Issue of Shares of Section 8 company ( Registered as Private Limited )

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This query is : Resolved

Basua (Querist)

13 September 2022 A Section 8 Company registered as a Private Company wants to raise funds AT FACE VALUE among friends of directors, what would be the best possible route without valuation of shares, or other complex secretarial work? Is it Private Placement u/s 42

Aashok Kumar Sharma online

Aashok Kumar Sharma

(Expert)

09 July 2024 Yes, for a Section 8 Company (which is a company registered under Section 8 of the Companies Act, 2013 for promoting charitable objects, etc.) wanting to raise funds at face value from friends of directors, the best possible route would typically be through Private Placement under Section 42 of the Companies Act, 2013. Here’s why and how it can be done:

### Private Placement under Section 42:

1. **Applicability:**
- Section 42 of the Companies Act, 2013 governs private placement of securities (shares or debentures) by companies.
- Private placement can be made to a select group of persons (up to 200 in a financial year excluding QIBs and ESOPs) without issuing a prospectus.

2. **Procedure:**
- **Board Resolution:** Obtain a board resolution authorizing the issuance of shares at face value to friends of directors.
- **Offer Letter:** Issue a private placement offer letter to the prospective investors (friends of directors) detailing the terms of the offer, including the number of shares, face value, consideration, etc.
- **Filing with ROC:** File Form PAS-4 (Private Placement Offer Letter) with the Registrar of Companies (ROC) within 30 days of issuance of offer letter.
- **Allotment:** Upon receipt of acceptance from the investors and within 60 days of receipt of application money, allot shares and file Form PAS-3 (Return of Allotment) with ROC.

3. **Conditions:**
- Ensure compliance with the conditions specified under Section 42, such as minimum subscription, maximum number of persons to whom offer can be made, pricing guidelines (face value in this case), and other procedural requirements.
- The shares can be issued at face value without the need for a valuation report, which simplifies the process compared to other methods.

4. **Documentation:**
- Maintain proper documentation including board resolutions, offer letters, applications received, minutes of meetings, and filings with ROC for compliance purposes.

### Advantages of Private Placement:

- **Simplicity:** Private placement at face value simplifies the process as it does not require a valuation report or complex secretarial work associated with other methods like preferential allotment.

- **Limited Compliance:** While there are procedural requirements under Section 42, they are relatively straightforward compared to other fundraising methods.

- **Specific Audience:** Private placement allows targeting a specific group of investors (friends of directors, in this case) who may have a personal interest or connection with the company’s objectives.

### Conclusion:

Private Placement under Section 42 of the Companies Act, 2013 is indeed a suitable route for a Section 8 Company to raise funds at face value from friends of directors. It provides a straightforward process without the need for valuation of shares, ensuring compliance with legal and regulatory requirements while simplifying the fundraising efforts. It’s advisable to consult with a company secretary or legal advisor to ensure all steps are correctly followed and compliant with applicable laws.

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