Introduction:
In order to ensure the sustained operation and prosperity of a corporation, it is imperative to procure capital for its activities. Corporations structured as entities with shares are obligated to allocate shares to procure the requisite capital necessary for corporate operations. Such allocation may occur through the following mechanisms:
- Through the issuance of a prospectus and the direct solicitation of public subscription for the shares of the company.
- By allotting entire shares to an 'Issue-House', this subsequently offers these shares for general public subscription.
- Finally, by means of private placements of shares, as provided for under Section 42 of the Companies Act, 2013.
Companies may raise the capital through various issuance process:
- Rights issue
- Sweat Equity Issue
- Private Placement
- Preferential allotment
- Bonus Issue
Right here we will discuss on Private Placement of Shares:
Private Placement of Securities:
As per section 42 of The Companies Act, 2013, A company can raise capital by means of private placement of securities. According to Explanation (1) of subsection (3) “Private placement" refers to any offer or invitation by a company to subscribe for or issue securities to selected group of persons, excluding public offerings, conducted through a private placement offer-cum-application, provided that it adheres to the conditions outlined in this section. These selected groups of people are known as ‘Identified person.’
Why do companies give preference to private placement of share?
- An economical method of capital procurement:
Securing funds through the issuance of securities via private placement is relatively cost-effective, necessitating solely the adoption of a resolution by the Board, in contrast to a public offering that mandates the dissemination of a prospectus. Consequently, it mitigates expenses and time constraints associated with the issuance process.
Conversely, a public offering incurs substantial costs due to advertising expenditures, public disclosure, obligations of documents and reports, and periodic updates to the public regarding the company's financial status, as prescribed quarterly or otherwise."
- Simplified Compliance Procedures:
Issuing shares through private placement alleviates the necessity for registration with the Securities and Exchange Commission (SEC) or adherence to public trading requirements, thereby streamlining compliance formalities for the company.
Moreover, private placements obviate the need for submission to the Securities and Exchange Board of India (SEBI) for review.
- Confidentiality Privileges for Companies:
Private placement of shares affords companies confidentiality, as offerings are directed exclusively to a limited, pre-selected group without public advertisement.
Although this confidentiality may prompt assertions of reduced transparency, it nonetheless provides companies with flexibility regarding public disclosure obligations.
- Access to Specialized Counsel :
Private placement subscriptions afford companies access to capital alongside expert guidance from seasoned private equity stakeholders, fostering expedited corporate advancement through strategic counsel and expanded networking opportunities.
- Enhanced Corporate Control :
Companies retain greater autonomy in determining the timing and scope of securities issuance via private placement, free from the stringent scrutiny accompanying public offerings, which mandate comprehensive evaluations of financial and operational statuses.
Section 42(2) Ceiling limit of identified person:
As per Section 42(2) of The Companies Act, 2013, there is a ceiling limit of "identified persons" which is not more than 50 members, and the members should be identified by the Board of Directors. This ceiling limit can be altered upon prescription under any rules and regulations by the government. If the company does not follow the cap limit or if there is any non-compliance with this section, it will make the private offer into a public offer. In this section, there is an exclusion of "Qualified Institutional buyers."
Explanation II of Section 42 gives the definition of "Qualified Institutional buyers," which is the same as explained under the Securities and Exchange Board of India Act, 1992.
Top of Form
Section 42(3) details of identified person:
This section mandates to record the name and address of the identified person in manner as may be prescribed under Company law.
Section 42(4) Payment of subscription money:
Subsequently, each identified person desiring to subscribe to the offered securities must submit an application for private placement, accompanied by the subscription funds in the form of a check, demand draft, or other banking instrument. Cash payments are not permissible for the subscription funds
Provided that, a company cannot utilize the subscription money until the allotment is made to identified person.
Section 42(5) Fresh offers of securities:
This section put prohibition on the fresh offer or invitation of share on private placement basis unless:
- The last allotment of previous offer or invitation has completed or settled.
- Or, The last offer or invitation withdrawn by the Company.
- Or, The last or previous offer or invitation abandoned by the company.
The condition mentioned above regarding the issuance of new securities doesn't prevent a company from offering securities to a single group of identified individuals multiple times, as long as it complies with the maximum number of identified persons specified in Section 42(2).
Section 42(6) Allotment of securities:
This section describes the time limit on allotment of shares that the company shall allot its securities within sixty days from the date of receipt of application money. If the company fails to do so then the company shall return the application money within fifteen days from the expiry of time limit of sixty days and if the company fails to return the application money within the time limit described earlier then company is liable to pay interest of 12% per annum on the application money from the expiry of sixty days.
Proviso of this section describes the utilization of money received on application that It should be kept in separate bank account in a scheduled bank and shall be utilized in two conditions:
- For adjustment against allotment of securities;
- For repayment of money if the company fails to allot the securities.
Section 42(7) Banned on advertisement:
This section prohibits the company to do an advertisement or use any media platform for advertise the offer or invitation of private placement of shares to general public.
Section 42(8) Filing the return allotment with registrar:
This section mandates that the company shall file the return of allotment with the registrar within the time limit of 15 days from the date of allotment along with the list of allottees with their complete information like full names, addresses, number of securities allotted and such other relevant information in such a manner as may be prescribed under Company law.
Section 42(9) Default in filing:
This section describes that if a company, who is issuing security on the basis of private placement of shares, does not file return of allotment within the prescribed time mentioned in the Section 42(8) which is fifteen days after the allotment of such shares then the company, its promoters and directors shall be liable with the penalty of fine of one thousand rupees per day after default but the amount should not exceed twenty-five Lakh rupees.
Section 42(10) Liability for breach of procedure:
Section 42(10) of the Companies Act, 2013, mandates that the company raising funds by private placement of shares shall comply with all the provisions of section 42 of the Companies Act, 2013, If any company contravenes with the procedure or provision of such section while issuing security then the Company along with its promoters and director shall be liable for penalty which may extend to the amount raised by such private placement of shares or two crore rupees, whichever is lower, and, the company shall also refund the amount with interest of 12 % p.a. received from such issuance of shares to the subscribers within the time limit of thirty days of the order imposing the penalty.
Section 42(11) When a private offer becomes pubic offer
This section is non-obstante clause to sub-section 9 and sub-section 10 of section 42 of The Companies Act, 2013, it clearly says that if the condition regarding the total number of 'identified persons' for issuing shares through private placement is violated, it will be considered as a public offer. Consequently, the regulations outlined in this Act, the Securities Contracts (Regulation) Act, 1956, and the Securities and Exchange Board of India Act, 1992, will apply to such securities issuances.
Procedure of Private Placement of shares in Non Listed Company:
Step:1 Convene Board Meeting
Pass a board resolution authorizing the private placement, specifying the terms of the offer, including the type of securities, price, and conditions and board should also decide when to convene the general meeting for taking approvals from the shareholders.
Step:2 Convene General Meeting
Arrange for a General Meeting to be held on a specified date and pass a Special Resolution regarding the issuance of securities through Private Placement. Following shareholder approval via a Special Resolution for each offer or invitation, the company may proceed with the private placement of its securities.
Step:3 Offer letter (PAS-4)
Circulate a private placement circular or notice to prospective investors, providing all relevant information about the company, the proposed securities, terms of the offer, and other regulatory disclosures required by law. This offer letter should not carry any right of renunciation. Offer can be made open for minimum 15 days or maximum 30 days.
Step: 4 Opening of separate Bank Account
For executing private placement company should maintain a separate bank account were the proposed investor will be deposit their commitment amount as per the offer letter.
Step 5: Allotment of Securities
Once the commitment amount from the identified investor comes in the separate bank account maintained the company, post this company must allot the predefined securities to the identified investors within 60days from the date of receipt of subscription amount.
Step 6: Return of Allotment (PAS-3)
Post Allotment within 15 days of such allotment company must intimate to concern ROC regarding the allotment through E-form PAS-3. The Company must attach the copy of offer letter along with valuation report, resolution copies while filing this E-form.
Step 7: Issuance of Securities Certificate & Maintenance of Registers
Company should issue the Securities certificate to the identified investors within 60 days from the date of allotment and should maintain the registers of such securities holder.
Document Required by private company for private placement of shares:
- Board Resolution: A resolution passed by the board of directors authorizing the private placement of shares and approving the terms of the offer.
- Shareholders' Resolution: In some cases, a resolution passed by the shareholders of the company may be required to authorize the private placement of shares, especially if it involves a significant issuance of new shares.
- Form PAS-4: This is the application form for private placement of shares, which contains details of the proposed offer, including the number and price of shares, basis of allotment, and declaration by the directors.
- Form PAS-5: This form contains the list of allottees to whom the shares are proposed to be allotted pursuant to the private placement, along with their consent to subscribe to the shares.
- Valuation Report: In certain cases, a valuation report prepared by a registered valuer may be required to determine the price at which the shares are being offered for private placement.
- Registrar of Companies (ROC) Filings: Certain filings with the Registrar of Companies may be required as per the provisions of the Companies Act 2013, such as filing of Form PAS-3 for the return of allotment of shares.
For private placement of shares in listed company, the Company needs to follow LODR regulations.
Article written by
Ayush Gupta an legal intern at Corpzo
