The private placement of shares is one out of the most well-known strategies embraced by different organizations to raise assets from the financial backers or general population. Companies, who are keen on fund-raising with the most straightforward and fastest way and one of the accessible choices is to make a private placement of securities to a chosen bundle of people not surpassing 200 in numbers. This process of the private placement is administered by the arrangements of the Companies Act, 2013 read with the Rules and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. At the point when this sort of issue is made by any listed company, it is known as a preferential allotment of shares while an issue of securities to a select gathering of people by an unlisted public limited company or a private limited company is named as the private placement of securities.
While going through this topic the author has adopted the question-answer method to cover the most relevant information which is important to be taken into consideration while dealing with this domain of Company Law.
Topics Covered in this article
What is Private Placement?
Private Placement implies any offer or any kind of invitation to buy in or issue of protections to a select gathering of people by an organization (by some other means than the method of public offer) through private placement offer-cum-application. A private placement will be made distinctly to chosen gathering of people who have been recognized by the Board, whose number will not surpass fifty or such higher number for example not more than 200, barring the certified institutional buyers and representatives of the organization being offered protections under a scheme of employees’ stock option, in a financial year.
It is likewise to be noticed that the arrangements for private placement apply to the issue of “securities” and not “shares”. Subsequently, the new provision of the legal framework has augmented the degree and covers a large group of instruments like shares, securities, debentures, other attractive protections, and so on. The Act, 2013 under Section 42(4) makes it compulsory for a company to conform to the arrangements of SEBI Act and SCRA if any offer or greeting isn’t consistent with the arrangements of the part and such offer or invitation will be treated as a public offer.
What are the provisions dealing with Private Placement?
Chapter III, Part II of the Companies Act, 2013 consists of provisions dealing with the private placement. As per section 42 of Act, 2013 ‘private placement’ along with the interpretation of the Hon’ble Supreme Court means as “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 including the condition that he offer or invitation is made to not more than 50 or such higher number of persons as may be prescribed (excluding QIB’s and employees offered securities under ESOP) in a financial year“. It means any offer or solicitation by any company (other than a public offering) to subscribe to or issue securities of a specific group of persons through a private offering that meets the conditions set out in Section 42 of the Companies Act 2013. This section of the Companies Act has gone through several amendments during the course of its journey.
Section 42 of the Companies Act, 2013 read along with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 contains arrangements dealing with the private placement of securities. As of the last amendment which is made in the Companies Act, 2013, both Section 42 and Rule 14 have gone through alterations via the Companies (Amendment) Act, 2017 and the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018.
As per the above-stated section, a company that is making a private placement is bound to issue the private placement offer and application to the identified person by the company in the format prescribed under the provision and it is also important to take note that this process of placement and application does not carry the right of remuneration within itself.
What are the compulsory requirements and rules required to be followed for Private Placement?
- According to Section 42 of the Act, 2013 the Board of Directors can support the preferential issue of the securities subject to the last endorsement of the investors of the company. The director’s board of the issuing company should distinguish the people to whom the special issue will be made, and a particular number will not surpass 50 in a financial year.
On the other hand, Rule 14(2) endorses that an organization can make a proposal to buy the securities of the company to 200 people in the total in a financial year and the tally of all 200 will be accessible independently for each class of security that is being given for an instance 200 for non-convertible debenture, 200 for inclination shares and 200 for equity shares individually and so on.
- It is also important to take into consideration that, regardless of whether a listed or unlisted company will conform to Section 42 of the Companies Act, 2013 and applicable Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. The company has to guarantee that the proposed issue of share doesn’t surpass its Authorized Capital and if under any circumstances the proposed issue will surpass its Authorized Capital at that point, in that case, it is very essential to finish the process of expanding the Authorized Capital of the organization.
- The company will not use the amount raised through private placement except if the assignment is made and the return of the same is documented with the Registrar.
- No new offer or invitation will be made except if the portions concerning any offer or invitation made before have been finished or until and unless that offer or invitation has been removed or deserted by the company.
- The company which is giving protections through Private Placement under Section 42 of the Act, 2013 will not deliver any open notices or use any media, advertising, or conveyance channels, or specialists to illuminate people in general everywhere about such an issue.
- The investors’ endorsement via Special Resolution is needed besides if there should be an occurrence of an offer or invitation for non-convertible debentures, where the proposed sum to be raised through such offer or invitation doesn’t surpass the breaking point as indicated under Section 180 (1) (c) of Act, 2013 at that point a Board goal would be sufficient.
- It is mandatory for the company to keep a total record of private placement offers in Form PAS.5. A duplicate of such records alongside the private placement offer letter in Form PAS.4 will be documented with the Registrar with endorsed expenses, within 30 days from the date of the private placement offer letter. In the situation of a listed company, a duplicate of such record will likewise be submitted to SEBI, within 30 days from the date of the private placement offer letter as per the Rule 14(3) of Companies (Prospectus and Allotment of Securities) Rules, 2014.
What is the maximum limit of making an offer and minimum value of the same for private placement?
As per the guidelines mentioned under the Companies Act 2013, the offer or invitation can be made to 200 people in the total in a financial year and not more than that, this does not include the offer which is made to Qualified Institutional Buyers (QIB) and Employees Stock Options. This limitation would be figured exclusively for every sort of safety that is equity share, preference share, or debenture. Nonetheless, it is important to take note that if and unless assignment for one sort of security is finished, another sort of safety will not be given under any circumstances. But this limitation is not applied in the case where the issues by Non-Banking Financial Company (NBFC) are enrolled with RBI and housing finance companies which are enrolled with NHB (National Housing Bank). On the off chance that RBI or NHB has not determined comparative guidelines, the arrangement of the Companies Act will apply.
The worth of such offer or greeting per individual will be with a speculation size of at least Rs 20,000 of the assumed worth/ face value of the securities. This limitation doesn’t make a difference to issues by NBFC listed with RBI and lodging account organizations enrolled with NHB (National Housing Bank). If RBI or NHB has not indicated comparative guidelines, the arrangement of the Companies Act will apply.
Does the rule of transferability apply to the security acquired in a private placement of securities?
Certain securities can be transferred under private placement. In the case where specified security is held by the promoters of the company and people having a place with the promoter group can be moved among the promoters or group of promoters or another new promoter subject to consistency with the arrangements of the Substantial Acquisition of Shares and Takeovers Regulations and the continuation of the lock in the possession of the transferee for the leftover time frame. Normally, the securities which are apportioned are dependent upon specific conditions and are non-adaptable.
What is the penalty for not complying with the provisions dealing with private placement?
Any private placement issue which is not made inconsistent with the arrangements of Section 42 of Act, 2013 will be considered to be a public offer and every one of the arrangements of this Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act and Regulations will apply. As per the provisions of the Companies (Acceptance of Deposit) Rules 2014, if the organization neglects to distribute the securities within 60 days of the receipt of the application money of the person, the company will discount the cash within 15 days of the culmination of the 60 days, the organization needs to pay a premium @ 12% per annum from the expiry of the 60th day to the candidate if it neglects to discount the application cash inside 75 days from the receipt of use cash and this sum would be treated as a store under the recommended rules.
If any issue of securities surpasses the endorsed number (for example 200 people in number), such an issue will be considered to be a public issue and the arrangements identifying with a public issue will be relevant to that issue according to clarification to Section 42(2). It is irrelevant, regardless of whether the issue is made in India or outside India.
According to section 42(10) of the Companies Act, 2013, if an organization acknowledges application money in contradiction of the above area, the organization alongside its promoters and chiefs would be at risk for the financial punishment/ penalty, which may reach out to the aggregate sum engaged with the private placement offer or Rs. 2 Crore whichever is higher, and the organization will likewise discount all the gathered sum to the endorsers of the proposal within a time of 30 days of the request forcing the punishment.
What are the advantages and disadvantages of private placement?
Private placement has become a typical route for new companies to raise funds for meeting the needs of the company, especially those in the web and monetary innovation areas. They permit these companies to develop a lot while staying away from the full glare of public investigation that goes with an IPO.
A young or new company, who is new in the competition can stay as a private entity, keeping away from the numerous guidelines and yearly revelation necessities that follow an IPO. The light guideline of private placement permits the organization to keep away from the time and cost of enrolling with the SEC. This implies that the way toward endorsing is quicker, and the organization gets its financing sooner.
In the event where the issuer is selling a bond, it likewise maintains a strategic distance from the time and cost of getting a FICO score from a security officer. A private situation permits the issuer to offer more perplexing security to certify financial issuers who comprehend the likely dangers and rewards.
Along with the new business or companies getting a way to survive the competition similarly the public limited companies can also raise their capital by privately placing the share and not inviting the public for the subscription of its shares and debentures. To do such a process the underwriter or the broker of the company finds people to participate; generally they are the clients who have an interest in the shares of the company.
The purchaser of a private placement security issue expects a higher pace of revenue than can be acquired on a trade on open market security and because of the extra danger of not getting a FICO score, a private arrangement purchaser may not accept a bond except if it is obtained by explicit security.
A private placement stock financial backer of the company also called an investor may likewise request a higher level of proprietorship in the business or a fixed profit installment for every portion of the stock.
Since the necessities for raising the assets via private position have been made tougher, it will fundamentally expand the consistency trouble on privately owned businesses hoping to raise assets through private placement. It is likewise to be noticed that as no particular exception has been accommodated privately owned businesses or little organizations, it will prompt decreasing adaptability accessible to privately owned businesses and the organizations worked by firmly held individuals for raising assets. Notwithstanding, better administration of all organizations is relied upon which will prompt straightforwardness in the undertakings of the Company and responsibility of the chiefs.
While completing this article the author has tried to cover important questions which helps in understanding the public placement of shares. This way of investing in a company is considered to be beneficial for the upcoming business which ultimately opens up a gateway for employment in the country. At the same time if the regulations laid down are not followed properly can lead to a huge penalty which acts as a threat to the wrongdoers.
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 Indian Legal Solution, Private Placement of securities in India under Companies Act, 2013, Indian Legal Solution (2020), https://indianlegalsolution.com/private-placement-of-securities-in-india-under-companies-act-2013/.
 Procedure for Private Placement, LAWRBIT, https://www.lawrbit.com/companies-act-procedures/private-placement/.
 Private Placement – Section 42 of Companies Act 2013, Taxmann Blog (2019), https://www.taxmann.com/post/blog/955/private-placement-section-42-of-companies-act-2013/.