In this blog post, Sanjna Vijh, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, provides an overview on a private placement. 

Every business needs funding as a fuel to run the business. There are several avenues for businesses to raise capital, and a business may choose to opt for more than one. One of the ways by which companies can raise capital is by way of selling securities to a selected small group of investors, which is known as private placement. The securities offered in private placement are not listed on a public exchange. Companies may offer securities like equity shares, preference shares & debentures, convertible and redeemable securities in a private issue. Companies usually prefer private placement as the procedure for issuing shares privately is relatively less complicated than a public issue. Articles of Association of a company must authorize to issue private placement of securities. The procedure for undertaking private placement is codified in Sections 42, and 62 of the Companies Act, 2013 (Act) read with the Companies (Prospectus and Allotment of Securities) Rules, 2014 (Rules).

Section 42 defines “private placement” as any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of a public offer) through the issue of a private placement offer letter and which satisfies the conditions specified in this section. In the case of a listed company, a private placement is usually called “preferential issue.”

Procedure

Before making the offer, a shareholders’ resolution need to be passed in favor of the private placement transaction. First, a private placement offer letter is issued by the company in Form PAS-4[1]. This letter contains certain information about the company and terms of the offer. As per Rule 14(1) (b) and Section 42(7), the offer letter is to be accompanied by an application form, either in writing or electronic form, serially numbered and addressed specifically to the person to whom the allotment is being made. The Companies (Amendment) Bill, 2016 which is still pending, proposes to do away with the provision of this separate offer letter[2].

A private placement offer can be made to up to 200 persons in aggregate in a financial year, excluding offers made to qualified institutional buyers, or in ESOPs[3]. Offer can only be made to persons whose names are identified before the invitation to subscribe. The provisions for a private placement transaction in the Act and Rules were inserted to remove discrepancies in the previous law. Thus, it is clarified in the current law that the limit of 200 persons is calculated individually for every type of security (equity share, preference share or debenture)[4]. The Act also clarifies that any offer not in compliance with the provisions of Section 42 will be considered a public offer with compliance thereof.[5] The minimum investment size should not be less than Rs. 20,000 of the face value of securities[6]. Complete information about private placement offers is to be submitted to the Registrar (to SEBI in the case of a listed company) in Form PAS-4 within 30 days of circulating the offer letter[7].

Conditions

Payment of subscription money towards securities is to be made through cheque or demand draft or other banking channels thereby maintaining transparency[8]. Additionally, the money received on the application in such a transaction shall be kept in a separate bank account in a scheduled bank and utilized only for adjustment against allotment of securities or repayment of money for the securities not allotted[9].

It is required by the provisions to complete allotment within 60 days from the receipt of application money otherwise repay the money within 15 days from the expiry of that period. An interest of 12% per annum is applicable on late refund of money. It is also restricted to make a fresh offer of the same nature unless a previous private placement offer is completed or withdrawn by the company[10].

Companies undertaking private placement are not allowed to release any advertisements or use media & marketing in any other way to spread information about the offer.

In order to strictly enforce the provisions governing a private placement transaction and ensure fairness in the procedure, the penalty for contravention of provisions of Section 42 is set at the amount involved in the offer, or Rs. 2 Crores, whichever is higher, along with repayment of money received from subscribers[11].

Conclusion

The provisions of law governing private placement in India are pro-investor and aim to ensure transparency in the process and accountability of the company. Strict penalties and records of the transaction that need to be submitted with Registrar help keep a check on companies indulging in malpractices. Therefore, it is the most preferred practice to increase capital which gives companies an option to issue any kind of securities to anyone previously identified by the company and also secures dealings of investors.

References:

[1] Rule 14 (1) of Rules

[2] http://www.prsindia.org/billtrack/the-companies-amendment-bill-2016-4232/

[3] Section 42(2) & Rule 14 (2) (b) of the Act

[4] Rule 14 (2) (b) of Rules

[5] Section 42(7) and Explanation I of the Act

[6] Rule 14 (2) (d) of Rules

[7] Rule 14 (3) of the Rules

[8] Section 42(5) of the Act

[9] Section 42(6) of the Act

[10] Section 42(3) of the Act

[11] Section 42(10) of the Act