(As amended by the Companies (Amendment) Act 2017 and Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018)
Private placement of shares is governed by section 42 of the Companies Act 2013 and Rule 14 of Companies (Prospectus and Allotment of Securities) Rules 2014 which has been recently amended on 07.08.2018 bringing various changes in private placement of securities.
“private placement" means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in section 42.
A Company can raise capital by offering its securities to a selected group of identified persons in the manner prescribed under Section 42 and rule 14.
In order to comply with the requirements of section 42 and rule 14 of the aforementioned by laws the company must first call the board meeting to finalise the identified person to whom the offer will be made and approve the offer letter in form PAS 4 as prescribed. The offer letter shall not have the right of renunciation and can only be subscribed by the person to whom the offer is made.
The board resolution so approved shall be duly filed with the registrar of companies in the form MGT 14
The private placement offer shall be then approved by the shareholders by a special resolution and the resolution shall be filed with the registrar of companies in the form MGT 14
The explanatory statement annexed to the notice for shareholder’s approval should contain the following:
- Particulars of offer including the date of passing the board resolution
- Kind of securities offered and the price on which the offer is made
- Basis or justification of price at which the offer is being made
- Name and address of valuer who performed valuation
- Amount which company wants to raise and other material terms of issue etc
The offer shall be made either in writing or through electronic mode within 30 days of recording the name of such person
Every identified person willing to subscribe to the offer shall apply along with the subscription money paid either by cheque, demand draft or other banking channel but not by cash. The payment shall be made by the first applicant and the company shall maintain all the records pertaining to private placement in form PAS 5 as prescribed.
The monies received shall be kept in a separate bank account in a scheduled bank and the amount shall not be utilized for any purpose other than for allotment of securities or repayment of monies in case the company fails to allot securities.
The allotment shall be made within 60 days from the date of receipt of application money. If the company fails to do so it must refund the money to the subscriber within 15 days from the end of 60th day and if the refund has not been made within 75th day from the date of receipt of application money then interest must be paid @ 12% p.a. from the 60th day
The company shall not utilize the subscription money unless the allotment of securities are made with respect of such application money received and the return pertaining to such allotment is filed with the registrar of companies in form PAS 3 within 15 days of such allotment.
- Private placement can be made to identified persons who have been identified by the board to a maximum of 200 person in a financial year. Provide that this shall not be applicable to NBFC and HFC if they comply with the requirements laid down by RBI and NHB.
- No fresh offer shall be made unless the allotment with respect of previous offer is complete or that offer or invitation is abandoned
- No advertisement or media marketing shall be made of any private placement offer
- If a company defaults in filing PAS 3 within 15 days 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 @12% per annum to subscribers within a period of thirty days of the order imposing the penalty
- Any private placement issue not made in compliance of the provisions of sub-section (2) of section 42 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
Changes at a glance:
- Earlier there was a requirement of offering securities of minimum Rs 25,000 face value. This requirement has been done away with.
- Earlier the details maintained in PAS 5 must be filed with the registrar now not required
- There are changes in the matters to be stated in the explanatory statement. More detailed
- PAS 3 could be filed within 30 days which is now reduced to 15 days
- Now money cannot be used unless PAS 3 is filed. Earlier there was no such requirement
- Non permissibility of renunciation has now been more specifically stated
- Now even the private limited companies will have to file the board resolution with the registrar pertaining to board resolution passed under section 42
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