Private Placement - Companies Act, 2013

According to the Companies Act, 2013, primarily there are four modes of increasing the share capital. The four modes are Public issue, Right issue, Bonus issue and Private Placement. Private Placement is one of the mode for

increasing the share capital. Hence, it is very important to understand the details of the same. In this article, we look at the provisions relating to Private Placement under Companies Act, 2013.

Meaning of Private Placement

Section 42 of the Companies Act, 2013 defines ‘private placement’ as: “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 this section including the condition that the offer or invitation is made to not more than 50 or such higher number of persons as may be prescribed (excluding QIB’s and employees offered securities under ESOP) in a financial year“. Hence, one of the main criteria for an increase in share capital through Private Placement mode is that the offer or invitation is not made to more than 50 persons.

Private Placement Provisions

The following are limitations and provisions that must be adhered by a company raising funds through Private Placement route:

Maximum Members

In case of public company, the person to whom offer may be made should not exceed 200 in a financial year. In case of 1, the maximum number of members shall not exceed 200.

Records

All Private Placement offers should be made only to persons whose names are recorded by the company prior to the invitation to subscribe.

Receiving Money

Amount towards the subscription of securities should be received only by cheque / demand draft / other banking channels. Amount should not be received in cash. The amount so received should be kept in a separate bank account and the company shall also keep a record of the bank account from where such payments has been received. The amount can be utilised only for allotment and the value of the offer per person should not be less than INR 20,000 of face value of securities. No cash transaction is permitted.

Share Allotment

Allotment has to be carried out in 60 days from the date of receipt of application form. If the allotment is not done in given time, application money needs to be repaid within 15 days. If the application money is not repaid in 15 days, the application money along with interest @ 12% per annum needs to be paid.

Statutory Filing

All private placement offers should be made only to persons whose names are recorded by the company prior to the invitation to subscribe. Company is required to maintain a complete record of private placement offers in form PAS-5. Copy of such records along with Private Placement offer letter in Form PAS-4 along with the names of the offeree has to be filed with the Registrar of Companies within 30 days from the date of circulation which includes the date of the offer letter. Also, a return of allotment of securities, has to be filed within 30 days of allotment, as required under section 42 of the Companies Act, 2013, and has to be filed with the Registrar in Form PAS-3 and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of all security holders containing Full name, address, PAN, and E-mail id of such security holders, Class of security held, Date of becoming security holder, Number of securities held, nominal value and amount paid up on such securities and particulars of consideration received, Issue share certificates and update minutes book and registers.

Section 42 of Companies Act

According to the provisions of section 42 (10) of the Act, if a company makes an offer or accepts monies in contravention of section 42 of the Companies Act, then, the company, its promoters and directors will be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher. The company is also required to refund all amount to subscribers within a period of thirty days of the order imposing the penalty.

Board Resolution for Private Placement

A sample board resolution format for private placement is reproduced below.

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Frequently Asked Questions

Common questions about Private Placement Compliance under Companies Act, 2013.

According to Section 42 of the Companies Act, 2013, a private placement refers to any offer of securities or invitation to subscribe to securities by a company to a select group of persons, not exceeding 50 (excluding qualified institutional buyers and employees under ESOP), through a private placement offer letter in a financial year. It is a mode of raising capital other than through a public offer.

A company can make a private placement offer only to persons whose names are recorded by the company prior to the invitation to subscribe. The offer cannot be made to more than 50 persons in a financial year (excluding qualified institutional buyers and employees under ESOP).

A company should receive the amount towards the subscription of securities only through cheque, demand draft, or other banking channels. Accepting cash payments is strictly prohibited. The company must maintain a separate bank account for this purpose and keep records of the bank accounts from which payments have been received.

The value of the private placement offer per person should not be less than INR 20,000 of the face value of the securities being offered.

A company must complete the allotment of shares within 60 days from the date of receipt of the application form. If the allotment is not made within this period, the company must refund the application money within 15 days, along with interest at the rate of 12% per annum.

A company is required to maintain a complete record of private placement offers in Form PAS-5 and file a copy of the private placement offer letter (Form PAS-4) along with the names of the offerees with the Registrar of Companies within 30 days from the date of circulation. Additionally, a return of allotment of securities (Form PAS-3) must be filed within 30 days of allotment.

If a company makes an offer or accepts monies in contravention of Section 42 of the Companies Act, 2013, the company, its promoters, and directors will be liable for a penalty that may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher. The company must also refund all amounts to subscribers within 30 days of the order imposing the penalty.

No, in the case of a private company, the maximum number of members (including those offered private placement) cannot exceed 200.

A public company can offer private placement to a maximum of 200 persons in a financial year.

Yes, a company must pass a board resolution for approving the private placement of securities. The article provides a sample board resolution format for reference.