In this blog post, Md. Badsha Fahad, a student at Faculty of Law, Aligarh Muslim University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, provides a detailed comparison on private placement both in the new and the old Companies Act.

To run a company whether private or public, it needs some force or support to run its business smoothly. Money plays that role quite conveniently. Because without the money, the company is more or less lifeless. It can raise funds either through debt or equity. The Companies Act, 2013 prescribes four ways to raise share capital: Public Issue, Rights Issue, Bonus Issue and Private Placement.

Private Placement

The Companies Act, 2013 ( hereinafter 2013 Act) defined private placement as any offer of securities or invitation to subscribe securities to a selected group of persons by a company through the issue of private placement offer letter. A private placement is preferred because of speed and fewer procedural requirements. The malpractices of private placement have led change in the legal provisions also. A classical example is that of the case of the Sahara Group wherein the companies Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL) issued unsecured optionally fully convertible debentures (OFCD) amounting to Rs. 24,000 crores to more than two crores investors. When Securities Exchange Board of India (SEBI), had come to know about the large scale collection of money from the public by Sahara through issuance of OFCD, it issued a show cause notice to SIRECL AND SHICL inter alia stating that the issuance of OFCD are public issue and therefore liable to be listed u/s 73 of the Companies Act, 1956 (hereinafter 1956 Act) and also directed to refund the money solicited and mobilised through the prospectus issued with respect to the OFCD, since they had violated various other clauses of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 and also various provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

It was pleaded on behalf of the Sahara Group that the OFCD were issued in the nature of “hybrid instrument” as defined u/s 2(19A) of the 1956 Act and SEBI did not have jurisdiction over those hybrid securities as it was not included in the definition of ‘securities’ under the Securities Exchange Board of India Act, 1992 (SEBI Act) or the Securities Contract Regulation Act, 1956 (SCRA), but would be governed by the Central Government u/s 55A (c) of the Act, 1956. The Apex Court ruled that the OFCD issued by the Sahara Group were public issue of debentures, hence securities and once the number 49 is crossed, the proviso to Section 73(1) of the Act, 1956 and application for listing becomes mandatory which falls under the administration of the SEBI u/s 55A(1) of the Act, 1956. The Court upheld the proceedings of the SEBI, and Sahara Group was ordered to refund the amount to investors along with interest.

Purpose of Private Placement

The following are the steps are to be taken for the purpose of private placement:-

• The private placement offer is to be made to only those persons only who are recorded by the company prior to the invitation to subscribe and that such persons will receive the offer by name.
• A private placement offer letter is to be made as per Form No. 3.4 with an application form addressed to the person only to whom the offer is made and shall be sent to him.
• The proposed offer of securities needs the approval of the shareholders of the company, by way of a Special Resolution, for each offer and invitation.
• The offer letter has to be sent to the proposed allottee either in writing or in electric mode, within 30 days of recording the names of such persons.
• The company is obliged to keep a record of all the private placement offers and acceptance in Form No.3.5.
• The records as maintained by the company has to be filed with the Registrar in Form 3.3 with the prescribed fee and with the Securities and Exchange Board within 30 days of the circulation of the private placement offer.
• The subscription amount shall be paid only by cheque, demand draft or other electronic banking methods and not by cash. And the payment must be made from the bank account of the person subscribing to such securities and in a case of joint holders, the payment is to be made from the bank account of the persons whose name appears first in the application.
• The money received shall be kept in a separate bank account and shall not be utilised except for adjustment against allotment of securities or for the payment of the money for which the company is liable to pay.
• The company shall make the allotment of the securities within 60 days after receiving the subscription fee, and if the company fails to make the allotment, it shall repay the subscription fee within 15 days from the date of completion of 60 days and if again the company fails to do so it shall back the amount along with interest at the rate of 12% p.a. from the expiry of the sixtieth day.
• A return of allotment shall be filed with the Registrar in Form 3.3 with the prescribed fees with a complete list of all security holders containing their full name, address pan number, class of security held, date of becoming the shareholder and the nominal and actual amount paid on such securities.
• Issue share certificates and update minutes book and registers.

Conclusion

The Companies Act, 2013 has made tremendous changes in the law relating to private placement and appropriate measures have been taken to curb the malpractices. The term ‘shares’ has been replaced by the term ‘securities’ to fill the loopholes that allowed the company to raise funds through other channels and thereby escape the regulatory oversight. The provision of private placement has applicable to both the public as well as the private companies. The number of persons to whom the private placement can be made has been made to 200; maximum four private placement offers can be made by a company during a financial year.

The payment can be made only through bank channels to reduce the opportunities for money laundering. The fact that non-compliance with any of the provision relating to private placement, the offer shall default be treated as public offer shall result in greater coordination between MCA and SEBI. All these changes will lead to better governance and transparency in the affairs of the companies. However, due to lengthy and stringent procedures for private placement, there will be significant burden compliance for the private companies looking to raise funds through a private placement. As there is no specific exemption for private companies or small companies, it will lead to reduced flexibility for private companies.