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“Discover the Power of Private Placements”

June 07, 2024
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What is Private Placement

Private Placement

Section 42 of the Companies Act, 2013 (‘Act’) provides that a company can make a private placement to a select group of persons. Private placement by companies means offering its securities or inviting to subscribe its securities for a select group of persons through an offer letter. It is different than public issue in which securities are offered to the public at large.

A company engaging in a private placement is prohibited from promoting its securities via public advertisements or employing marketing, media, or distribution agents to publicize the offer. Should the offer be advertised or marketed, it will be classified as a public offer rather than a private placement.

The main contents of Section 42 of the Companies Act, 2013 are as follows:

  1. Offer or invitation to subscribe or issue of securities.
  2. To a select group of persons
  3. Through the issue of private placement offer cum application

Private Placement Offer Letter

Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘Rules’) outlines the regulations governing private placements by companies. All private placement offers must be extended exclusively to individuals whose names are documented by the company prior to the issuance of the invitation to subscribe. These documented individuals will receive the offer, and the company is required to maintain a comprehensive record of such offers in Form PAS-5.

The company should send the private placement offer letter to the specific person within thirty days of recording the person’s name. The company should file the complete information of the offer with the Registrar of Companies (‘ROC’) within thirty days of circulating the private placement offer letter.

Special Resolution for Making Private Placement

The company can make a private placement of its securities after approval of shareholders of the company for the proposed offer or invitation to subscribe to securities by passing a Special Resolution for every offer or invitation.

Maximum Limit of Private Placement

The number of individuals to whom a company can make a private placement should not surpass fifty persons or the higher limit prescribed by the Rules within a financial year. This limit of fifty persons excludes qualified institutional buyers and employees of the company who are offered securities under an employee stock option scheme as per Section 62 of the Act.

According to the Rules, the total number of persons to whom an offer or invitation for private placement can be made should not exceed two hundred in a financial year. This limit excludes qualified institutional buyers and employees who are offered securities under an employee stock option scheme as per Section 62 of the Act.

Each individual private placement offer or invitation should have an investment size of Rs. 20,000 based on the face value of the securities. However, the restrictions on the maximum number of select persons and the value of private placements do not apply to the following:

  1. Non-banking financial companies registered under the Reserve Bank of India Act, 1934.
  2. Housing finance companies registered with the National Housing Bank under National Housing Bank Act, 1987.

Mode of Payment of Private Placement

Each identified individual wishing to subscribe to the private placement issue must apply using the private placement application provided by the company, accompanied by the subscription money paid via demand draft, cheque, or other banking channels, not by cash. Subscribers should make the payment for securities from their own bank accounts. The company is required to maintain a record of the bank accounts from which they receive the subscription payments.

Allotment of Private Placement

A company issuing an invitation or offer for private placement must allot its securities within sixty days of receiving the application monies. If the company is unable to allot the securities within this timeframe, it must refund the application money to the subscribers within fifteen days following the sixty-day period.

If the company fails to repay the application money within these fifteen days, it will be liable to repay the subscription money with an interest rate of 12% per annum, calculated from the end of the sixtieth day.

The company must keep the application money in a separate bank account in a scheduled bank and should not utilise it for any purpose other than the following:

  1. For adjustment against allotment of securities.
  2. For repaying application monies where the company is unable to allot securities.

Record of Private Placement Offers

The company must maintain a comprehensive record of private placement offers in Form PAS-5. A copy of this record, along with the private placement offer letter in Form PAS-4, should be filed with the Registrar of Companies (ROC) within thirty days of the circulation of the private placement offer letter, accompanied by the applicable fees as stipulated in the Companies (Registration Offices and Fees) Rules, 2014.

If the company is a listed entity, it should also file the record of private placement offers and the private placement offer letter with the Securities and Exchange Board within thirty days of distributing the private placement offer letter.

Return of Allotment of Private Placement

The company must file the return of allotment of securities with the ROC, after allotting the securities, within thirty days of allotment in Form PAS-3 and the fees as provided in the Companies (Registration Offices and Fees) Rules, 2014.

The Form PAS-3 filed by the company, other than One Person Company and small company, should be pre-certified by a practising CMA (Certified Management Accountant), CA (Chartered Accountant) or CS (Company Secretary).

Penalty for Non-Compliance of Private Placement

A company, its directors and promoters will be liable for a penalty if the company accepts monies or makes an offer in contravention of the Act and Rules. The penalty may extend to the amount involved in the invitation or offer or Rs.2 crore, whichever is higher. The company should also refund all monies to the subscribers within thirty days of the order imposing the penalty.

Important Points:

  1. The fresh offer or invitation under this section shall not be made until and unless the allotments with respect to any offer or invitation made earlier have been completed or that offer has been withdrawn by the company.
  2. If a company makes an offer to allot or invites subscription or allots or enters into an agreement to allot, the securities to more than the 200 persons in a financial year, then the same shall be considered a public offer.
 

DISCLAIMER: The information provided in this article is intended for general informational purposes only and is based on the latest guidelines and regulations. While we strive to ensure the accuracy and completeness of the information, it may not reflect the most current legal or regulatory changes. Taxpayers are advised to consult with a qualified tax professional or you may contact to our tax advisor team through call +91-9871990777 or info@semantictaxgen.in the appropriate government authority to verify the accuracy of the information and to obtain advice on their specific tax situations.

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