Private Placement Under Companies Act 2013

Procedure and Checklists of Private Placement of Shares under Companies Act 2013

Before the introduction of companies act 2013, private placement was not defined under any law though the ICDR regulations defines the term Preferential Allotment as any allotment to one or more shareholder or person instead of all the existing shareholders.

Provisions related to Private Placement of Shares by a Company are prescribed in Sections 23 and 42 of the Companies Act, 2013 and Companies (Prospectus & Allotment of Securities) Rules, 2014.

"private placement" means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section."

The 2013 Act primarily prescribes four modes of increasing share capital:

• Public issue;
• Rights issue;
• Bonus issue and
• Private placement.

To protect and maintain the shareholders activism and transparency in a Company, the Companies Act 2013 has prescribed various procedural requirements for making a Private Placement of Shares by Companies. Few key requirements can be summarized as under:

• Private Placement Offer can be made to not more than 200 people. One thing to expressly mention here is that, this limit is applicable not to the number of shareholders who are allotted the shares, but is applicable to the invitation to subscribe being made.

• This limit excludes Qualified Institutional Buyers and Employee of the company under a scheme of employees stock option as per provision of Section 62(1)(b) of Companies Act 2013  and the limit of 200 people is calculated individually for each kind of security. It would then seem that, due to this restriction, the issuing company cannot make a public announcement of such offers.

• The share application form has to be numbered and addressed specifically to the person to whom the invitation is being send by the Private Placement Offer Letter.

• The value of the Offer per person SHALL NOT BE LESS THAN RS 20,000/-  of the ‘face value’ of securities.

• Valuation report from Registered valuer (CA, CS and CWA)

• the payment mode for subscribing shares under the private placement should  be through  the bank channel of the person subscribing to the securities and the company should keep a record of the bank account from where such payments have been received.

• Monies payable on subscription to securities to be held by joint holders shall be paid from the bank account of the person whose name appears first in the application.

• No cash transaction is permissible

• The money received as application money for allotment of Shares shall be kept in a separate bank account of the company (a) for adjustment against allotment of securities; or (b) for the repayment of monies where the company is unable to allot securities. [Section 42(6)]

• A Shareholder’s special resolution shall be required to approve the Private Placement Offer and this resolution should be acted upon within 12 months. At any given point in time, there should be only one active offer for each kind of security.

• Shares have to allotted within 60 days of receiving share application money from the allottee, Otherwise from the 75th day, the share application monies have to be repaid. In the event of failure to repay, interest at 12% pa has to be paid. If there is a Foreign Direct Investment, RBI has allowed for 180 days for allotment. Here, there is an obvious conflict between the RBI regulation which talks of 180 days under the Foreign Exchange Management Act, 1999 and the Companies Act, 2013, which talks of 60 days’ time frame for allotment of shares.

• Copies of the Private Placement Offer Letters along with the Records of Private Placement Offer Letters have to be filed with the Registrar of Companies within 30 days from the date of circulation (i.e. date of the Offer letter).

• Again, after allotment of the securities, within 30 days, a return of allotment has to be filed with the ROC in PAS-3.  [Rule 14 (4)]

• To save from misuse of the share application money the Act prescribes that the share application money received has to be kept in a separate bank account and utilized only for the allotment or repayment.

• Non-compliance can lead to a penalty of Rs 2 crores or the amount involved in the offer, whichever is higher. [Section 42(10)]

Detailed Procedure of Private Placement of Shares under the Companies Act 2013

Major Forms Relating to Private Placements

Conclusion:

Advantage of Private placement is that it bypass the stringent regulatory requirement of public offer, another advantage is reduced cost and reduced time of issuance. Issuance of security publicly may be time consuming and expensive. Private placement can be tailored to meet the financing need of the company and investing need of the investor because private placement are negotiated privately between the investor and issuing company

Exceptions/ Modifications/ Adaptations (please check these notification on  (http://www.mca.gov.in/)

1.  In case of Nidhi company - Section 42  shall not apply except Sub-section (2) with explanation (I), sub-sections (3), (5) & (7)  of Section 42 . - Notification Dated 5th june, 2015. 

2. In case of Specified IFSC Public Company - Sub-sections (3) and (7) of section 42 shall not apply.  - Notification Dated 4th January, 2017.

3. In case of Specified IFSC Public Company - Sub-section (6) of section 42 for the words “sixty days” read as “ninety days” -  Notification Dated 4th January, 2017.

4. In case of Specified IFSC Private Company - Sub-sections (3) and  (7) of section 42 shall not apply.  -  Notification Dated 4th January, 2017.

5. In case of Specified IFSC Private Company - Sub-section (6) of section 42, for the words “sixty days” read as “ninety days”.  -  Notification Dated 4th January, 2017.

Writer –  Akash Vij 

Email ID: Akashvij20@gmail.com

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