Private Placement under Section 42 of Companies Act, 2013

Companies use private placement to raise capital from select investors. A company gives securities to a select group of identified investors. A company do it through a Private Placement Offer Letter (Form PAS-4). Section 42 of the Companies Act, 2013 handles this process. So, it allows private and public companies to secure capital effectively. They also follow the strict rules. In this blog, you will get guidance on Private placement.

What is Private Placement?

Private Placement refers to a method for companies to raise capital. A company does it through selling securities, shares, or debentures to a select group of up to 200 investors in a financial year. It excludes qualified institutional buyers (QIBs) and employees. It is managed by the Section 42 of the Companies Act, 2013. This allows companies to raise funds. There is no need to advertise publicly or create a detailed report. This focuses on institutional investors, wealthy individuals, or promoters.

Key Conditions for Private Placement under Section 42

Here are the key conditions for Private Placement under Section 42 of the Companies Act:

1) Targeting and Limits

A specific group of persons makes the offer. The Board of Directors of the company has identified it. There are no more than 200 individuals in aggregate for each financial year.

2) Approval Process

Firstly, the Board of Directors must approve the private placement and the draft offer letter (PAS-4), identify the proposed investors, and call a General Meeting. Thereafter, the shareholders must approve the private placement by passing a Special Resolution.

3) Offer Letter (PAS-4)

The company needs to circulate a private placement offer-cum-application letter (Form PAS-4) to identified persons. There is no need for public advertisement or marketing.

4) No Right of Renunciation

The offer is personal to each identified person. You cannot renounce or transfer it to another person.

5) Investment Size

The offer needs to have an investment size of at least Rs. 20,000 in face value of securities.

6) Payment and Banking

You need to pay the subscription money.  This is paid through cheque, demand draft, or bank transfer from the bank account. There is no need of cash payment.

7) Separate Bank Account

The scheduled bank keeps the application money in a separate bank account.

8) Allotment Timeline

The company must allot the securities within 60 Days of Receipt of Application Money.

9) Non-Allotment Refund

In case the allotment is not made within 60 days of receipt of application money, the money is repaid within 15 days of expiry. Failure to refund attracts a 12% interest per annum.

10) ROC Filings

This includes:

• PAS-3

This means a Return of allotment. You can file it through the Registrar of Companies (ROC) within 15 days of allotment.

• PAS-5

It requires a record of private placement offers that need to be maintained and filed.

11) Exclusions

The exclusions can include Qualified Institutional Buyers (QIBs) and employees receiving securities under an Employee Stock Option Plan (ESOP).

12) Exemptions

Certain provisions relating to private placement may be modified or exempted for NBFCs and Housing Finance Companies subject to RBI/NHB directions.

What is the Special Resolution for making a private placement?

The company has the right to make a private placement of its securities after getting approval from its shareholders. The company can do this approval by passing a Special Resolution for every offer or invitation.

Return of Allotment in Private Placement

The company needs to file the return of allotment with the Registrar of Companies (ROC). They can file it after allotting the securities. The filing deadline is within 15 days of allotment in Form PAS-3. This includes the fees set by the Companies (Registration Offices and Fees) Rules, 2014. The information can include:

a) Complete list of all security holders

b) Full name, address, PAN, and E-mail of such security holders.

c) Class of security held

d) Date of allotment of security.

e) Number of securities held, the amount paid and nominal value on such securities.

f) The company received particulars of the consideration when it issued securities for consideration compared to cash.

The company must have the Form PAS-3. A practicing Certified Management Accountant (CMA), Chartered Accountant (CA), or Company Secretary (CS) checks this form. It is compared to a One Person Company or a small company.

Steps for Private Placement under Section 42

Below are the steps of Private placement:

Step 1: Board Resolution

Firstly, you must need an approval from the board of directors of a company. A fresh Special Resolution is required for each private placement offer; however, in the case of Non-Convertible Debentures (NCDs), a single Special Resolution may be passed once in a year to cover multiple private placement offers during that year. The resolution can include the details of:

a) Security type

b) Price justification

c) Total number of securities

d) The way to set the price

e) Names of potential investors (if already identified)

Step 2: Offer Letter Preparation

This step allows company to prepare a private placement offer letter (Form PAS-4). It will be done after he board approves the Private Placement. The Form PAS-4 can include the required information:

a) Company background and financial information

b) Purpose of the issue

c) Price justification.

d) Issue terms

e) Rights and benefits come with the securities

f) Financial statements from the past three years.

Step 3: Filing with Registrar of Companies (RoC)

The offer is only for a special group of people. The offer is limited to 200 each year (not including QIBs and employees).

Step 4: Subscription and Allotment

Subscription funds are required to be obtained only from the bank account of the individual named in the application. The funds must be get through banking channels. The allotment need to be completed within 60 days of receiving the application money. Then, you must file Form PAS-3. The Form PAS-3 is the Return of Allotment. This form can be file through the RoC. It will be filed within 15 days of allotment. If the company does not assign shares within 60 days, it must return the money within 15 days.

Penalty for Non-Compliance

A company with its directors and promoters will suffer from a penalty when the company takes money in contravention of the Act and Rules. In case of non-compliance with private placement provisions, the company, its promoters and directors are liable for a penalty which may extend to the amount involved in the offer or Rs- 2 crore, whichever is lower. The company must also return all money to the subscribers. They will return it within thirty days of the penalty order.

Conclusion

Private placement helps companies efficiently raise capital from selected investors. This can be raised without any public offer. It is regulated under the Section 42 of the Companies Act, 2013. So, it is important to know these rules for company to get funds. You must also focus on the details such as PAS-4 offers and timely filings. If you still face a query in it, get in touch with Online Legal India.

FAQ

Q1. What is Private Placement?

Private Placement refers to a method for companies to raise capital. The companies can include public and private companies. They can raise capital by issuing securities to a select group of identified persons. This includes equity shares, preference shares, or debentures. It needs a private placement offer letter (Form PAS-4) and strictly excludes public advertisement or solicitation.

Q2. What is the maximum number of investors allowed in a Private Placement?

A company will be able to make a private placement offer of up to 200 people total in one financial year. A 200-person limit does not contain Qualified Institutional Buyers (QIBs) It also do not have employees offered securities under an Employee Stock Option Scheme (ESOS). The limit applies individually to each type of security (equity, preference, debentures).

Q3. What are the key timelines for allotment and refunds?

Here are the key timelines for allotments and refunds:

1. Allotment

Securities need to be allotted within 60 days from the receipt of application money.

2. Refunds

In case the allotment is not completed within 60 days, the company need refund the money within 15 days.

3. Interest

 If you do not give the refund within 15 days, you must pay 12% interest each year.

Q4. Can a company use the money immediately after receiving it?

No, a company cannot use the money immediately after receiving it. The funds need to be kept in a separate bank account in a scheduled bank. Funds can be utilized only after allotment is made and PAS-3 is filed.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Online Legal India is a digital platform. If you require legal assistance, we strongly recommend consulting a qualified lawyer or law firm.