invitation under this section shall be made unless the allotment with respect to any offer or invitation made earlier have been completed.
C. If a Company give offer for Equity shares, such offer is pending. Whether Company can simultaneously issue offer letter for Preference shares?
As per language of sub section 5, if any offer of any security is pending, company is not allowed to issue other security until unless allotment is made for pending offer or invitation has been withdrawn or abandoned by the Company. However,
Exemption Condition: Subject to maximum number of identified person under section 42(2) a Company may, at any time, make more than one issue of securities (that is, of equity share, preference share or debenture) to such class of identified persons as may be prescribed.
In a welcome move Companies would be allowed to make offer ‘Multiple Security Instruments Simultaneously’.
Note:
if the number of persons to whom the offer is made does not exceed 200, then the company may, at any time, make more than one issue of securities to such class of identified persons. Prima facie, it appears that this proviso allows a company to make simultaneous offers of different kinds of securities as long as the number of applicants doesn’t cross 200.
In other words, a group of investors in a private equity transaction can be termed as a ‘class of identified persons’ (as provided under proviso of revised sec 42(5)) and then they can be offered two different types of securities simultaneously or some can be offered one type of security and some can be offered a other type of securities.
XVI. Minimum gap between two offers.
There is no condition in the Act or rule regarding minimum gap between two offers. A company can come with new offer immediately after completion of earlier offer.
XVII. No advertisement of offer:
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.
XVIII. Maximum no. of offers in a Financial year:
There is no condition in the Act or rule regarding maximum Number of Private Placement offers in a financial year. According to this company can come with private placement offer in a financial year any no. of times. But remember an offer can’t be made more than 200 peoples in a financial year.
XIX. Separate Bank Account:
i. The payment for subscription should be through the bank account of the person subscribing to the securities.
ii. The Company should keep a record of the bank account from where such payments have been received.
iii. No cash transaction is permitted.
iv. The money so received shall be kept in a separate bank account of the company and utilized only for allotment (or repayment).
v. Payment may be made either by Cheque or Demand Draft or other banking channel.
Note: this provision shall not be applicable in case of “issue of shares for consideration other than cash”.
XX. Valuation report:
The price of the security has to be justified and the inference is that it requires a valuation report by a Registered Valuer.
XXI. Days in which share should be issued:
Allotment has to be carried out within 60 days of receiving of money.
XXII. If not allotted within 60 days:
If allotment is not made within 60 days then till 75th day the monies have to be repaid. Failure to repay has a liability of interest at 12% pa.
XXIII. Note:
- Special Resolution for Issued of Debenture: In case of Offer or invitation for non-convertible debenture, it shall be sufficient if the company passes a single Special Resolution of all the offers or invitation made for debenture during a year. No need to pass Resolution again and again for the Private Placement of Debenture in a year.
- Date of private placement offer-cum-application shall be deemed to be the date of circulation of private placement offer letter.
Process of Private Placement of Securities:
INITIAL STEPS:
a) Check the Authorized Share Capital of Company.
b) If Authorized capital permits to increase paid up share capital, then its ok. If Authorized capital doesn’t permit to increase authorized capital then first increase authorized share capital of company.
c) To decide Name of identified person and no. of shares offered to them.
d) To Draft Letter of Offer in PAS-4.
e) To obtain Valuation Report from Registered Valuer.
I. STEP – To Call Meeting of Board of Directors
i. Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting.
ii. Attach Agenda of Board Meeting along with Notice.
iii. Attach Notes of Agenda and Draft Resolution along with Agenda.
iv. Attach draft Letter of offer along with Agenda & Notice.
II. STEP – To Hold Meeting of Board of Directors
i. Check the quorum of Board Meeting.
ii. Identify the persons to whom you will issue shares
iii. Pass Board Resolution for approval of offer letter i.e. PAS-4.
iv. Authorize a director of company to issue Letter of Offer.
v. Letter of offer shall be dispatched through above mentioned modes.
vi. Issue Notice of General Meeting. (As per Section- 101(1) issue notice of General Meeting at least 21 days before General meeting).
vii. Notice shall specify place, date, day and the hour of the meeting and shall contain a statement on the business to be transact in the such meeting. [Section-101(2)]
viii. Authorize a director of company to issue notice of General Meeting and
ix. Authorize a director to certify and file e-forms with ROC.
x. Pass Board resolution for opening of Separate Bank Account
III. STEP – Filing of e-form MGT-14
i. File MGT-14 with within 30 days of passing of Board Resolution.
ii. Attachments
- Certified True copy of Board Resolution
IV. STEP – To Call General Meeting
i. To issue Notice of General Meeting.
ii. Issue notice to Directors, Shareholders, Auditors etc.
iii. Prepare explanatory statement as per Section 42 read with rule 14.
V. STEP –Hold Extra Ordinary General Meeting:
i. Check the quorum of Meeting. (Section-103).
ii. Present Offer Letter in PAS-4 before the members of the meeting.
iii. Pass Special Resolution for Private Placement of Shares.
VI. STEP – Filing of e-form MGT-14
i. File MGT-14 with within 30 days of Passing of Special Resolution.
ii. Attachments
-
- Notice of General Meeting along with Explanatory Statement.
- Certified True copy of Special Resolution.
- Minutes of General Meeting
- Attendance Sheet of General Meeting
VII. STEP – Correspondence by Shareholders
i. Receive the acceptance/ rejection of offer from shareholders within time prescribed in Letter of Offer.
ii. Receive the application money from the shareholders accepting the offer within time prescribed in Letter of Offer in separate Bank Account.
VIII. STEP – To Call Meeting of Board of Directors
Within 60 days of receipt of letter of offer company have to allot shares by holding of Board Meeting
i. Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting.
ii. Attach Agenda of Board Meeting along with Notice.
iii. Attach Notes of Agenda and Draft Resolution along with Agenda.
iv. Attach list of people who have subscribed for the shares.
IX. STEP – To Hold Meeting of Board of Directors
i. Check the quorum of Board Meeting.
ii. Present List of Allottees before the Board Members.
iii. Pass Board Resolution for allotment of shares (within 60 days of receiving of money).
iv. Pass Board Resolution for Issue of Share Certificates and authorization of directors for signing of Share Certificates
X. STEP- To File form with ROC:
i. To File PAS-3 with concerned Registrar of Companies within 15 days of passing of Resolution in Board Meeting for Allotment of Shares.
ATTACHMENTS:
i. List of Allottees.
ii. CTC of Board Resolution for allotment of Shares.
XI. STEP- To Issue of Share Certificates:
Issue Share Certificate in Form- SH-1 (as per Section-56) with in 2 (two) months from the date of Board Meeting in which allotment of shares made by the Company.
XII. STEP- Payment of Stamp Duty on Issue of Share Certificate:
As per Indian Stamp Act, every company is required to make payment of Stamp Duty on Share Certificates within 30 days of issue of Share Certificates.
Every state have their own process and provision for payment of stamp duty.
Quick Bites
A. Whether Valuation report required for Private Placement of Shares?
There is mandatory requirement u/s 42 read with rule 14 to obtain Valuation Report for Private Placement of shares. Company can’t issue shares on Face Value in case of Private Placement of Shares.
B. Whether Company can receive allotment money in Cash u/s 42?
Section 42 doesn’t allow the company to receive Allotment money in Cash. Allotment money must be received in separate Bank Account.
C. Whether there is any restriction on use of money received from subscribers of Right Offer?
Section 42 Company can’t use subscription money of Private Placement of Shares before filing of PAS-3
D. Whether Limit of 200 persons shall be calculated individually/ jointly for each type of securities?
The restriction of 200 persons would be reckoned ‘Individually’ for each kind of security that is ‘Equity Shares, Preference Shares or Debentures’.
E. What if Company give private placement offer to more than 200 persons in a financial year ?
If offer is made to more than 200 peoples:
If a company, whether listed or unlisted makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than 200 persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognized stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of Chapter III.
Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with.
F. Whether there is need to file offer Letter PAS-4 with ROC in e-form GNL-1?
As per Amendment, there is no need to file e-form PAS-4 with ROC in e-form PAS-4.
G. How does the 200-investor limit apply across different classes of securities in the same financial year?
Insight: The 200 cap is per type of security (i.e., 200 for equity, 200 for preference shares, 200 for NCDs). Many companies miss this nuance and club all types together.
H. What happens if a company receives application money from more than 200 persons, but all do not get allotted shares?
Insight: Even offering to more than 200 is a violation and will trigger public offer norms, irrespective of actual allotment.
Basic Abouts Private Placement of Shares:
a) Mandatory to open Separate Bank Account for Right issue of Shares.
b) Needs to file MGT-14 for Issuance of Letter of Offer with ROC by Private Limited Companies.
c) PAS-3 can be file within 15 days of holding of Board Meeting for allotment of Share.
d) Shares can be issue only on valuation price.
e) There is restriction under Companies act to receive subscription money only through banking channel.
Key Circulars / Notifications
| Reference | Brief Description |
| MCA Notification dated 7th August 2018 | Clarification on utilization of money only post PAS-3 filing |
| General Circular 06/2015 | Clarification regarding PAS-4 circulation method |
| Companies Amendment Act 2017 & 2019 | Introduced stricter compliance and penalties |
Penalty for Non-Compliance
| Default | Penalty |
| Contravention of Section 42 | Company, promoters, and directors: Penalty up to amount raised or ₹2 crore, whichever is lower, plus refund with interest |
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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).
Also Read:
Private Placement of Equity Shares – Requirements & Procedure
Meaning, Provisions & Procedure For Issue of Shares Via Private Placement
Private Placement – Section 42 of Companies Act 2013 – Procedure & key points
Conditions & Steps for Private Placement: Companies act, 2013
Issue of Shares Through Private Placement | Companies Act, 2013
Checklist for Issue of shares on private placement basis
Private Placement of Shares- Key Changes– Companies Amendment Bill, 2017
Private Placement by unlisted public and private companies
Private Placement of Shares/Securities – Companies Act, 2013
Step by step procedure on Private Placement in case of Private Limited Company
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