Introduction
Private placement is a cost effective way of raising capital without going for public issue. Every company at some point needs to increase its share capital. When it decides to increase its capital, speed and fewer procedural requirements are two factors which are always of concern.
While there are many methods to increase the paid-up capital as discussed below, companies often take recourse to private placement for allotting shares and increasing their capital.
Private placements can be made by both private and public companies and governed by provisions of the Companies Act, 2013 read with rules and the SEBI ICDR REGULATIONS, 2018, and termed as preferential allotment in case of Listed company and when this kind of issue or invitation is made by unlisted and private company it is termed as private placement of securities
Private Placement
Section 42 of the Companies Act, 2013 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 contains provisions of private placements of securities. Recently, both Section 42 and Rule 14 have undergone amendments by way of the Companies (Amendment) Act, 2017 and the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018.
“Private Placement” means any offer of securities (Not Only Shares) or invitation to subscribe securities to a select group of persons by a company through issue of a private placement offer letter and which satisfies the conditions specified in section 42 of the Act.
Applicability
This section is applicable to all types of companies.
Maximum no of offerees in each financial year
Section 42 of the Companies Act, 2013 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribe that, a private placement shall be made only to a selected group of person who have been identified by the Board and shall be made to not more than 200 persons in the aggregate in a financial year (excluding qualified institutional buyers and employees of the company being offered securities under ESOP).
This restriction would be reckoned individually for each kind of security that is equity share, preference share or debenture
However, in the maximum limit of 200 offerees following are excluded:
- NBFCs which are registered with the RBI under the RBI Act, 1934; and
- HFCS which are registered with the National Housing Bank under the National Housing Bank Act, 1987, if they are complying with the regulations made by RBI or the National Housing Bank In respect of offer or invitation on private placement basis
Provided that such company shall comply with companies Act if RBI or National Housing Bank have not specified similar regulations.
Special Resolution for Private Placement
Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 provides that the offer should be previously approved by the shareholders of the company, by a Special Resolution, for each of the offers or invitations and the explanatory statement annexed to the notice for shareholder’s approval shall provide the following;
- Particulars of the offer including date of passing Board Resolution;
- Kinds of securities offered and the price at which such securities are offered;
- Basis or justification for the price at which the security is being offered including the premium if any;
- Name and address of valuer who performed the valuation;
- Amount which the company intends to be raised through such offer or invitation;
- Material terms, proposed time schedule, objects of offer, contribution as made by the promoters or directors , principle terms of assets charged as securities;
Provided that in case of offer or invitation for non-convertible debentures, it shall be sufficient if the company passes the Board Resolution each time if such issue is within the borrowing limit specified under Section 180(1)(c) of the Companies Act. However, in case if the limit exceeds the limit of 180(1)(c) then it shall be sufficient if the company passes special resolution once in a year for all the offers of such debentures during the year.
A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the ROC.
Private Placement Offer Letter (PPOL)
A PPOL in form of PAS-4 shall be accompanied by an application form 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 30 days of recording the names of such persons by the company.
Provided that no other person other than the person to whom PPOL is addressed is allowed to apply through such application form and any such application conforming to this shall be treated as invalid.
Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 provides that PPOL shall not contain any right to renunciation.
Payment through Banking Channel
The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the Bank account from where such payment for subscriptions have been received.
Every person who is identified and willing to subscribe to the private placement shall pay the amount under private placement offer either by cheque or demand draft or other banking channel and not by cash.
Utilisation of application money
Issuer Company must open a separate bank account in a scheduled bank for receiving money on application and such amount shall be utilized only for following purposes;
- For adjustment against allotment of securities; or
- For the repayment of monies where the company is unable to allot the securities.
Prohibition for Private Placement of Shares/ Securities
No Company offering securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.
Allotment of Shares / Securities must be within 60 days
Issuer Company shall allot its securities within 60 days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within 15 days from the date of completion 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 12% per annum from the expiry of the sixtieth day.
Return of Allotment for Private Placement of Shares or Securities
A return of allotment of securities shall be filed with the Registrar within 15 days of allotment in Form PAS-3 along with a complete list of all the allottees containing-
- The full name, address, permanent Account Number and E-mail ID of such security holder;
- The class of security held;
- The date of allotment of security;
- The number of securities herd, nominal value and amount paid on such securities; and particulars of consideration received if securities were issued for consideration other than cash.
Record of Private Placement
The Company shall maintain a complete record of private placement offers in Form PAS-5.
Non-compliance
Any private placement issue not made in compliance of the provisions 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 Board of India Act and Regulations will apply.
Contravention of Section 42 attracts penalty which may extend to the amount involved in the offer or invitation or Rs.2Cr whichever is lower, and the company shall also refund all monies with interest to subscribers within a period of 30 days of the order imposing the penalty.
