Private Placement of Securities Under Companies Act 2013

     

Private Placement of Securities Under Companies Act 2013

As per Explanation I to Section 42(3), “private placement” means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in this section.

Private Placement Offer-cum-Application

Section 42(1) provides that a company may, subject to the provisions of this section, make a private placement of securities.

Section 42(3) reads, a company making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed. The private placement offer and application shall not carry any right of renunciation.

Maximum number of persons to whom offer can be made and other incidental matters

As per section 42(2), a private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed fifty or such higher number as may be prescribed [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be prescribed.

qualified institutional buyer” has been defined under the section to mean that the qualified institutional buyer as defined in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended from time to time.

Accordingly any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62 shall not be considered while calculating the number of identified persons.

Where 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, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be the public offer and shall be accordingly dealt.

Applying to private placement

As per section 42(4) states that every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash:

Hence all the payments have to be made either by cheque or demand draft or other banking channel and not by cash.

However, a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar.

According to section 42(5) the company shall not make any fresh offer or invitation with respect to private placement unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.

A company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed subject to the maximum number of identified persons as stated above.

Time limit for allotment and payment of interest/refund of subscription money otherwise

Section 42(6) states that a company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent per annum from the expiry of the sixtieth day.

Subscription money to be kept in a separate bank account

Proviso to Section 42(6) states that monies received on application received by the company shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.

Offer to be made specifically addressing persons

Section 42(7) states that no company issuing securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.

Return of allotment

Section 42(8) states that a company making any allotment of securities, shall file with the Registrar a return of allotment within fifteen days from the date of the allotment in such manner as may be prescribed, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.

Where a company defaults in filing the return of allotment within the period mentioned above, the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.

Penalty

According to section 42(10), if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest to subscribers within a period of thirty days of the order imposing the penalty.

Section 42(11) states that notwithstanding anything contained in sub-section (9) and sub-section (10), any private placement issue not made in compliance of the provisions of the sub-section (2) shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be applicable.

Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes the following procedure in connection with Private Placement:

Special Resolution of Shareholders

A Company shall not make an offer or invitation to subscribe to securities through private placement unless the proposal has been previously approved by the shareholders of the company, by a special resolution for each of the offers or invitation.

The explanatory statement annexed to the notice for shareholders’ approval shall contain the following disclosure:

(a) particulars of the offer including date of passing of Board Resolution;

(b) kinds of securities offered and the price at which such security is being offered;

(c) basis or justification for the price (including premium,if any) at which the offer or invitation is being made;

(d) name and address of valuer who performed valuation;

(e) amount which the company intends to raise by way of such securities;

(f) material terms of raising such securities ,proposed time schedule ,purposes or objects of offer,contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects;principle terms of assets charged as securities:

Where the amount to be raised through such offer or invitation does not exceed the limit specified in Section 180(1)(c) ,in such cases relevant Board Resolution under Section 179(3)(c) would be adequate.

In case of offer or invitation for non-convertible debentures, where the proposed amount to be raised through such offer or invitation exceeds the limit specified in Section 180(1)(c),it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitations for such debentures during the year.

Maximum Number of persons to whom offer can be made :

Sub-rule (2) to Rule 14 provides that an offer or invitation to subscribe securities under private placement shall not be made to persons more than two hundred in the aggregate in a financial year.The limit of two hundred persons shall exclude the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62

It is further clarified that the restrictions aforesaid would be reckoned individually for each kind of security that is equity share, preference share or debenture.

Further sub-rule (7) provides that the provisions of sub-rule (2) shall not be applicable to:

(a) Non-banking financial companies which are registered with the Reserve Bank of India under the Reserve Bank of India Act,1934; and

(b) housing finance companies which are registered with the National Housing Bank under the National Housing Bank Act,1987

if they are complying with regulations made by the Reserve Bank of India or the National Housing Bank in respect of offer or invitation to be issued on private placement basis.

Prescribed form for private placement cum application letter:

A private placement offer cum application letter shall be in the form of an application in Form PAS-4 serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode within 30 days of recording the name of such person pursuant to sub-section (3) of section 42.

Record of private placement to be maintained by the Company:

The Company shall maintain a complete record of private placement offers in Form PAS-5

Payment for subscription to be made from the Bank Account of the person subscribing to securities:

The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the bank account from where such payment for subscription has been received.

Return of Allotment:

A return of allotment of securities under section 42 shall be filed with the Registrar within fifteen days of allotment in Form PAS-3 with prescribed fees along with complete list of allottees containing the details like the full name, address , PAN No. and e-mail id of security holder, the class of security held, the date of allotment of security, the number of securities held, nominal value and amount paid on such securities and particulars of consideration received if the securities were issued for consideration other than cash

Mandatory filing of Special Resolution or Board Resolution with the Registry:

A Company shall issue private placement offer cum application letter only after the relevant special resolution or board resolution has been filed in the Registry.

Related Post :

Procedure For Issue of Shares on Preferential Basis

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