Section 42- Companies Act, 2013- Offer or invitation for subscription of securities on private placement.

The Companies Act, 2013  offers bunch of avenues to companies for raising funds and one of those is raising funds by issuing various securities. One of the avenue available with the companies is to raise funds by issuing securities through Private Placement.

Section 42 of the Act, as amended by Companies (Amendment) Act, 2017 read with the Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 deals with the issue of securities by way of Private Placement.

WHAT DOES PRIVATE PLACEMENT MEAN-

Explanation I to section 42(3) defines “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.

SECTION 42 – DISCUSSED

Offer to be made only to selected group of persons: [Sec 42(2) read with Rule 14(2)]

> A private placement shall be made only to a select group of persons who have been identified by the Board

> whose number shall not exceed 200 in a financial year (subject to prescribed conditions)

> QIBs & employees of the company being offered securities under a scheme of ESOP/ESPS shall not be considered while calculating the limit of 200 persons.

Note: The restrictions on limit of identified persons would be reckoned individually for each kind of security i.e. equity share/preference share/debenture.

Private Placement Offer-cum-Application: [Sec 42(3) read with Rule 14(3)]

> A private placement offer cum application letter shall be in the form of an application in Form PAS-4

> which shall be 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 their name.

Note:

1. only identified person can apply private placement offer cum application letter, if person other than identified person applies then the said application shall be treated as invalid.

2. The private placement offer and application shall not carry any right of renunciation

PAS-5: [Rule 14(4)]

> The Company shall maintain a complete record of such offers in Form PAS-5.

Shareholder’s Authority [Rule 14(1)]:

> A Company shall not make any Private Placement unless the same has been previously approved by Special Resolution.

> Explanatory statement annexed to the notice for shareholders’ approval shall disclose:

a) particulars of the offer

b) date of passing of Board resolution

c) kinds of securities offered

d) price at which security is being offered

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

f) name and address of valuer who performed valuation

g) amount which the company intends to raise by way of such securities

h) 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.

Note: In case of offer or invitation for NCDs what will be required in case where the proposed amount to be raised:

i. does not exceed the limit as specified in section 180(1)(c) – Board Resolution passed at meeting of board would suffice.

ii. exceeds the limit as specified in section 180(1)(c) – it will be sufficient to take prior approval by special resolution only once in a year for all the offers or invitations for such debentures during the year.

Application to Private Placement [Section 42(4)]

> 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

> paid either by cheque or demand draft or other banking channel except by cash.

Note: Fresh offer or invitation for Private Placement shall not be made unless any previous offer or invitation has been completed or withdrawn or abandoned by the Company. [Section 42(5)]

Opening of separate Bank Account

> Monies received on application shall be kept in a separate bank account in a scheduled bank and 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.

> Company shall not utilize the funds so raised from a Private Placement unless it has

a) allotted shares to the subscribers and

b) filed e-form PAS-3 return of allotment with the ROC

Allotment of Securities [Section 42(6)]

> A company making an offer or invitation under this section shall allot its securities within 60 days from the date of receipt of the application money for such securities

> If the company is not able to allot the securities within given period, it shall repay the application money to the subscribers within 15 days from the expiry of 60 days

> 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 60th day

Note: In case the application money is not refunded within 15 days of completion of 60 days, then amount pending for refund shall be treated as Public Deposit pursuant to Section 73 of the Act.

PAS-3: [Section 42(8) read with Rule 14(6)]

> A Company shall file with the ROC a return of allotment in e-form PAS-3 within 15 days of allotment.

> Complete list of all the allottees shall also be attached.

Restriction on Advertisements:

> Company issuing securities under this section shall not release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.

PROCEDURE FOR PRIVATE PLACEMENT

> Hold Board Meeting- Approval shall be taken for the following agenda:

a) Issue of securities by way Private Placement Basis;

b) Approve the name of Identified person to whom the private placement offer/invitation has to be made;

c) Approve Offer Letter

d) Approve the notice of calling for Extra-Ordinary General Meeting

e) Approve the Opening of a separate Bank Account for keeping the application money received.

> Convene Extra-Ordinary General Meeting – for the followings purpose:

a) Pass Special Resolution to approve Private Placement.

b) Approve Offer letter

> File e-form MGT-14 – with ROC within 30 days of passing the Special Resolution approving the Private Placement.

> Offer cum Application Letters in Form PAS-4 shall be send whether in electronic mode (emails) or by post to Identified Persons within 30 days of recording the names of the identified persons. It can be circulated only after filing MGT-14

> Form PAS-5 Prepare the complete record of private placement offer in Form PAS-5.

> Open Separate Bank Account Application money to be received in a Separate Bank Account with Scheduled Bank within the offer period as mentioned in the Offer cum Application Letter.

> Call Board Meeting After closure of offer period call a Board Meeting and pass resolution for allotment of securities and issue securities certificate.

> Form PAS-3 – Return of allotment shall be filed in e-form PAS-3 within 15 days from the date of the allotment made i.e. after passing Board Resolution for allotment of securities.

> Allotment The securities shall be allotted within 60 days of the receipt of Application money by the Company.

> Stamp duty – Within 30 days of issue of securities certificates, the company shall pay stamp duty as per the respective Stamp Act of the State.

> Utilization of Money – The Company can utilize the money raised through Private Placement only after filing e-form PAS-3.

PROCEDURE

> If a company defaults in filing PAS-3 within 15 days from the date of allotment

Company, its promoters and directors shall be liable to a penalty for each default of Rs. 1000 for each day during which such default continues but not exceeding 25 lakh rupees.

> If a company makes an offer or accepts monies in contravention of this section

Company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or 2 crore rupees, whichever is lower, and the company shall also refund all monies with 12% interest to subscribers within a period of 30 days of the order imposing the penalty.

Disclaimer– The article is based on the relevant provisions and as per the information existing at the time of the preparation. In no event Author shall be liable for any direct and indirect result from this article. This is only a knowledge sharing initiative. The Author can be reached at 9372393027.

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