Private Placement - A Comprehensive Overview

Private placement is a method by which companies raise capital by offering securities to a select group of investors, limited to 50 or such higher number as prescribed, rather than through a public offering. This process is governed by Section 42 of the Companies Act, 2013, along with the Companies (Prospectus and Allotment of Securities) Rules, 2014.

This article provides an overview of private placement, its procedure, and key considerations for private companies seeking to raise funds through this route.

What is Private Placement

Private placement refers to the issuance of securities, including equity shares, preference shares, debentures, or other instruments, to a selected group of investors. The number of such investors cannot exceed 200 in a financial year per security type, excluding Qualified Institutional Buyers (QIBs) and employees under Employee Stock Option Plans (ESOPs). This method allows companies to raise capital efficiently without undergoing the extensive regulatory requirements associated with a public issue.

Key Features of Private Placement

1. Limited Number of Investors: A company can offer securities to a maximum of 200 investors per security type in a financial year, excluding QIBs and employees under ESOPs. It is clarified that this restriction applies separately to each category of security, i.e., equity shares, preference shares, and debentures, with a limit of 200 for each. However, issuance of another category of security shall not commence until the allotment of the previously issued security is completed. For example, if equity shares are issued first, preference shares or debentures may only be issued after the allotment of equity shares is finalized.
2. Offer Through Private Placement Offer Letter (PAS-4): The company must issue an offer letter in Form PAS-4 to identified investors. No public advertisement or solicitation is permitted.
3. Utilization of Funds: The funds raised through private placement can be utilized only after filing Form PAS-3 (Return of Allotment) with the Registrar of Companies (ROC).
4. Withdrawal of Issue: A company may withdraw its issue by notifying the identified investors before the closure of the open offer.
5. Non-Compliance Consequences: Any offer made in non-compliance with Section 42 will be deemed a public offer.
6. Filing Requirements: Form MGT-14 is not an STP (Straight Through Processing) Form, whereas Form PAS-3 is an STP Form.

Procedure for Private Placement

Step 1: Board Meeting

• Convene a Board Meeting to approve the private placement offer and determine the terms of the issue.
• Approve the draft PAS-4 (Private Placement Offer Letter) and call for a General Meeting to obtain shareholders’ approval.
• The Notice of the Extraordinary General Meeting (EGM) must include an explanatory statement disclosing:

Step 2: Shareholders’ Approval

• Pass a Special Resolution in the General Meeting.
• File Form MGT-14 with the ROC within 30 days of passing the resolution.

Step 3: Issuance of Offer Letter (PAS-4)

• Send PAS-4 to identified investors within 30 days of the Special Resolution.
• The offer letter must be issued only after filing Form MGT-14 with the ROC.
• PAS-4 may be circulated in writing or electronically and must be serially numbered.
• Maintain a record of private placement offers in Form PAS-5.

Step 4: Receipt of Subscription Money

• Investors must subscribe by paying through cheque, demand draft, or banking channels. Cash transactions are not allowed.
• The company must open a separate bank account in a scheduled commercial bank for receiving application money.

Step 5: Allotment of Securities

• Convene a Board Meeting to allot securities to investors who have accepted the offer and paid the subscription money.
• Securities must be allotted within 60 days of receiving the application money.
• If allotment is not completed within 60 days, the company must refund the amount within 15 days, failing which interest at 12% p.a. is payable.
• Issue Share Certificates or Debenture Certificates to the investors.

Step 6: Filing of PAS-3 (Return of Allotment)

• File Form PAS-3 with the ROC within 15 days of allotment.
• Include details of the allottees and securities issued.

Non-Compliance Penalties

• Company Penalty: ?2 crore or the amount raised through private placement, whichever is higher.
• Officer-in-Default Penalty: ?2 crore for contraventions.

Attachments Required for Compliance Filings

Form MGT-14 Attachments:

1. Certified True Copy (CTC) of the Special Resolution with the Explanatory Statement.
2. Shorter Notice Consents, if applicable.
3. PAS-4 (Offer Letter).
4. Valuation Report.

Form PAS-3 Attachments:

1. PAS-4 (Offer Letter).
2. Valuation Report.
3. CTC of the Board Resolution approving the allotment.
4. List of Allottees (Excel Sheet).

Details to be included in Form PAS-4:

• As per Rules 9, 13 & 18 of The Companies (Share Capital & Debentures) Rules, 2014.

Details to be included in Form PAS-5:

1. Full name, address, PAN, and email ID of the security holder.
2. Class of security offered.
3. Date of allotment.
4. Number of securities, nominal value, and amount paid on such securities.

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