Private Placement Provisions & Procedure

Private placement is a strategic way for companies to raise funds by offering shares to a select group of investors rather than the public. It helps businesses get capital quickly, with less regulatory burden and more flexibility than a public offering. The Companies Act, 2013 lays down clear provisions and procedures for private placement to ensure transparency and investor protection.

This blog explains the key provisions, step-by-step process, timelines, and compliance requirements for private placements in India. By understanding these rules, companies can raise funds efficiently while staying fully compliant with the law.

Understanding Private Placement – Basic Provisions and Procedure

Private placement is the issuance of securities by a company to a selected group of investors without offering them to the public. This allows businesses to raise funds quickly and directly from specialized investors, such as high-net-worth individuals and institutions, without public disclosure or lengthy regulatory requirements.

The Companies Act, 2013, regulates private placements to protect investor interests and ensure transparency. It defines rules on the number of investors, minimum investment requirements, filing requirements, and proper documentation.

Key Provisions of Private Placement

1. Definition:

A private placement is the sale of shares or securities to a select group of investors. Often used by startups or growing companies to raise funds efficiently. It involves fewer regulations, faster fundraising, flexibility in terms, but comes with limited investor participation and less liquidity.

2. Governing Provisions:

• Section 42 of the Companies Act, 2013
• Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014

3. Limit on Number of Investors:

• A maximum of 200 persons per financial year.
• Exemptions:
  • Banks registered under the RBI Act, 1934
  • Housing Finance Companies registered under the National Housing Bank Act, 1987

4. Exempted Categories (Not Counted in 200):

• Qualified Institutional Buyers (QIBs)
• Employees under ESOP schemes

5. Time Limit for Allotment:

• Shares must be allotted within 60 days of receiving the application money.
• If allotment fails, refund within 15 days; otherwise, repay with 12% annual interest from day 61.

6. Forms Required:

To comply with private placement rules, companies must file:

• PAS-3 – Return of Allotment of Securities
• PAS-4 – Offer Letter
• PAS-5 – Record of Private Placement Offers
• MGT-14 – Filing of Special Resolution

7. Step-by-Step Process of Private Placement

• Board Meeting:
• Approve list of investors for private placement.
• Approve offer letter (Form PAS-4).
• Approve calling of Extra-Ordinary General Meeting (EGM) for shareholder consent.
• Extra-Ordinary General Meeting (EGM):
• Approve special resolution for share issuance on a private placement basis.
• Approve circulation of the offer letter to selected investors.

• Filing with ROC:
• File MGT-14 within 30 days of shareholder approval.
• Circulation of Offer Letter:
• Send the offer letter within 30 days of filing MGT-14.
• Offer letter can only be sent after MGT-14 filing.
• Bank Account:
• Open a separate bank account to receive application money.
• Receipt and Allotment:
• Receive share application money.
• Hold board meeting to allot shares within 60 days of receipt.
• Post-Allotment Compliance:
• Update register of members within 7 days of allotment.
• File PAS-3 within 15 days of allotment.
• Issue share certificates within 2 months.
• Pay stamp duty within 30 days of issuance.
• Maintain a complete record of private placement in PAS-5.

Note: No fresh offer or invitation under Section 42 can be made until earlier allotments are completed, withdrawn, or abandoned.

8. Usage of Allotment Money

• The company can use the allotment money only after filing PAS-3 with the ROC.

9. Prohibitions in Private Placement

• No public advertisement, marketing, or media announcement allowed.
• Securities cannot be offered to foreign individuals or companies without government approval under FEMA (Non-Debt Instrument) Rules, 2019.

10. Penalties

1. Contravention of Section 42:

• Company, directors, and promoters may face a penalty up to the amount raised or ₹2 crore, whichever is lower.
• Refund money with interest within 30 days of penalty imposition.

2. Default in Filing Return of Allotment:

• Penalty of ₹1,000 per day, up to a maximum of ₹25 lakh.

Conclusion

Private placement is a strategic way for companies to raise capital efficiently from a select group of investors. It avoids public offering regulations while maintaining transparency and protecting investor interests.

By following the Companies Act provisions and proper filing procedures, businesses can benefit from quick fundraising, flexibility in terms, and confidentiality. Proper compliance ensures no penalties and smooth operations.