PRIVATE PLACEMENT

Section 42 of the Companies Act, 2013 (‘Act’ for short) provides for ‘offer or invitation for subscription of securities on private placement.’ The Companies (Amendment) Act, 2017 substituted a new section for section 42, which came into effect from 07.12.2018.

Meaning

The expression ‘private placement’ is defined by Explanation I to section 42(3) of the Act as 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.

Issue of shares

Section 42(1) of the Act provides that a company may make a private placement of securities. The following points are to be noted for the issue of shares on private placement basis-

• A private placement shall be made only to a select group of persons identified by the Board.
• The number of persons for offering private placement shall not exceed 200 persons in a financial year.
• While calculating the limit of 200 persons, any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees’ stock option under Section 62 shall not be considered.
• This offer will not be issued to non-banking finance companies, registered under Reserve Bank of India Act and Housing Finance Companies registered with the National Housing Bank under National Housing Finance Act.
• The proposal is to be approved by the shareholders in the general meeting by means of a special resolution.
• The explanatory statement annexed to the notice for shareholders' approval, the following disclosure shall be made-

• particulars of the offer including date of passing of Board resolution;
• kinds of securities offered and the price at which security is being offered;
• basis or justification for the price (including premium, if any) at which the offer or invitation is being made;
•  name and address of valuer who performed valuation;
• amount which the company intends to raise by way of such securities;
• 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; principal terms of assets charged as securities.

• The said special resolution shall be filed with the Registrar of Companies.

• A company making private placement shall issue private placement offer and application in such form in PAS – 4.
• The application in Form PAS – 4 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 the name of such person.
• The company issuing securities under private placement scheme 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.
• No person other than the person addressed in the private placement offer cum application letter shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid.
• The private placement offer and application shall not carry any right of renunciation.
• 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 and not by cash.
• 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 payment for subscription has been received.
• In case of joint holders, the payment shall be paid from the bank account of the person whose name appears first in the application.
• A company shall not utilise the amount raised through private placement unless allotment is made and the return of allotment is filed with the Registrar of Companies.
• The company making 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 that period, it shall repay the application money to the subscribers within 15 days from the expiry of 60 days.
• The amount received on application shall be kept in a separate bank account in a scheduled bank.
• The said amount shall not be utilised for any purpose other than-

• for adjustment against allotment of securities; or
•  for the repayment of monies where the company is unable to allot securities.

• The company shall maintain a complete record of private placement offers in Form PAS-5.
• A company making any allotment of securities under this scheme, shall file with the Registrar a return of allotment within 15 days from the date of the allotment in Form PAS – 3 along with the required fee.
• A complete list of allottees containing the following details is to be attached with PAS – 3-

• the full name, address, Permanent Account Number and E-mail ID of such security holder;
• the class of security held;
• the date of allotment of security;
• the number of securities held, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash.

• No fresh offer or invitation shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.

Penalty

If a company defaults in filing the return of allotment within the period prescribed, the 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 Rs.25 lakhs.

If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or Rs.2 crores, whichever is lower, and the company shall also refund all monies with interest to subscribers within a period of 30 days of the order imposing the penalty.

Deemed Public Offer

Any private placement issue not made in compliance of the Act, 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, 1992  shall be applicable.

Utilisation of fund collected through Private Placement

The amount collected through private placement is utilised according to the objects of the scheme. There shall not be no variation from these objects. If it is so, then it will be considered as breach of the provisions of SEBI and regulations made there under. There shall not fraud or intention to fraud the stakeholders.  In such an event the SEBI may initiate investigations on the breach of the SEBI regulations and may impose penalties and restricted the parties concerned from the trading in the securities market.