Private Placement is an effective way to issue securities for raising capital by a company not intending to go public. The whole mechanism of the private placement is governed by Section 42 of the Companies Act 2013 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
What is Private Placement?
- A company, intending to raise capital, may make a private placement by way of offering securities (not by public offer) to a select group of people through the issue of the private placement offer letter and complying with the conditions of this section. The following points merit consideration in this regard:
- The offer or invitation for private placement can be made to a maximum of 200 persons in aggregate in a financial year. However, the above limit of 200 shall not include offers made to Qualified Institutional Buyers and employees of such company under an employee stock option scheme as per Section 62(1)(b).
- The above limit is separately applicable for the private placement of equity shares, preference shares, and debentures.
- The offer shall require each person to make a minimum investment of Rs. 20,000 towards the face value of the security.
- All the money paid towards the subscription shall be paid by any mode other than cash. This may include demand drafts, cheques, or other banking channels.
- Unless the allotment for other offers or invitations for private placements made earlier are completed or have been abandoned or withdrawn by the company, no fresh offer or invitation for private placement can be made.
- The payment shall be made only from the bank account of the person subscribing to the securities. In the case of joint holders, payment shall be made from the bank account of such a person whose name is placed first in the application.
- Utilization of any media, agents, or marketing and distribution channels, as well as public advertisements to information about private placement offered to the public at large, is prohibited.
- The date of the private placement offer letter shall be deemed to be the date of its circulation.
Timeline for Private Placement
The company shall allot securities within 60 days of receipt of application money. In case of non-allotment within the said period, the company shall refund the entire application money to the subscribers within 15 days after completion of the 60 days. Such refund shall be made along with the interest @12% per annum after the expiry of the 60th day.
The application money shall be kept in a separate bank account in a scheduled bank and can be utilized only for the following purposes:
- Adjustment against allotment of securities
- Repayment in case of non-allotment of securities to the subscribers
Non-Applicability of Private Placement provisions
Provisions of the private placement are not applicable to the following:
- Housing Finance Companies
- Non-Banking Financial Companies
This relaxation applies only if the above companies with the private placement regulations made by the Reserve Bank of India (RBI) and National Housing Bank (NHB) respectively.
However, in case the RBI and NHB do not specify the ceilings of the maximum number of persons that can be offered private placement and the minimum amount of investment, then the above ceiling of 200 persons and limit of Rs. 20,000 shall become applicable to the above companies.
When Private Placement will be considered a public issue?
While the whole idea behind private placement is to enable a company to raise capital without going public, however, in certain circumstances, the private placement will be treated as a public issue:
- If a listed or an unlisted company offers, invites, allots, or enters into an agreement to allot securities to more than 200 persons, then it shall be treated as an offer made to the public, and accordingly, Part-I (Public Offer) of Chapter-III (Prospectus and Allotment of Securities) shall become applicable.
- An offer or invitation that does not comply with Section 42 of the Companies Act 2013 shall be treated as a public offer. Eventually, the company shall be required to comply with all the provisions of the Companies Act, 2013; SCRA, 1956; and SEBI Act, 1992.
- Private Placement Forms
- PAS-3: Return of allotment of securities.
- [PAS-3 along with a complete list of shareholders shall be filed with the registrar within 15 days of allotment]
- PAS-4: Private placement offer letter for making an offer or invitation to subscribe to securities
- PAS-5: Complete record to be maintained by the company for private placement offers.
[A copy of this record along with the private placement offer letter (PAS-3) shall be filed by the company with the registrar with applicable fees within 30 days of circulating the private placement offer letter. In the case of the listed company, it shall also be filed with SEBI]
Penalty
In case of any contravention, the company, as well as its directors and promoters, shall be liable for a penalty. It may extend to the higher of:
- The amount involved in the offer or,
- Rs. 2 crores
The company shall also refund the entire money within 30 days of the penalty order to the subscribers.
In case of any assistance with Section 42 of the Companies Act 2013, feel free to contact professionals, they have years of expertise in handling end-to-end private placement compliances and provide expert guidance and consultancy support.
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