Private Placement of Securities
Brief Introduction and Purpose of Private Placement of Securities:
A Company shall need to raise funds for purpose of setting up of projects or new
venture / expansion of the existing business or for funding the working capital
requirements. The Company has the option to raise funds either by way of raising
debt funds such as loan from Banks / Financial Institutions / Non#Banking
Finance Companies or by way of issue of Debentures or Bonds, or further issue of
Share Capital. It will depend on current financial position of the company to
choose, whether to raise further funds by way of debt funding or by way of share
capital, after taking into consideration its internal financial dynamics.
Part II of the Chapter III of the Companies Act, 2013, deals with the Private
Placement. A private placement is a capital raising event that involves the sale
of securities to a relatively small number of selected group of persons
A private placement is different from a public issue in which securities are
made available for sale on the open market to any type of investor.
Statutory Provisions for Private Placement of Securities:
The provisions of Section 42 of the Companies Act, 2013, as amended by Companies
(Amendment) Act, 2017 read with the Rule 14 of the Companies (Prospectus and
Allotment of Securities) Rules, 2014 deal with the issue of securities by way of
Private Placement. The Private Placement means any offer of securities or
invitation to subscribe securities to a select group of persons (herein referred
to as "identified persons"), by way of issue of securities, then only the
proposed issue shall be considered as Private Placement.
Number of Persons to whom the offer shall be made:
A Private Placement shall be made only to Identified Persons not exceed fifty or
such higher number as may be prescribed [200* persons in aggregate has been
prescribed] excluding the Qualified Institutional Buyers (QIBs) and employees of
the company being offered securities under a scheme of ESOP, in a financial year
subject to the prescribed conditions.
*The limit of 200 in aggregate shall be reckoned individually for each kind of
security viz. equity share, preference share and debentures etc.
If a company, listed or unlisted, makes an offer to allot or
invites subscription, or allots, or enters into an agreement to allot,
securities to more than the prescribed number of persons, same shall be deemed
to be an offer to the public.
Private Placement Offer#cum#Application:
A private placement offer cum application form shall be in the form of an
application in Form PAS#4, which should be serial numbered and addressed to the
person to whom the offer is made and sent to him, either in written or in
electronic mode, within 30 days of recording their name.
The Company shall maintain a complete record of such offers in Form PAS#5. [Rule
Authorization by prior Shareholder’s Approval:
A Company shall make any offer or invitation, to subscribe the securities
through private placement unless the same has been previously approved by
shareholders of the Company, by a Special Resolution, for each of the offers or
invitations*. The notice calling Extra#Ordinary General Meeting of the
shareholders must contain an explanatory statement bearing the particulars of
offer, date of passing Board resolution, kinds of securities offered and its
price, basis or justification for the price, name and address of valuer who
performed valuation, amount which the company intends to raise, material terms
of raising such securities, proposed time schedule, purpose or objects of offer,
contribution being made by the promotes or directors.
*In case of offer or invitation for non#convertible debentures, where the
proposed amount to be raised through such offer or invitation exceed the limit
as specified in Section 180(1)(c), it shall be sufficient if the Company passes
a previous special resolution only once in the year for all the offers or
invitations for such debentures during the year. [Rule 14(1)]
Subscription of Securities:
Every person to whom Private Placement offer has been made and who is willing to
subscribe to the shares of the Company may do so by filling the application form
attached with the offer cum application letter alongwith subscription money.
Note: Fresh offer or invitation for Private Placement shall not be made unless
any previous offer or invitation has been completed or withdrawn or abandoned by
the Company. [Section 42(5)].
Mode of payment of Subscription Money:Subscription money can be paid in any of the following modes:
- By Cheque or
- By Demand draft or
- By other banking channels except cash. [Section 42(4)]
Separate Bank Account with Scheduled Bank:Monies received must be kept in a separate bank account and shall not be
utilized for any purpose other than:
(a) For adjustment against allotment of securities or
(b) Repayment of monies where the company is unable to allot securities
After completion of allotment process, the Company will be allowed to move the
funds in regular Bank account used for day to day transactions.
Note: Utilization of Money:
Company cannot utilize the funds so raised from a Private Placement unless it
has allotted shares to the subscribers and it has filed a return of allotment
with the Registrar of Companies in Form PAS#3.
Time Limit for Allotment of Securities:
A Company making an offer or invitation under this section shall allot its
securities within 60 days from the date of receipt of application money. In case
the Company is not able to allot the securities within 60 days, the Company
shall refund the application money to the subscribers within 15 days from the
expiry of 60 days and if Company fails to repay applications money, it shall be
repaid with interest at 12% p.a from the expiry of 60th day. [Section 42(6)]
In case the application money is not refunded within 15 days of
completion of 60 days, then amount pending for refund shall be treated as Public
Deposit under Section 73 of the Companies Act, 2013.
Offer should not be advertised:
No Company shall release any public advertisements or any media, marketing or
distribution channels or agents to inform the public at large about such an
Filing of Return:
A Company shall file with the Registrar a return of allotment in Form
PAS#3 within 15 days* from the date of allotment, along with complete list of
*Before the Companies (Amendment) Act, 2017, the date of filing of return of
allotment was 30 days which was reduced to 15 days as per amended Section 42(8)
of the Act.
Procedure For Private Placement
Following procedure should be followed by the Company intending to issue
securities under Private Placement:
- Convene the meeting of the Board of Directors of the Company, to
approve the followings;
# Issue of securities by way Private Placement Basis.
# Finalization and Identification of persons (Identified person).
# Number of securities to be issued.
# Take note of the Valuation Report and decided the price of security.
# Draft offer letter in Form PAS#4.
# Approve the notice of calling for Extra#Ordinary General Meeting of the
shareholders of the Company to take members approval.
# Opening of a separate Bank Account for keeping the application money
- File Form MGT#14 within 30 days of passing the Board Resolution for
issue of securities as per Section 117 & 179(3)(c).
Note: A private Company is not required to file Form MGT#14, except in case
of offer or invitation of non#convertible debentures and the amount of the
proposed issue does not exceed the limits as specified under the Section 180
of the Companies Act, 2013.
- Convene Extra#Ordinary General Meeting for the followings purpose:
# Pass Special Resolution to approve Private Placement.
# Approve the Offer Letter to be sent to the Identified Persons.
- File Form MGT#14 with ROC within 30 days of passing the Special
Resolution approving the Private Placement.
- Send Offer cum Application Letters in Form PAS#4 to Identified Persons
within 30 days of recording the names of the identified persons. Such Offer
cum Application Letters can be sent in electronic mode (emails) or by post.
- Prepare the complete record of private placement offer in Form PAS-5.
- Receiving application money in a Separate Bank Account with Scheduled
Bank within the offer period as mentioned in the Offer cum Application
- After Closure of Offer Period call a Board Meeting and pass Resolution
for allotment of securities and issue securities certificate.
- File the return of allotment in Form PAS#3 within 15 days from the date
of the allotment made i.e. After passing Board Resolution for allotment of
- Make sure the securities are allotted within 60 days of the receipt of
Application money by the Company.
- Within 30 days of issue of securities certificates, the Company shall
pay stamp duty as per the respective Stamp Act of the State.
- The Company will be allowed to utilize the money raised through Private
Placement only after Return of Allotment in Form PAS-3 is filed with the
Registrar of Companies.
- The Company should update its Registrar of Members in case of issue of
share or Registrar of Debenture holders or Securities holders, in case of
any other security.
Through this brief article we have tried to cover mostly all the aspects of the
subject. Any observations, comments and views are most welcome. This article is
for informative and knowledge sharing purposes only.
Written By: Parvinder Sharma
, New Delhi,
Email id: [email protected]
, Mobile: 9872477504