Private Placement of Shares

Private Placement of Shares

Narrating in simple terms, a private placement is one of the ways through which the company can raise its share capital. Through private placement, the company can raise the capital by offering its shares to a selected group of persons. Following are the relevant section and rule as applicable to the private placement of shares –

·         Section 42 of the Companies Act, 2013; and

·         Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

It must be noted that both the above-referred section and rule has undergone various amendments and the said amendments have been made effective from 7^th August, 2018. Present article helps to analyze the various provisions and procedure involved in the private placement of shares.  

Pre-Requirements of Making Private Placement –

Under private placement before making any offer or invitation to the subscriber, it is mandatory for the company to obtain previous approval of an offer from its shareholders, by way of passing the special resolution. Such previous approval is mandatory for each of the offer or invitations.

Following disclosures needs to be done in the explanatory statement that is being annexed to the notice for the shareholders –

·         Particulars of offers;

·         Date of the passing of board’s resolution;

·         Type of securities offered along with its price and justification / basis of the price offered;

·         Name and address of the valuer;

·         Total amount which the company can raise by way of such securities;

·         Material terms of raising such securities etc.

It must be noted that before making any private placement offer / invitation, the company is required to file, special resolution or board’s resolution, in the Registry.

Restriction on Total Number of Offer or Invitation –

A private placement shall be made only to an ‘identified person’, who has been identified by the Board and such numbers shall not be more than 50 or such higher numbers as may be prescribed.

Further, it must be noted that, the private placement offer or invitation, to subscribe securities, cannot be made to persons more than 200 in aggregate in a financial year. It must be noted that the restriction of 200 persons is to be calculated individually for each kind of securities i.e. equity, preference shares or debentures.

Following are the list of persons which are to be excluded while calculating the limit of 50 or 200 persons –

·         Offers or invitation made to qualified institutional buyers; or

·         Offers or invitation made to employees of the company under a scheme of employees stock option.

Offer of Private Placement –

The company is required to make private placement offer in the form of an application in FORM PAS 4. Such application needs to be serially numbered and it should be specifically addressed to the person to whom the offer is being made.

Such an application can be sent to the identified person, within a period of 30 days of recording of the name, either in writing or in electronic mode.

Acceptance of Private Placement Offer –

The identified person who is willing to subscribe to the offer of private placement shall apply along with the subscription money. Subscription money is payable either by cheque or demand draft or any other banking channel, however, cash payment is not allowed.

Allotment of Securities –

A company is required to allot its securities within a period of 60 days from the date of receipt of the application money. However, in case the company is not able to allot its securities, the company is required to repay the allotment money to the subscribers within 15 days (no interest is payable if the amount is repaid within 15 days). After the completion of the period of 15 days (in total 75 days i.e. 60 + 15), the company is liable to pay interest @ 12% per annum and such interest is payable from the 61^st day.

Maintanence of Record –

The company is required to maintain all the records in FORM PAS 5.

Return Filing –

·         Return is to be filed in FORM PAS 3;

·         Return is to be filed within a period of 15 days from the date of allotment;

·         Return is to be filed with the registrar of the companies;

·         Return is to be filed along with the complete list of details of all the allottees.

Various Restrictions on The Company Issuing Securities Through Private Placement –

·         The company cannot release any public advertisement or cannot use service of any media, marketing or distribution channels or agents to inform public about private placement offer;

·         The company cannot make any fresh offer or invitation unless allotment with respect to previous offer has been completed or such previous offer / invitation has been withdrawn or abandoned.

Penalty Provisions for Various Failures –

SR. NO.	PARTICULARS	AMOUNT OF PENALTY	DEFAULTERS
1	Penalty for non-filing / late filing of return of allotment.	INR 1000 each day during which the default continues. Maximum amount of penalty cannot exceed INR 25 Lakhs.	Company, promoters and directors
2	Penalty for making offers or accepting money in contravention of section 42 of the Companies Act, 2013	Amount raised through the private placement or INR 2 Crore whichever is lower	Company, promoters and directors