What is a private placement?
A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than on the open market. It is an alternative to an initial public offering (IPO) for a company seeking to raise capital for expansion.
Section 42 of the Companies Act, 2013 defines ‘Private Placement':
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.
Applicable Rule: Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014
Conditions for Private Placement:
• A Company shall not make any Private Placement unless the same has been approved by Special Resolution.
• An offer or invitation to subscribe securities under private placement shall not be made to more than 200 persons in aggregate in a financial year and not more than 50 people in each offer.
• QIBs and employees offered Securities through ESOP as per provisions of clause (b) of sub-section (1) of section 62 are not to be included in the ambit of 200 person to whom the offer is made.
• Neither a public advertisement nor any media/marketing/distribution channels or agents will be used to inform the public at large about such an offer.
• No fresh allotment or invitation shall be made unless the allotment or invitation made earlier has been completed /withdrawn/abandoned by the Company.
• Valuation report required by a Registered valuer to justify the price of securities.
Procedure for Private Placement:
1. CONVENING BOARD MEETING-
Hold the meeting of the Board of Directors of the Company, to approve the followings;
• Issue of securities by way Private Placement Basis.
• Finalization and Identification of persons (Identified person).
• Number of securities to be issued.
• Take note of the Valuation Report and decided the price of security.
• Draft offer letter in Form PAS-4.
• Approve the notice of calling for Extra-Ordinary General Meeting of the shareholders of the Company to take members approval.
• Opening of a separate Bank Account for keeping the application money received.
File Form MGT-14 within 30 days of passing the Board Resolution for issue of securities as per Section 117 & 179(3)(c).
Note: A private Company is not required to file Form MGT-14, except in case of offer or invitation of non-convertible debentures and the amount of the proposed issue does not exceed the limits as specified under the Section 180 of the Companies Act, 2013.
2. CONVENING EXTRAORDINARY GENERAL MEETING-
Pass Special Resolution to approve Private Placement and approve the Offer Letter to be sent to the Identified Persons. File the certified copy of the same in E Form MGT-14 within 30 days of passing Special Resolution at Extra Ordinary General Meeting.
In the explanatory statement annexed to the notice for shareholders' approval, the following disclosure shall be made:-
(a) particulars of the offer including date of passing of Board resolution;
(b) kinds of securities offered and the price at which security is being offered:
(c) basis or justification for the price (including premium, if any) at which the offer or invitation is being made;
(d) name and address of valuer who performed valuation;
(e) amount which the company intends to raise by way of such securities;
(f) 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; principle terms of assets charged as securities.
Note: This shall not apply in case of offer or invitation for. non-convertible debentures, where the proposed amount to be raised through such offer or invitation does not exceed the limit as specified in clause (c) of sub section (1) of section 180 and in such cases relevant Board resolution under clause (c) of subsection (3) of section 179 would be adequate:
Note: In case of offer or invitation for non-convertible debentures, where the proposed amount to be raised through such offer or invitation exceeds the limit as specified in clause (c) of sub-section (1) of section 180, it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitations for such debentures during the year.
3. OFFER CUM APPLICATION LETTERS IN FORM PAS-4
A private placement offer cum application letter shall be in the form of an application in [Form PAS-4] 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 thirty days of recording the name of such person pursuant to sub-section (3) of section 42:
Note: Filing of offer letter (PAS-4) in E-form GNL-2 dispensed with after Companies (Amendment) Act-2017.
4. RECORD OF PRIVATE PLACEMENT[RULE-14(4)]
The company shall maintain a complete record of private placement offers in Form PAS-5.
Note: Filing of record of Private Placement (PAS-5) in E-form GNL-2 dispensed with after Companies (Amendment) Act-2017
5. APPLICATION MONEY
Receive application money in a Separate Bank Account with Scheduled Bank within the offer period as mentioned in the Offer cum Application Letter and shall not be utilized for any purpose other than:
(a) For adjustment against allotment of securities or
(b) Repayment of monies where the company is unable to allot securities. [Section- 42(6)]
After completion of allotment process, the Company will be allowed to move the funds in regular Bank account used for day to day transactions.
Note: Monies payable on subscription to securities to be held by joint holders shall be paid from the bank account of the person whose name appears first in the application.
*As per Section 42(4) Subscription money can be paid in any of the following modes:
(i) By Cheque or
(ii) By Demand Draft or
(iii) By other Banking Channels except cash
6. ALLOTMENT OF SECURITIES WITHIN 60 DAYS OF RECEIVING OF ALLOTMENT MONEY
After receiving of allotment money hold a Board Meeting and pass Resolution for:
• Allotment of securities
• and issue securities certificate.
If the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days and 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 twelve per cent. per annum from the expiry of the sixtieth day. [Section-42(6)]
7. RETURN OF ALLOTMENT(PAS-3)
A Company shall file with the Registrar a return of allotment in Form PAS-3 within 15 days from the date of allotment, along with complete list of all allottees containing:
(i) the full name, address, permanent Account Number and E-mail ID of such security holder;
(ii) the class of security held;
(iii) the date of allotment of security;
(iv) the number of securities held, nominal value and amount paid on such securities; and particulars of consideration received if securities were issued for consideration other than cash.
Note: Before the Companies (Amendment) Act, 2017, the date of filing of return of allotment was 30 days which was reduced to 15 days as per amended Section 42(8) of the Act.
8. UTILIZATION OF MONEY
Company cannot utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in Form PAS-3.
9. ISSUE OF SHARE CERTIFICATES AND UPDATE REGISTERS:
The Company shall issue share certificate within 2 months from the date of allotment and should update its Register of Members in case of issue of share or Registrar of Debenture holders or Securities holders, in case of any other security.
10. CONSEQUENCE OF NON -COMPLIANCE:
If a company defaults in filing the return of allotment within the period prescribed under sub-section (8) of Section 42 (i.e. 15 days from the date of allotment), the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.
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 two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub- section (6) to subscribers within a period of thirty days of the order imposing the penalty.
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