Private Placement Under Section 42 of Companies Act 2013

Private Placement Under Section 42 of Companies Act 2013. Private placement is a method for companies to raise funds by offering securities to a select group of individuals. Section 42 of the Companies Act, 2013 (the ‘Act’) provides the legal framework governing private placement. This article explores the concept, procedures, and regulations surrounding private placement in simple terms, offering insights into its benefits, requirements, and compliance obligations.
What is Private Placement?
Private placement refers to the process by which a company offers or invites subscription for its securities to a select group of people, other than the public. This is done through a private placement offer letter, avoiding the need for public advertising or mass marketing.
It’s an effective way for companies to raise capital while maintaining control over the investors and ensuring compliance with specific legal guidelines.
Key Features of Private Placement
1. Select Group of Investors: The offer is made only to a predefined list of individuals, identified by the company’s board.
2. No Public Advertising: The offer cannot be marketed publicly. If public advertisements are used, it will be considered a public issue.
3. Offer Letter: The private placement is carried out through a specific document called a private placement offer letter, as mandated under the rules.
Types of Securities Offerings in Private Placements
Under Private Placements, gaining insight into the different types of securities offerings is essential for making informed investment choices. Unlike Initial Public Offerings (IPOs), private placements involve the direct issuance and sale of securities to a limited group of investors, bypassing the requirement for a public prospectus. This approach provides issuers with a more flexible and efficient way to raise capital. 
-Regulation D (Reg D) Funds
-Private Stocks
-Private Equity
-Angel Funds
-Hedge Funds
-Oil & Gas Funds
Private Placement Offer Letter
Under Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, companies must:
-Use Form PAS-4 to issue the private placement offer letter.
-Maintain a record of all offers in Form PAS-5.
-Address the offer letter to specific individuals, either in writing or electronically, within 30 days of identifying the persons.
The private placement offer letter must accompany a serially numbered application form addressed to the recipient. It should explicitly mention the terms and conditions of the offer.
Approval Through Special Resolution
Private placement requires shareholder approval through a Special Resolution. This resolution authorizes the company to offer or invite subscriptions for securities under private placement. Each offer or invitation must be approved separately.
Maximum Limit of Private Placement
The law imposes strict limits to ensure the exclusivity of private placements:
1. Maximum Number of Persons:
-The offer can be made to up to 50 persons per offer or a higher number as prescribed in the rules.
-The aggregate limit is 200 persons per financial year across all types of securities.
-Qualified institutional buyers (QIBs) and employees under an Employee Stock Option Plan (ESOP) are excluded from this limit.
2. Minimum Investment Size:
-The minimum investment per person must be Rs. 20,000 in the face value of securities.
These restrictions ensure that private placement remains a targeted and controlled fundraising method.
Mode of Payment
Subscribers to private placement must:
-Pay through banking channels like demand drafts, cheques, or electronic transfers.
-Use their personal bank accounts for the transaction.
Payments made in cash are strictly prohibited, and companies are required to maintain records of bank accounts from which subscriptions are received.
Allotment of Securities
Companies must adhere to the following timelines for allotment:
1. Time Limit for Allotment:
-Securities must be allotted within 60 days of receiving the application money.
2. Refund Policy:
-If the securities are not allotted within 60 days, the company must refund the money within 15 days.
-Failing this, the company is liable to pay an interest of 12% per annum from the expiry of the 60-day period.
The application money must be kept in a separate bank account until the allotment is completed.
Filing Requirements with the Registrar of Companies (ROC)
1. Offer Letter:
-File Form PAS-4 and PAS-5 with the ROC within 30 days of circulating the private placement offer letter.
2. Return of Allotment:
-File Form PAS-3 within 30 days of allotment, including details of the subscribers and the securities allotted.
-Form PAS-3 must be certified by a practicing professional such as a CA, CS, or CMA (except for small companies and OPCs).
Penalty for Non-Compliance
Failure to comply with private placement regulations attracts severe penalties:
-A penalty up to Rs. 2 crore or the amount involved in the offer, whichever is higher.
-The company must refund the entire amount to the subscribers within 30 days of the penalty order.
Exemptions
Certain entities are exempt from the limits and restrictions of private placement:
1. Non-Banking Financial Companies (NBFCs) registered under the RBI Act.
2. Housing Finance Companies registered with the National Housing Bank.
These entities can conduct private placements without adhering to the upper limit of 200 persons.
Conclusion
Private placement is a strategic way for companies to raise funds while maintaining exclusivity and control over their investor base. By adhering to the regulations under the Companies Act, 2013, and ensuring compliance with all procedural requirements, companies can effectively utilize this fundraising method. However, non-compliance can lead to severe penalties, emphasizing the importance of careful planning and execution. If you want to book a consultation with us, please connect with us at info@ccoffice.in or Call/Whatsapp us on 9988424211.
FAQs
1. What securities can be issued through private placement?
Ans. -Equity shares
        -Preference shares
        -Debentures
2. What documents are required for private placement?
Ans. -Valuation report
         -Private placements offer letter (Form PAS-4)
         -Board resolution approving private placement
         -General meeting notice with explanatory statement
         -Records of offers (Form PAS-5)
         -Application forms with subscription money
         -List of allottees with details
3. Is it mandatory to file Form MGT-14 with the ROC?
Ans. Yes, Form MGT-14 must be filed within 30 days of passing the board resolution approving the private placement.
4. Can existing shareholders participate in private placement?
Ans. Yes, shares can be issued to existing shareholders under private placement, provided it is made to a select group of individuals and not through public offering.
5. Does the 200-person limit applicable per security type or cumulatively?
Ans. The 200-person limit applies separately to each type of security (e.g., equity shares, preference shares, debentures) within a financial year.
6. Can companies use cash for subscription payments?
Ans. No, subscription payments must be made through demand drafts, cheques, or electronic banking channels.
7. What happens if the company fails to refund application money on time?
Ans. The company must repay the subscription money with an interest of 12% per annum from the expiry of the 60-day allotment period.

Private placement is a method for companies to raise funds by offering securities to a select group of individuals. Section 42 of the Companies Act, 2013 (the ‘Act’) provides the legal framework governing private placement. This article explores the concept, procedures, and regulations surrounding private placement in simple terms, offering insights into its benefits, requirements, and compliance obligations.

What is Private Placement?

Private placement refers to the process by which a company offers or invites subscription for its securities to a select group of people, other than the public. This is done through a private placement offer letter, avoiding the need for public advertising or mass marketing.

It’s an effective way for companies to raise capital while maintaining control over the investors and ensuring compliance with specific legal guidelines.

Key Features of Private Placement

1. Select Group of Investors: The offer is made only to a predefined list of individuals, identified by the company’s board.

2. No Public Advertising: The offer cannot be marketed publicly. If public advertisements are used, it will be considered a public issue.

3. Offer Letter: The private placement is carried out through a specific document called a private placement offer letter, as mandated under the rules.

Types of Securities Offerings in Private Placements

Under Private Placements, gaining insight into the different types of securities offerings is essential for making informed investment choices. Unlike Initial Public Offerings (IPOs), private placements involve the direct issuance and sale of securities to a limited group of investors, bypassing the requirement for a public prospectus. This approach provides issuers with a more flexible and efficient way to raise capital.

-Regulation D (Reg D) Funds

-Private Stocks

-Private Equity

-Angel Funds

-Hedge Funds

-Oil & Gas Funds

Private Placement Offer Letter

Under Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, companies must:

-Use Form PAS-4 to issue the private placement offer letter.

-Maintain a record of all offers in Form PAS-5.

-Address the offer letter to specific individuals, either in writing or electronically, within 30 days of identifying the persons.

The private placement offer letter must accompany a serially numbered application form addressed to the recipient. It should explicitly mention the terms and conditions of the offer.

Approval Through Special Resolution

Private placement requires shareholder approval through a Special Resolution. This resolution authorizes the company to offer or invite subscriptions for securities under private placement. Each offer or invitation must be approved separately.

Maximum Limit of Private Placement

The law imposes strict limits to ensure the exclusivity of private placements:

1. Maximum Number of Persons:

-The offer can be made to up to 50 persons per offer or a higher number as prescribed in the rules.

-The aggregate limit is 200 persons per financial year across all types of securities.

-Qualified institutional buyers (QIBs) and employees under an Employee Stock Option Plan (ESOP) are excluded from this limit.

2. Minimum Investment Size:

-The minimum investment per person must be Rs. 20,000 in the face value of securities.

These restrictions ensure that private placement remains a targeted and controlled fundraising method.

Mode of Payment

Subscribers to private placement must:

-Pay through banking channels like demand drafts, cheques, or electronic transfers.

-Use their personal bank accounts for the transaction.

Payments made in cash are strictly prohibited, and companies are required to maintain records of bank accounts from which subscriptions are received.

Allotment of Securities

Companies must adhere to the following timelines for allotment:

1. Time Limit for Allotment:

-Securities must be allotted within 60 days of receiving the application money.

2. Refund Policy:

-If the securities are not allotted within 60 days, the company must refund the money within 15 days.

-Failing this, the company is liable to pay an interest of 12% per annum from the expiry of the 60-day period.

The application money must be kept in a separate bank account until the allotment is completed.

Filing Requirements with the Registrar of Companies (ROC)

1. Offer Letter:

-File Form PAS-4 and PAS-5 with the ROC within 30 days of circulating the private placement offer letter.

2. Return of Allotment:

-File Form PAS-3 within 30 days of allotment, including details of the subscribers and the securities allotted.

-Form PAS-3 must be certified by a practicing professional such as a CA, CS, or CMA (except for small companies and OPCs).

Penalty for Non-Compliance

Failure to comply with private placement regulations attracts severe penalties:

-A penalty up to Rs. 2 crore or the amount involved in the offer, whichever is higher.

-The company must refund the entire amount to the subscribers within 30 days of the penalty order.

Exemptions

Certain entities are exempt from the limits and restrictions of private placement:

1. Non-Banking Financial Companies (NBFCs) registered under the RBI Act.

2. Housing Finance Companies registered with the National Housing Bank.

These entities can conduct private placements without adhering to the upper limit of 200 persons.

Conclusion

Private placement is a strategic way for companies to raise funds while maintaining exclusivity and control over their investor base. By adhering to the regulations under the Companies Act, 2013, and ensuring compliance with all procedural requirements, companies can effectively utilize this fundraising method. However, non-compliance can lead to severe penalties, emphasizing the importance of careful planning and execution. If you want to book a consultation with us, please connect with us at info@ccoffice.in or Call/Whatsapp us on 9988424211.

FAQs

1. What securities can be issued through private placement?

Ans. -Equity shares

-Preference shares

-Debentures

2. What documents are required for private placement?

Ans. -Valuation report

-Private placements offer letter (Form PAS-4)

-Board resolution approving private placement

-General meeting notice with explanatory statement

-Records of offers (Form PAS-5)

-Application forms with subscription money

-List of allottees with details

3. Is it mandatory to file Form MGT-14 with the ROC?

Ans. Yes, Form MGT-14 must be filed within 30 days of passing the board resolution approving the private placement.

4. Can existing shareholders participate in private placement?

Ans. Yes, shares can be issued to existing shareholders under private placement, provided it is made to a select group of individuals and not through public offering.

5. Does the 200-person limit applicable per security type or cumulatively?

Ans. The 200-person limit applies separately to each type of security (e.g., equity shares, preference shares, debentures) within a financial year.

6. Can companies use cash for subscription payments?

Ans. No, subscription payments must be made through demand drafts, cheques, or electronic banking channels.

7. What happens if the company fails to refund application money on time?

Ans. The company must repay the subscription money with an interest of 12% per annum from the expiry of the 60-day allotment period.