Private Placement Compliance Pitfalls That Can Sink a Startup Fundraise: A Practical Guide to Section 42

Priyanshi Garg | Last updated: 27 June 2026

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Private placement under Section 42 of the Companies Act, 2013, is crucial for startup funding but often mishandled. This guide highlights common errors founders make, such as misusing application money before filing the return of allotment (PAS-3) or missing the strict 60-day allotment and 15-day refund deadlines. It also covers issues like breaching the 200-investor limit and failing to comply with FEMA regulations for foreign investors, all of which carry significant financial and legal consequences.

Introduction Private placement under Section 42 of the Companies Act, 2013 is the unglamorous workhorse behind almost every startup funding round in India. Every time a startup issues equity shares, Compulsorily Convertible Preference Shares (CCPS), or Compulsorily Convertible Debentures (CCDs) to a VC or angel investor, it's doing so through this provision. And yet, because it sits in the background of a fundraise, overshadowed by term sheets, valuation negotiations, and shareholder agreements

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About the Author

Priyanshi Garg

Student

As a qualified Company Secretary, I bring hands-on experience in corporate governance, regulatory compliance, and end-to-end transaction support across both private and listed company frameworks. Over the course of my professional journey, I have been actively involved in private placements, rights issues, bonus issue ... Read more

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