This article is written by Laboni Bhakta of GNLU during her internship with iPleaders. As per the 2013 Company’s Act “private placement” means any offer of 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(PPOL) and which satisfies the conditions specified in this section 42 of the 2013 Act. What is private Placement? Section 42 of the Act 2013 defines ‘private placement’ which can be said to be in consonance with interpretation of the Supreme Court 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“. For the purposes of sub-section (1) of section 42 a company may make an offer or invitation to subscribe to securities through issue f a private placement offer letter in Form PAS-4. (under Company Rules and Forms, 2014) Issue of Securities by Companies (Section 23) The term securities has same meaning as given in clause (h) of the Section 2 of the Securities Contract Regulation Act , 1956 ( SCRA) However there are separate legal methods for public and private companies for issuing securities. A Private Company may issue its securities-
- By way of right or bonus ; or
- Through private placement
A Public Company may issue securities-
- To public through prospectus i.e “Public Offer”.
- Through private placement.
- Through right or bonus issue.
The term “public offer” includes “initial public offer”; “further public offer”; or “offer for sale of securities to the public by an existing shareholder” through a issue of prospectus. Number of Subscribers under Private Placement: Subjected to sub-section (1) of 42 , the offer of securities or invitation to subscribe shall not exceeding 50 or such higher number as may be prescribed (excluding qualified institutional buyers and employees of the company being offered securities under the scheme of employees stock option as per provisions of clause (b) of sub-section of Section 62 ), in the financial year and on such conditions (including the form and private placement) as may be prescribed. How does a company (Private or Public) makes private placement? A company whether private or public, may make private placement of securities through issue of a “Private placement Offer Letter” (PPOL) by virtue of which the offer of securities shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed in a financial year and on such conditions as may be prescribed on such conditions prescribed like:
- No of subscribers: Under PPOL an offer can be made not more than 200 people and not just the limitation of allotment to 200 people but also invitation to subscribe cannot be made more than 200 people. Within this 200 people limit Qualified Institutional Buyers and Employees are excluded. No public announcement of such offers can be made.
- Identify the persons to whom private placement offer/invitation has to be made: All offers shall be made only to those persons whose names are recorded by the company prior to the invitation to subscribe. Allotments can be made only to such persons addressed specifically to the persons whom the offer is made along with the Offer letter.
- Money payable through cheque/DD: All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash.
- Amount of subscription: The money so received as subscription should be through the bank account of the person subscribing to the securities, shall be kept in a separate bank account of the company. The company shall also keep a record of the bank account from where such payments been received, which has to be utilised only for allotment and the value of the offer per person shall not be less than INR 20,000 of face value of securities . No cash transaction is permitted.
- Approval: The price of the security has to be justified and it also requires a valuation report by a Registered Valuer (which can be a Company Secretary, Chartered accountant or a Cost Accountant)
- Articles of Association must also prescribe about approval of the Offer:The Articles of Association must also provide for shareholders of the company through special resolution approving the Offer and this resolution should be acted upon within 12 months and that at any given point in time, there should be a active Offer for each kind of Security.
- Tenure within which Allotment has to be carried out: Allotment has to be carried out within 60 days or the monies has to be repaid else from the 75th day and the failure to repay has a liability of interest at 12% p.a. In case of FDI (Foreign Direct Investment), RBI has provided for 180 days for allotment.
- Filings: The company shall maintain a complete record of private placement offers in the Form PAS-5.
Provided that the 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 and again after allotment of the securities within 30 days a return of allotment has to be filed with the ROC.
- File return of allotment with Registrar : a return of allotment of securities under section 42 shall be filed with the Registrar within 30 days of allotment 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 f 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.
- Non-compliance if any can lead to penalty amounting to INR 2 crores or the amount involved in the offer, whichever is higher.