Private Placement (Section 42)
What Is a Private Placement?
(Section 42 of the Companies Act, 2013 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014)
(1) A company may, subject to the provisions of this section, make a private placement of securities.
(2) 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 fifty or such higher number as may be prescribed [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be prescribed.
Simple Definition :
A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than on the open market. It is an alternative to an initial public offering (IPO) for a company seeking to raise capital for expansion.
Investors invited to participate in private placement programs include wealthy individual investors, banks and other financial institutions, mutual funds, insurance companies, and pension funds.
One advantage of a private placement is its relatively few regulatory requirements.
Issuing a private placement is a practical means by which a company can raise capital, however, the process involved is not as well-known as other public market alternatives. The infographic below details the steps involved in issuing a private placement, revealing how similar the process is to obtaining bank financing
There is some important provision 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.
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. 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.
No fresh offer or invitation shall be made unless the allotments with respect to any previous offer or invitation have been completed.
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:
iii. Private Placement Offer Letter
A Private Placement Offer Letter 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. Private Placement Offer Letter 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.
vi. No Advertisement for Private Placement of Shares / Securities
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.
vii. Allotment of Shares / Securities must be within 60 days
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.
viii. Return of Allotment for Private Placement of Shares / Securities
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-
- The full name, address, permanent Account Number and E-mail ID of such security holder;
- The class of security held;
iii. The date of allotment of security ;
- 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 (15 days) 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.
xii. 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.
SIMPLE 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.