Decoding Private Placements of Equity Shares - Requirements and Procedures

"Private Placement" means any offer or invitation to subscribe or issue of Shares to a selected group of persons by a company through private placement offer-cum-application, subject to specific conditions.

Section 42 of the Companies Act, 2013 provides complete procedure and rules for issuing shares on Private Placement basis, provided as under:

Group of Persons

A private placement shall be made only to a select group of persons who have been identified by the Board of Directors of the Investee Company. Such number of persons must not exceed fifty at a time and not exceeding two hundred in a financial year and it excludes qualified institutional buyers and employees of the company who are offered securities under ESOP.

Amount of Investment

The amount of Investment per applicant shall not be less than Rs. 20,000/-. Such Application money shall be deposited from Bank account of the applicant either by cheque or demand draft or other banking channel but not by cash. Such application could not be utilized by the company until it allots the corresponding securities.

Also, the monies received on the application shall be kept in a separate bank account in a scheduled bank and 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.

Allotment of Securities

The company issuing the shares through private placement shall allot its securities within sixty days from the date of receipt of the application money against such securities and if the company is not able to allot the securities within 60 days, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days. Further, 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% p.a. from the expiry of the sixtieth day.

Following is the Detailed Procedure to be complied with for Issuing Equity shares through private placement:

1. Hold Board Meeting to approve the Notice of Holding General Meeting of Shareholders for the following purposes:

• To Hold General meeting and approve the Notice along with the Offer Letter.
• To alter AOA should it be required to give effect to Private Placement  
• To Issue of Equity shares at Face Value along with premium (if any) to Investors on Private Placement Basis.
• To open Separate Bank Account in the name of for depositing the money against allotment of Shares.

2. Providing Instructions to specified Bank for the opening of separate Bank Account and depositing the money against allotment Shares.
3. Confirm whether Letters from all proposed allotees giving consent to subscribe the issue are received or not.
4. Prepare the List of Allotees along with all the required details as per the format prescribed under the Form PAS-5
5. 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
6. File Form GNL-2 with MCA along with the PAS-4 and PAS-5 as attachments within 30 days of approval of the offer letter.
7. Hold Board Meeting for Allotment of Securities.
8. File Form PAS-3 and Form MGT-14 within 15 days of the allotment. Attach Special Resolution, Detailed List of allotees and Valuation Report in Form PAS-3.
9. Intimate the Investors about the Outcome of the Board Meeting.
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.  

Following is the list of Document required to be prepared for Issuing Equity shares through private placement (on the basis of Procedural Timelines)

• Outcome of Board Meeting along with the Draft Notice of General Meeting and Explanatory Statement, Draft Offer Letter, Proposed List of allotees
• Consent letters from all the proposed allotees
• PAS-5 including detailed list of allotees.
• Certified Copy of the Resolution Passed by the Members of the Company along with an Explanatory Statement and approved Offer Letter.
• Valuation Report as on the date of Allotment by a Chartered Accountant or a SEBI registered Merchant Banker.
• Copy of Outcome of the Board Meeting for the Allotment of shares.

In case if the applicant under the private placement is an NRI entity, to whom the shares are to be allotted, in such cases the following additional procedure is to be followed in addition to the above-mentioned procedure:

1. Once the amount of Application money is remitted by the Applicant, request the AD-category bank for providing the FIRC and KYC with respect to the amount deposited by the applicant/remitter.
2. File ARF (Advance Remittance Form) with RBI within 30 days of receipt of such application money from outside India.
3. On Approval of ARF, a UIN shall be generated and in case there is any surplus amount received due to the variation in currency exchange, file Form A-2 for the refund of such surplus amount.
4. File Form FC-GPR with RBI within 30 days of Allotment of the Shares to the Foreign Investor.
5. In case there is a delay in filing the above-mentioned format RBI, a Clarification letter is also required to be submitted along with the corresponding form. No additional documents other than mentioned earlier are required to be filed for the prescribed forms.

W.e.f. 1st September, 2018, Forms ARF, A-2 and FC-GPR are now required to be filed at www.firms.rbi.org.in. Earlier those were to be filed at www.ebiz.gov.in.