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Private Placement Provisions & Procedure

Understanding Private Placement – Basic provisions and procedure to be followed

Private placement, as defined by the Companies Act of 2013, is the issue of securities by a firm to a select group of investors without conducting a public offering.

This strategy enables businesses to raise funds directly from specialized investors, such as institutional investors or high-net-worth individuals, without the need for stringent regulatory restrictions or public disclosure. The Companies Act of 2013 normally establishes rules and conditions on private placements to protect investors’ interests and maintain transparency. These may include restrictions on the number of investors, minimum investment amounts, and compliance with disclosure requirements.

Private Placement Provisions & Procedure under Companies Act

Private placements are frequently preferred by businesses looking to acquire capital fast and efficiently while keeping secrecy and flexibility in the fundraising process.

S. No.

Particulars

Explanation

1.        

Definition

A private placement is a sale of securities to a select group of investors, typically used by start-ups to raise capital without the costs and regulations of an IPO. It involves fewer regulations, allowing for faster fundraising and more flexibility in terms negotiation, but comes with the risk of limited investor participation and lack of liquidity.

2.        

Governing provisions of the Companies Act, 2013

Private Placement is governed by

  • Section 42 of the Companies Act, 2013 &
  • Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014.

3.        

Limit on persons

A private placement shall not be made to persons more than 200 in the aggregate in a financial year.

Exemption: Below mentioned are exempted from above provision:

·            A Banking financial companies which are registered with RBI under RBI Act, 1934.

·            Housing Finance Companies which are registered with the National Housing Bank under National Housing Bank Act, 1987

4.        

Exempted Category

While taking a count of the limit of 200 persons, below mentioned persons shall not be included:

i) Qualified Institutional Buyers

ii) Employees of the company under a scheme of Employees Stock Option (ESOP)

5.        

Time limit for Private Placement

The Company shall make an allotment within 60 days from the date of receipt of application money.

If the Company fails to allot the securities within 60 days, then it shall repay the application money to the subscribers within 15 days from the expiry of 60 days.

And if the Company fails to repay the application money within the said period i.e 15 days then it shall be liable to repay the money along with interest @12% per annum which shall be calculated from the expiry of 60 days.

6.        

Forms required for Private Placement

o   PAS-4

o   PAS-5

o   MGT-14

o   PAS-3

7.        

Step-wise process of Private Placement

   i.     Convene Board Meeting for below mentioned purposes:

    a) Approving the list of persons to whom the shares shall be      issued on a Private Placement basis.

    b) To approve offer letter for issuance of Shares (Form PAS-4)

    c) Calling Extra-Ordinary General Meeting for obtaining the consent of the shareholders for issuance of shares on Private Placement Basis.

  •   Call Extra-Ordinary General Meeting to approve the resolution for issuance of shares on a private placement basis as a Special Resolution & to approve the offer letter to be circulated for this purpose.
  •     File MGT-14 within 30 days of approval of the resolution by the shareholders of the Company.
  •        Circulate the offer letter to persons to whom the offer is to be made within 30 days of recording their names. It should further be noted that the offer letter should be circulated only after filing Form MGT-14.
  •      Open a Separate Bank Account for receiving the share application money.
  •       Receipt of Share Application Money.
  •      Hold a Board Meeting for the allotment of shares to the persons from whom the application money has been received within 60 days of such receipt.
  •   Entry in the register of members within 7 days of allotment of   shares to the shareholders.
  •        Filing of Form PAS-3 within 15 days of allotment of shares. It should further be noted that the share application money is utilized only after filing of Form PAS-3.
  •        Issuance of Share Certificates within 2 months from the date of allotment.
  •       Payment of Stamp Duty on Share Certificates within 30 days of issuance of share certificates as per the Indian Stamp Act.
  •      Company shall maintain a complete record of private placement offers in Form PAS-5.

NOTE:

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 or has been withdrawn or abandoned by the company.

8.        

Usage of allotment money

The Company can use allotment money after allotment is made and return of allotment is filled with ROC in Form PAS-3.

9.        

Prohibitions under Private Placement

i) No Company issuing securities through Private Placement shall release any public advertisement or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.

ii) Securities cannot be offered to companies or individuals from neighbouring countries to India without government approval under the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019.

10.    

  • Contravention of Section 42

For Company, Directors and Promoters:

·         Penalty up to amount raised or 2 crores whichever is lower.

and

·         Refund of money with interest within 30 days of imposing of    penalty.

11.    

Default in filing of Return of Allotment

For Company, Directors and Promoters:

·Penalty of Rs. 1,000/- per day of delay to maximum of Rs. 25 lacs

Conclusion

Private placement, as defined in the Companies Act of 2013, provides a strategic channel for businesses to raise capital efficiently and discreetly. Businesses can get the necessary cash by targeting a specific group of investors, avoiding the burden of substantial public disclosure and regulatory compliance that come with public offerings. The Act’s safeguards and conditions ensure that investor interests are protected while maintaining openness.

For companies seeking to expedite their fundraising efforts while retaining a level of confidentiality and flexibility, private placement stands out as an attractive option. It allows for direct engagement with investors who can provide substantial capital, thereby facilitating the company’s growth and expansion. As with any financial strategy, it is crucial for companies to navigate the regulations carefully and adhere to the prescribed norms to maximize the benefits of private placement.

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