What is Private Placement of Shares: A complete outlook

There are several ways available to a company in which capital can be raised. It could be a public issue (IPO/FPO), rights issue, bonus issue, preferential allotment, or private placement of shares. While some of these mandate lengthy procedures to be followed like in the case of an IPO, others are less burdensome and involve fewer complexities. One such easy way to raise capital is through the private placement of shares.

When a company issues its shares to a select group of persons other than by way of a public offer, it is referred to as a private placement of shares. The rules relating to it are governed by Section 42 of the Companies Act, 2013.

A private placement is an offer made by a company to subscribe to securities privately without the use of any public advertisement, marketing channels, media, or distribution agents to announce to the public at large about such an issue [Section 42(7)]. If any of these means are used, then the offer would be regarded as a public offer and not a private placement.

Applicable provisions

Section 42 of the Companies Act, 2013

Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014

Board Resolution

Private placement of securities may only be made to a select group of persons or identified persons (these persons are identified by the Board of Directors of the company). Hence, for a company that wishes to offer shares under the private placement, the first thing to do is to hold a meeting of the Board of Directors for the purpose of considering and approving the issue of securities through private placement.

The board members must identify the group of persons to whom private placement of shares shall be made. At the said meeting, the board members must also approve the draft notice of the general meeting to be convened for taking shareholders’ approval on private placement, along with the explanatory statement to be annexed to the notice.

Special Resolution for private placement of shares

A corporation can’t make an offer to subscribe to securities through private placement unless the plan has been approved by its shareholders in advance, through a special resolution for each of the offers or invitations. Therefore, a general meeting should be convened for the passing of a special resolution for the issue of securities through private placement.

The notice of the meeting for obtaining shareholders’ approval must be accompanied by an explanatory statement containing the following disclosures:

Details of the offer
Date of the passing of board resolution
Types of securities being issued and the price at which they are being issued
The basis or justification for the price at which the securities are being issued
The contact details and address of the valuer who conducted the valuation
The amount of capital intended to be raised by the company through private placement of shares
Important terms and objectives of the offer, the proposed time schedule, the contribution being made by the company’s promoters or directors (if any) as part of the offer, etc.

Maximum limit on the number of allottees

Section 42(2) of the Companies Act and Sub-rule (2) to Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 specifies the maximum number of persons to whom invitation can be issued by a company on a private placement basis.

A company cannot make an offer to subscribe securities under private placement to more than 200 persons in aggregate in one financial year. This limit of 200 persons does not include qualified institutional buyers and employees of the company who are being offered securities under an ESOP scheme. As a result, any offer made to qualified institutional buyers or to the company’s employees under an ESOP scheme won’t be considered while calculating the number of allottees.

The law also dictates that the aforementioned constraints would be calculated separately for each type of security, such as an equity share, a preference share, or a debenture.

If a company enters into an agreement to offer securities to more than the prescribed maximum limit of persons, it shall be dealt with as a public offer, and accordingly, all the relevant provisions of the Companies Act, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 will become applicable.

Private placement offer-cum-application letter

According to Section 42(3) of the Companies Act, 2013, a company making private placement needs to provide a private placement offer-cum-application letter in the prescribed manner to the identified persons whose names have been recorded by the company for the said purpose. It is worthy of note here that this offer-cum-application letter does not entitle the holder of any right of renunciation.

This letter will be in the form of an application in Form PAS-4 and will be specifically addressed and sent to the person to whom the offer is made. It may be sent either in writing or in electronic mode and must be issued within 30 days of recording the names of the identified persons in the company. [Sub-rule (3) to Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014]

Maintenance of record of the offer

The company needs to mandatorily maintain a record of private placement offers made to all the persons in the prescribed form, i.e., Form PAS-5.

The time limit for allotment of securities

Whenever a person is willing to subscribe to securities and applies for them in the private placement offer, the application to be made by him/her along with the subscription money must be paid either by cheque or demand draft or other banking mode and not by cash.

Once a company has received application money for securities offered under a private placement scheme, it is mandatory that it allots the securities on that behalf within 60 days of receipt of the application money.

In case it cannot allot the securities within 60 days, it has to refund the money to the subscribers within 15 days after the expiry of the 60-days deadline. Now, if it doesn’t repay the money even within that period, then it shall be liable to repay the money along with interest @12% p.a. from the expiry of the 60^th day.

The law also clarifies that the subscription money received by the company has to be kept in a separate bank account in a scheduled bank. This sum can be utilized only for the purpose of adjustment against allotment of securities or for refunding the money if the company fails to allot shares.

Payment for subscription

The subscription money for securities issued through private placement has to be paid out of the bank accounts of the persons subscribing to such securities. Moreover, the company must preserve a record of those bank accounts from which money is being paid by the subscribers.

Return of Allotment

A company making private placement of shares must file a return of allotment with ROC in Form PAS-3 within 15 days of allotment, along with the prescribed fees. It shall comprise complete details of allottees like name, address, PAN, & email-ID of the allottees, date of allotment, classes of securities held by them, number of securities, nominal value, the amount paid on such securities, and the particulars of consideration if they are issued for a consideration other than cash.

According to Section 42(9), if a company defaults in filing the return of allotment within the aforesaid time, then the company, its promoters, & directors will be liable to pay a penalty of rupees one thousand per day until the time the default continues. And the maximum amount of penalty can extend up to rupees 25 lakhs.

Filing of Special Resolution with Registrar of Companies

The private placement offer-cum-application letter as discussed in the above paragraphs cannot be issued by a company unless it files the relevant special resolution or board resolution with the Registrar of Companies.

Penalty

As per Section 42(10), if a company makes an offer under private placement in contravention of the provisions of Section 42 of the Companies Act, 2013, then such a company, its promoters, & directors will be liable to pay a penal amount that may extend to monies raised through private placement or rupees 2 crores, whichever is less.

Where a penalty order has been imposed on a company, it shall need to refund all monies taken from subscribers, along with interest @ 12% p.a., within 30 days of the release of such order.

The procedure of private placement of shares

By combining the aforesaid details, the procedure for a private placement of shares can be summarized in the below manner:

1. Passing of board resolution under section 179(3) of the Companies Act, 2013

2. Filing of e-form MGT‐14 with the Registrar of Companies within 30 days of passing of the resolution in the board meeting

3. Calling a general meeting and passing a special resolution in regard to the private placement

4. Filing of e-form MGT-14 within 30 days of passing a special resolution in general meeting

5. Sending private placement offer-cum-application letter in from PAS‐4 within 30 days of recording names

6. Maintaining a complete record of private placement offers in PAS-5

7. Opening of separate bank account in a scheduled bank where monies received on the application shall be kept

8. The identified person shall make subscription either by cheque or demand draft or other banking modes, but not by cash

9. Allotment of securities to be made within 60 days of receipt of application money

10. Filing of Form PAS‐3 within 15 days of allotment (money received through private placement cannot be utilized unless return in the said form is filed with ROC)

11. Issue share certificates within 2 months from the date of allotment

12. Make entry of private placement in the register of members

How does private placement of shares differ from preferential allotment?

On the face of it, private placement and preferential allotment of shares appear to be the same. But company law has made a slight line of distinction between them.

The governing section for a private placement of shares is Section 42 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. For a preferential issue, the governing section is Section 62(1)(c) of the Companies Act, 2013 and Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014. However, the law additionally states that a preferential issue should also comply with the conditions laid down in Section 42 of the Act. Hence, we can say that a preferential issue is a sub-set of ‘private placement’.

The securities for which a private placement can be done are equity shares, preference shares, convertible debentures, and non-convertible debentures. Hence, any type of security can fit into. But only equity shares, fully and partly convertible debentures, or securities convertible into equity can be issued on a preferential basis.

For the issue of shares on a preferential basis, it is necessary to check beforehand whether such issue is specifically authorized by the company’s Articles of Association. However, authorization in articles is not required in the case of a private placement.

In case of preferential allotment, the securities have to be allotted within 12 months from the date of passing of the special resolution. Hence, once a special resolution is passed in a general meeting, it shall be valid for one year. On the other hand, the time limit for allotting securities under private placement is 60 days from the date of receipt of application money.

For private placement of shares, Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes only a few disclosures in the explanatory statement annexed to the notice for shareholders’ approval. But in the case of preferential allotment, Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 lists down detailed disclosures in the explanatory statement.

Preferential allotment requires a compulsory valuation report from a registered valuer to determine the price of securities to be issued. But in a private placement, there is no such valuation report that is mandated under the law.

Another important difference between these two variants of raising capital is the mode of payment. The identified persons shall apply for a private placement offer and make a subscription either by cheque or demand draft or other banking modes, but not by cash (cash mode is prohibited). But the mode of payment in case of preferential allotment of shares can be either cash or consideration other than cash. It is not particularly mentioned under its standalone provisions that payment has to be made by banking channels only. However, if one reads the provisions of preferential allotment in conjunction with those of private placement, the interpretation may signify the same for both.

Hope the information provided in this article proves helpful to you!