When a company intends to make a private placement offer, it has to be made in the stipulated format to a select group of persons, without opting for any advertisement or marketing. In this article you shall see about private placement- section 42 of companies act 2013.
A private placement is an efficient and economical option for a company to raise capital without going public. It implies a company making an offer of securities or inviting a specific group of people to subscribe to securities using a private placement offer letter. The process must be by Section 42 of the Companies Act, 2013. Securities such as debentures, equity shares, and preference shares can be issued through private placement.
However, a company opting for it, cannot make an offer of its securities using public advertisements or resort to other marketing methods such as using the media or taking the help of agents or channels to enlighten the public about the respective offer. Once the offer is advertised or marketed, it will not be considered a private placement and will be treated as a public offer.
Offer Letter in Private Placement:
The private placement by companies is regulated by the Companies (Prospectus and Allotment of Securities) Rules, 2014. It offer letter in Form PAS 4 is used by the company to invite to subscribe to the securities allotted. A company can make the offer only to those persons whose names have been recorded already before making the invitation. The persons thus mentioned will receive the offer and the company thereafter should retain the record of the offers made through Form PAS 5.
While addressing a private placement offer letter to a respective person, the company should send an application form with a serial number either in writing or in electronic mode. The letter should be sent within 30 days of recording the person’s name. Thereupon, the person receiving the placement offer letter should accept the offer. The details about the offer should be submitted to the Registrar of Companies (ROC) within 30 days from the date of sending the private placement offer letter.
Special Resolution to Be Passed:
Placement of securities can be made by a company only after the approval of its shareholders by passing a special resolution for the respective offer to subscribe to securities.
Threshold of Private Placement:
The number of select persons to whom the company can offer a private placement should not be more than 50 or more than the number prescribed by the rules in the respective financial year. However, this does not include qualified institutional buyers and the company’s employees who are offered securities under the Employee Stock Option Plan as per the Companies Act, 2013.
The threshold limits pertaining to the maximum number of persons to whom the private placement offer can be made and the value of the same does not correspond to:
- Non-Banking Financial Institutions, incorporated under the Reserve Bank of India Act, 1934
- Housing Finance establishments registered with the National Housing Bank under National Housing Bank Act, 1987.
Subscription of Private Placement – Section 42 of Companies Act 2013:
The persons who intend to subscribe to the private placement shall apply through the private placement application along with the necessary amount of money through a demand draft or cheque or any other authorised payment channel of an authorised bank. It may be pertinent to note that the payment shall not be made through cash.
The payment must be made through the subscriber’s bank account, wherein the company must duly maintain a record of such payments made by the subscribers.
Maintenance of Record:
The company must take all due care to maintain the records of the private placement offers made and those that were accepted subsequently. The copies of Forms PAS 4 and PAS 5 should be documented and filed with the ROC filing with the designated fee as directed by the Companies (Registration Offices and Fees) Rules, 2014. The filing must be done within 30 days from the date on which the offer for private placement was made to the subscribers.
Filing of Return of Allotment:
The company must duly furnish the return of the allotment of securities with the ROC, once the allotment of securities has been accomplished. The return of allotment has to be registered within 15 days in Form PAS 3 with the required fee as directed by the Companies (Registration Offices and Fees) Rules, 2014.
The following particulars have to be presented:
- A list of all the security holders with their details like name, address, PAN (Permanent Account Number), e-mail etc
- Details pertaining to the class of the security held
- Date on which the security is allotted
- Number of securities and amount paid with the nominal value
- If the securities were issued for consideration other than cash, the details of such consideration.
The Form PAS 3 filed by the company should be notarised by a practicing Chartered Accountant or a Company Secretary if the filing company is not a One Person Company (OPC) or a small company.
Penalty in Case of Non-Compliance in Private Placement Procedure:
The company should always act in consonance with the Companies Act 2013 https://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf and the corresponding rules. If the company collects monies or acts against the provisions of the Act, a penalty will be levied which might extend to the amount thus involved in the respective offer or an amount of ₹2 crores, whichever is higher. The company thereafter has to indemnify the monies given by subscribers within 30 days from the date of imposing the penalty.
