This article is written by Advocate Shamika Vaidya pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho.com. Here she discusses the Private Placement.

Introduction

In simple words, private placement can be explained as a means of raising capital by the companies without going for public issues. Public Issues like Initial Public Offering and Further Public Opening are means of raising capital by the companies.

However, undertaking them involves compliances, stringent procedures and disclosures. Moreover, not many companies are able to meet the thresholds to be able to undertake these issues. In such cases, companies find the route of the private placement to be convenient.

Objectives

Primarily, Private Placements are initiated for raising funds but that might not always be the case. Manier times private placements serve strategic objectives.

1. They can be undertaken to consolidate stakes of promoters or controlling stakeholders.
2. Inducting a business/strategy partner to further the business strategy.

Types of Private Placements

Private Placement in Listed Markets        

PIPE b) Institutional Private Placements c) Qualified Institutional Placements

Private Placement in Unlisted Companies

Private Equity b) Venture Capital

Private Placements in Listed Companies

Private Placement in Public Equity (PIPE)

The name itself triggers the question as to why a public listed company with access to a powerful source of the capital market to raise funds would need private placement. However, there are certain advantages even for a public listed company to raise capital through private placements.

Advantages to the Company

• Going for an FPO involves a plethora of compliances, disclosures and is altogether a time-consuming procedure.
• Speculations in the market can result in low valuation in the capital market when the market is bleak. In such a situation private placement provides the best solutions to raise capital with good valuation.
• The investors investing through private placements are well educated and informed investors who look forward to long term holdings are ready to invest in the company with higher valuation if they see the significant future value.
• It is surreal for a company to go for an FPO after its valuation is eroded pursuant to an IPO.

Advantages to the Investors

• Investors are able to capture a good stake in the companies at attractive prices when the company raises capital during bleak markets.
• There is a lesser regulatory framework compared to the traditional routes
• There are easy exit opportunities in the listed companies.
• Investors can invest in the bearish market in attractive prices and later sell the stake at high prices during the bull cycle.

Private Placements  

• Regulation 14(2)(a) of Companies (Prospectus and Allotment of Securities) Rules, 2014 states that a special resolution by the shareholders of the company is necessary in order to initiate the process of private placement.
• For the purpose of invitation for non-convertible debentures, a special resolution one a year for all the offers during the year is sufficient.
• The offer for Private Placement is made only to selected people who are recognized by SEBI.
• Not more than 50 of these people can participate in the procedure. These number does not include QIB.
• Any company who intends to make an offer to subscribe to securities needs to send placement offer form along with Form PAS-4 to the identified persons either in electronic mode or writing.
• No person other than the addressee can fill up the application.
• The company has to maintain a record of the private placement offer in form PAS-5
• A company cannot advertise publicly or through agents or distribution channels about an issue.

Registrar

• A copy of the complete record of private placement along with placement offer form is to be filed with Registrar and stock exchange in case the company is listed and along with requisite fee.
• Pursuant to the allotment of the securities, a return of allotment has to be filed within fifteen days which includes the details of the allottees.

• A company can only utilize money raised through private placement when allotment is made and the return of allotment is filed with the Registrar.

Applicants

• Persons willing to subscribe have to apply in the private placement along with subscription money, the mode of payment cannot be in cash.
• If the private placement is not in accordance with the SEBI regulations then it will be considered as on public offer and Securities Contracts (Regulation) Act, 1956 will be applicable.  
• In case of any default in contravention, the promoters of the company are subjected to a fine of 2 crores or the money raised through the placement whichever is lower. Moreover, the company has to refund all the money with interest to the subscribers.
• The company has to allot securities within a period of sixty days from the date of receipt of application money. In case the company is not able to do so then it is liable to repay the money with interest of twelve percent per annum.
• A fresh offer cannot be initiated unless allotment to the prior issue has been given or the offer is abandoned.

Institutional Private Placement

Rationale

• Minimum Public Holding was introduced through the Securities Contract Act which mandated the listed companies to maintain a minimum public holding of 25%.
• Companies are fined or even delisted if they do not comply with this norm and moreover is not an uncommon affair. Institutional Placement is an efficacious way to increase public holding.
• Institutional Placement is an exclusive placement for the Qualified Institutional Buyers in off-market mechanism.
• Institutional Placements can be either through the new issue of shares or Offer for Sale.
• Firstly, the placements offer the shares only to a fixed number of investors which would otherwise be floated in the secondary market. In such an instance there is a high possibility of erosion of the share value. Secondly, the shares are offered to the group of people who have an appetite for large holdings.
• Institutional Placements are useful during divestments of Public Sector Undertaking shares by the government and for the dilution of the promoters stake.

Statutory Framework

• A special resolution by the shareholders is mandatory for carrying out institutional placement program.
• The offer document has to be registered with the Registrar of Companies and file a company with a stock market. A soft copy of the offer document has to be filed with SEBI.
• The merchant banker has to submit a due diligence certificate Form A schedule VI
• The allocation of the securities in an IPP is made through; proportionate basis, price priority basis, any other criteria mentioned in the offer document.

Allotment

• Minimum 25% of the securities have to be allotted to the Mutual Funds & Insurance companies.
• The bids have to be accepted using ASABA facility only.
• The minimum number of allottees for each offer of eligible securities made under the institutional placement programme shall not be less than ten: Provided that no single allottee shall be allotted more than twenty-five percent.
• The aggregate of all the tranches of institutional placement programme made by the eligible seller shall not result in an increase in public shareholding by more than ten percent. or such lesser percent. as is required to reach minimum public shareholding.
• The issue shall be kept open for a minimum of one day or the maximum of two days.
• The allotted securities are locked in for the period of one year from the date of allocation and can only be sold on the recognized stock exchange.

Qualified Institutional Placements

Rationale

• Listed companies can raise capital through Qualified Institutional Placements which are exclusively for the qualified institutional buyers. The fundamental difference between PIPE and QIP is that the later is only reserved for a category of investors.
• Pursuant to the Initial Public offer, companies may require capital for their growth, diversification or other strategic reasons. The Regulations are well equipped to aid companies in doing so through procedures like (FPO) Further Public Offer.
• Typically, listed companies prefer the route of Qualified Institutional Placements as a means to raise capital.
• Unlike FPO which involves inherent risk, intricacies, and compliances, price discovery in QIP is efficient as the bidding happens with less number of investors.
• Moreover, the allotments can be discretionary and it offers an excellent opportunity to contact eligible investors who are interested in long term investments.

Qualified Institutional Buyer is defined under 2(ss) of the ICDR Regulations and includes

• Foreign venture capital fund, alternative Investment Fund, mutual funds.
• Category I and II of Foreign Portfolio Investors.
• Pension Funds, Insurance Funds, and Provident Funds.
• Public Financial Institution and Development Financial Institutions

Regulation 2(tt) of the ICDR Regulations defines Qualified Institutional Placement as a private placement of eligible securities to QIB.

Regulation 172 of the ICDR Regulation states the eligibility conditions for QIP

• A Special Resolution by the shareholders is necessary. Resolution is not necessary if the placement is for the purpose of complying the minimum public shareholding.
• Securities that are to be allotted have to be listed on the recognized on the stock exchange for at least a period of one prior to the placement.
• A subsequent QIP can be made only pursuant to six months from the date the prior QIP
• The promoters and director should not be a fugitive economic offender.
• The issuer cannot make a subsequent QIP for a period of six months from the date of prior QIP.
• Regulation 178 states that the securities allotted under the placement cannot be sold by the allottee by other means than a recognized stock exchange for a period of one year.

Allotment

• QIP are made on the basis of placement documents which contain information and disclosures (Schedule VII of the ICDR Regulations).
• The placement document is circulated only to the select investors. The same is updated on the stock exchange websites with a disclaimer that the offer is only for a category of investors.
• Regulation 177 states that the tenure of the convertible securities cannot exceed sixty months from the date of allotment.
• The allotted securities can only be sold by the allottee on the recognized stock exchange and not by any other means for a period of one year.

•         Minimum number of allottees

1.   2  Allottees                                Issue size ≤ two hundred and fifty crore
2.   5 Allottees                                Issue size > two hundred and fifty crore

• A single allottee cannot be allotted securities more than fifty percent of the issue size. A single allottee may mean buyers belonging to the same group or under the same control.
• Any QIP related to the promoter of the issuer cannot be alloted with the securities.
• If any of the QIP have certain rights under the share purchase agreement or veto rights then they are also deemed to be related to the promoter;
• Mutual Funds have to be allotted minimum of 10 %.

Merchant Bankers

• A Merchant Banker can be appointed as a lead manager.
• If any of the Merchant Banker is an associate they need to disclose the same.
• The Merchant Banker carries out due diligence to check whether the company is complying with the necessary regulations.
• The Merchant banker is obliged to furnish Preliminary Placement document and due-diligence certificate to the stock exchanges where the shares of the company are listed.

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