Corporate Law Newsletter – Deconstructed — Private Placement Provisions : June 2024

Introduction

In the dynamic world of business, the significance of money, or capital is paramount. Thus, it necessitates the existence of a legal framework, to govern the issuance of securities in the ever-growing number of companies in India. 

The Companies Act 2013 (“Act”), sets out the guidelines and provisions that a company must adhere to in order to raise capital by way of issuance of securities.

This article shall focus on the private placement procedure, through which a company can raise funds by issuing its securities to individuals and entities.

The Act defines ‘private placement’ to mean any offer or invitation to subscribe or issue securities to a select group of persons identified by the board of directors of a company (“Board”) (other than by way of public offer) through private placement offer-cum-application. 

However, it is pertinent to note that, no company issuing securities via private placement is allowed to publish or release any public information about its intention to issue its securities.

Who Can Issue Securities Via Private Placement

Both public companies and private companies can issue securities through private placement basis. 

Applicable Provisions

Private placement procedure is governed by Section 42 of the Act, along with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (“Rule 14”).

Which Securities Can Be Issued Via Private Placement

Section 42 titled ‘Offer or Invitation for Subscription of Securities on Private Placement’ permits a company to issue securities on a private placement basis and is not limited to the issue of shares. The term ‘Securities’ includes shares, stocks, bonds, debentures, security receipts and mutual fund units. 

To Whom Can An Offer Can Be Made

An offer or invitation to subscribe to the securities under private placement can be made to a select group of persons that have been identified by the Board. However, the Board must ensure that the identified persons must not exceed 50 (Fifty) persons at one time and shall not be more than 200 (Two Hundred), in a financial year. 

Exceptions:

It is to be noted that, while calculating the limit of 200 (Two Hundred) persons in a financial year has been reached or not, offers made to employees of the company or qualified institutional buyers is not considered. Further, it is pertinent to note that, irrespective of the provisions under section 42 and Rule 14, a private company cannot have more than 200 (Two Hundred) members. The moment a company makes an offer to more than the prescribed number of persons, such offer shall be deemed to be a public offer.  

Offer And Issue Of Securities

The company must conduct a board meeting, to authorize issuance of securities through private placement. However, the issue is contingent upon shareholder approval via a special resolution in an extraordinary general meeting (“EGM”). For shareholder approval, the Company must send a notice with an explanatory statement specifying details of the offer, to its shareholders.

Exceptions:

Shareholder approval is not required for issuing non-convertible debentures (“NCD”) if the proposed amount to be raised does not exceed the sum of the company’s paid-up share capital along with its free reserves and securities premium apart from temporary loans from the company’s bankers.  

Process For Offer And Issue Of Securities

Within 30 (Thirty) days of passing the special resolution by the shareholders of the company in the EGM, the company must file such resolution with the Registrar of Companies (“ROC”). Such filing is done via Form MGT-14, to record and inform the ROC of the Company’s intention to raise funds via private placement. Once filed, the company can send out the ‘private placement offer cum application letter’ in the form of an application in Form PAS-4, to the pre-identified group of persons, in writing or in electronic mode. 

Form PAS-4 contains two parts namely Part A and Part B. Part A details out general information, particulars of the offer, the pre-issue and post-issue shareholding pattern of the company, mode of payment of for subscription (cheque, demand draft, banking channels only, no cash allowed), mandatory disclosures by the Company and financial position of the company. Part B is to be filled out by the applicant, specifying their personal details and their consent to subscribe to the offered securities. Post such consent, the applicant or the offeree has to send application money to the Company’s separate bank account in a scheduled bank. 

Further, the company must keep a record of all the offers it has made in the format of Form PAS-5 which shall specify the date of when approval of the relevant authority (Board or the shareholders, as the case may be) was obtained, the amount of the offer, the date of circulation of Form PAS-4 and the details of to whom these letters were sent to. PAS-5 does not need to be filed with the ROC. 

Process For Allotment Of Securities

Upon receiving application money from the offeree, the company, via another board meeting must authorize allotment of securities to the offerees. Shareholder approval is not necessary. The company must allot the subscribed securities within 60 (Sixty) days of receiving the application money. If the company fails to do so, the company shall be bound to repay the application money within 15 (Fifteen) days from the date expiry of 60 (Sixty) days, post which an interest rate of 12% (Twelve per cent) per annum from the expiry of the 60th (Sixtieth) day shall be levied.  

The company should refrain from utilizing the funds until a return is filed with the ROC in Form PAS-3. Additionally, Form PAS -3 must be filed within 15 (Fifteen) days of date of allotment. The date of allotment shall be the date of the Board’s resolution authorizing allotment. Once the securities have been allotted, the Company has to record the name of its new shareholders in the requisite registers prescribed under the Act.

Penalty

While private placement provides flexibility to both public and private companies in issuing various types of securities, adherence to timelines as given under section 42 and Rule 14 is mandatory so as to not attract the penalty to be levied upon the company, its promoters and directors.  Default in the filing of Form PAS-3 within 15 (Fifteen) days, shall attract the company, its promoters and the directors, a penalty of INR 1,000 (Indian Rupees One Thousand) for each day of such default up to INR 25,00,000 (Indian Rupees Twenty-Five Lakhs) per person. The Ministry of Corporate Affairs recently fined a company and its directors, INR 39,00,000 (Indian Rupees Thirty-Nine Lakhs) for failing to allot shares within the required timeframe, despite filing Form PAS-3. In the present case, the company did not allocate shares to its subscribers even after seven years.

The penalty for contravention of the provisions under Part II of Chapter III of the Act is fine equivalent to the amount raised through the private placement or INR 2,00,00,000 (Indian 

Rupees Two  Crores), whichever is lower, and the company shall also refund all monies with interest to the subscribers within a period of thirty days of the order imposing the penalty. 

In conclusion, the process of private placement under the Act offers companies a structured framework to raise capital from a select group of investors without the need for a public offer. It bypasses the complexities involved in a public offer.