Private Placement – Section 42 of Companies Act 2013

Section 42 of the Companies Act, 2013 (‘Act’) provides that a company can make a private placement to a select group of persons. Private placement by companies means offering its securities or inviting to subscribe its securities for a select group of persons other than by way of a public issue through a private placement offer letter.

Private placement of securities can be made only to select persons or identified persons (as identified by the board of the company). A company making a private placement cannot offer its securities through any public advertisements or utilise any marketing, media, or distribution agents or channels to inform the public about such an offer. If the offer is advertised or marketed, it will be considered a public offer and not a private placement by the company.

Private Placement Offer Letter

Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘Rules’) provides the regulations relating to the private placement by companies. The Rules state that the company should offer or invite to subscribe its securities through a private placement offer letter in Form PAS-4. 

All private placement offers should be made only to those persons whose names are recorded by the company before sending the invitation to subscribe. The persons whose names are recorded will receive the offer, and the company should maintain a complete record of the offers in Form PAS-5. 

A company should send a private placement offer letter accompanied by an application form serially numbered and addressed either in writing or electronic mode, specifically to the person to whom such an offer is made. The company should send the private placement offer letter to the specific person within thirty days of recording the person’s name. 

The person to whom the private placement offer letter is addressed in the application form should accept the offer. The company should file the complete information of the offer with the Registrar of Companies (‘ROC’) within thirty days of circulating the private placement offer letter.

Special Resolution for Making Private Placement

The company can make a private placement of its securities after approval of shareholders of the company for the proposed offer or invitation to subscribe to securities by passing a Special Resolution for every offer or invitation. 

Maximum Limit of Private Placement

The select persons to whom the company can make a private placement should not exceed fifty persons or such a higher number prescribed by the Rules in a financial year. The limit of fifty persons excludes the qualified institutional buyers and employees of the company who are offered securities in the financial year under a scheme of employees stock option as per Section 62 of the Act.

The Rules state that the offer or invitation of private placement should not be more than two hundred persons in the aggregate financial year. The limit of two hundred persons will exclude the qualified institutional buyers and employees of the company offered securities in the financial year under a scheme of employees stock option as per Section 62 of the Act.

The value of the private placement offer or invitation for each person should be of an investment size of Rs.20,000 of the face value of the securities. However, the limit of the maximum number of select persons and value of private placement does not apply to the following: 

• Non-banking financial companies registered under the Reserve Bank of India Act, 1934.
• Housing finance companies registered with the National Housing Bank under National Housing Bank Act, 1987.

Mode of Payment of Private Placement 

Every identified person wanting to subscribe to the private placement issue should apply through the private placement application given to such a person by the company along with the subscription money paid by demand draft or cheque or other banking channel and not by cash.

The subscribers should make the securities subscription payment from their bank account to the securities. The company must keep a record of bank accounts from where they receive the subscription payments.

Allotment of Private Placement

A company making an invitation or offer of private placement should allot its securities within sixty days from the receipt of the application monies for the securities. The company should repay the application money to the subscribers within fifteen days from the completion date of sixty days if the company is unable to allot securities within sixty days. 

When the company fails to repay the application money within fifteen days after completion of sixty days, it is liable to repay the subscription money with an interest rate of 12% per annum from the expiry of the sixtieth day. 

The company must keep the application money in a separate bank account in a scheduled bank and should not utilise it for any purpose other than the following:

• For adjustment against allotment of securities.
• For repaying application monies where the company is unable to allot securities. 

Record of Private Placement Offers

The company should maintain a complete record of private placement offers in Form PAS-5.  The copy of the record of offers and the private placement offer letter in Form PAS-4 should be filed with the ROC with the fees as provided in the Companies (Registration Offices and Fees) Rules, 2014 within thirty days of the circulation of the private placement offer letter. 

When the company is a listed company, it should file the record of private placement offers along with the private placement offer letter with the Securities and Exchange Board within thirty days of circulating the private placement offer letter.

Return of Allotment of Private Placement

The company must file the return of allotment of securities with the ROC, after allotting the securities, within thirty days of allotment in Form PAS-3 and the fees as provided in the Companies (Registration Offices and Fees) Rules, 2014 having the following information: 

• Complete list of all security holders.
• Full name, address, PAN, and E-mail of such security holders.
• Class of security held.
• Date of allotment of security.
• Number of securities held, the amount paid and nominal value on such securities. 
• Particulars of the consideration received if the securities were issued for consideration other than cash. 

The Form PAS-3 filed by the company, other than One Person Company and small company, should be pre-certified by a practising CMA (Certified Management Accountant), CA (Chartered Accountant) or CS (Company Secretary). 

Penalty for Non-Compliance of Private Placement 

A company, its directors and promoters will be liable for a penalty if the company accepts monies or makes an offer in contravention of the Act and Rules. The penalty may extend to the amount involved in the invitation or offer or Rs.2 crore, whichever is higher. The company should also refund all monies to the subscribers within thirty days of the order imposing the penalty.

Frequently Asked Questions

What kinds of securities are covered under private placement?

The following securities can be issued under private placement:

• Equity shares
• Preference shares
• Debentures

Which documents are required for the issue of securities through private placement?

The following documents are required to issue securities through private placement:

• Valuation report
• Private placement offer cum application letter
• Certified copy of board resolution approving the private placement offer.
• Notice of general meeting along with the explanatory statement of special resolution.
• Records of private placement offers in form PAS-5.
• Application form along with subscription money from all the proposed investors.
• List of allottees containing full name, address, PAN and e-mail ID, class of security, date of allotment and number of securities held, nominal value and amount paid on such securities.

Is it required to file MGT-14 with the ROC mandatorily?

Yes. MGT 14 must be filed with the ROC pursuant to passing of board resolution for issue of securities within 30 days of passing such board resolution.

Can private placement be made to existing shareholders?

The Companies Act, 2013 does not specifically mention the offer of securities to existing shareholders. In most cases, promoters and directors are also the shareholders of the company to whom private placement is applicable.  Further, an offer of securities to the existing shareholders is an offer to a select group of persons and not open to the public. Thus, shares can be issued to existing shareholders under the private placement.

Is the limit of 200 persons considered for the issue of each kind of security or jointly for all securities?

The restriction of 200 persons applies individually for each kind of security, i.e. equity share, preference share or debenture. Thus, 200 person limit is considered for the issue of each kind of security and not jointly. For example, the offer of equity shares to 200 persons and debentures to 200 persons in the same financial year is valid.

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