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Procedure for Private Placement in Public & Private Companies

Procedure for Private Placement in Public & Private Companies

Background

  • A private placement refers to the offering or issuance of securities by the Company to a specific group of identified individuals, rather than through a public issue. This is done via a private placement offer-cum-application and must comply with the conditions outlined in Section 42 of the Companies Act, 2013.
  • The number of such identified persons shall not exceed 50 or such higher number as specified under Rule 14 of the companies (prospectus and Allotment of Securities) Rules, 2014. Rule 14(2) further states that:

– For the purpose of sub-section (2) of section 42, 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. Any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of ESOS as per provisions of clause (b) of sub-section (1) of section 62 shall not be considered while calculating the limit of two hundred persons. Also, the limit would be reckoned individually for each kind of security that is equity share, preference share or debenture.

    • Provisions of Rule 14(2) as stated above shall not be applicable to:
      • NBFCs registered with RBI.
      • Housing Finance Companies registered with National Housing Bank (NHB)

when corresponding provisions are contained in their respective acts.

Sections/ Rules/Regulation:

  • Sections 42,61, 96, 100, 101, 173, 179, 180 of the Companies Act, 2013
  • Rule 9A, 9B, 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
  • Rule 18 of the Companies (Management & Administration) Rules, 2018)
  • Secretarial Standards-1
  • Secretarial Standards-2

Pre-requisites & Important Points:

  • The issue of shares on private placement basis shall be within the limits of Authorized share capital of the company. If it is likely to exceed the limits, then first authorized capital needs to be increased by virtue of the authority contained in the AOA (U/s 61 of Companies Act 2013) and if there is no provision in the AOA, they also need to be altered.
  • A company shall not utilize the money raised through private placement before making the allotment and before filing the return of allotment with the Registrar.
  • A company shall not make any fresh offers unless the previous offers have been completed or withdrawn or abandoned by the company.
  • A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the Registrar
    • Private companies shall file the copy of Board resolution or Special resolution with respect to approval with the registrar as per Section 179 (3)(c) of the Companies Act, 2013.
  • A company can proceed for private placement only when the same has been approved by the shareholders by passing a special resolution. An exception to this rule is when offer or invitation is made for non-convertible debentures the proposed amount to be raised through such offer or invitation does not exceed the limit specified under Section 180 (1) (c) of the Companies Act.
    • In addition to the above exception if the offer or invitation is made for non-convertible debentures here *the proposed amount to be raised through such offer or invitation exceeds the limit specified under Section 180 (1) (c) of the act then 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.
    • *The same shall be applicable in case of offer or invitation of securities to qualified institutional buyers.
  • To make an offer or invitation to any body corporate which shares land border with India, that body corporate has to obtain approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attach the same with the private placement offer cum application letter.
  • A company issuing security through private placement shall not use any means of advertising the same to inform the public at large about such issue of securities.
  • Private placement offers and application shall not carry any right of renunciation.
  • If 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 recognized stock exchange in or outside India, the same shall be deemed to be an offer to the public.
  • The money for subscribing the securities to be paid either by cheque or demand draft or other banking channel and not by cash.

Procedure:

Meeting of Board

  • As per Section 173 of the Companies Act, 2013 and Secretarial Standard-1:
    • Notice of the Board Meeting shall be issued to all Directors at their registered addresses by post or hand delivery or by electronic means at least 7 days before the date of the board meeting, with provision for shorter notice in case of urgent business.
    • The notice shall include Agenda, Notes to Agenda, and Draft Resolution.
    • The Board Meeting shall pass resolutions to:
      • Approve the issuance of securities through private placement.
      • Approve the Private Placement Offer Letter
      • Identify the persons to whom the offer is to be made.
      • Fix the day, date, time, and venue of the General Meeting.
      • Approve the draft notice convening the General Meeting with explanatory statement as per Section 102 of the Companies Act, 2013.
      • Authorize a Director or Company Secretary to sign and issue the notice of the General Meeting.
    • Draft Minutes shall be prepared and circulated within 15 days from the conclusion of the Board Meeting and shall be signed after finalization and kept in Minutes Book.
    • A copy of the Board resolution shall be filed with the registrar in Form MGT-14 within 30 days of passing of Board resolution.
    • A company shall obtain the approval of the shareholders by convening a general meeting or by passing resolution by postal ballot.

General Meeting Procedure

  • As per Sections 96 and 100 of the Companies Act, 2013 and Secretarial Standard-2:
    • Notice of general meeting shall be given at least 21 clear days prior to the conduct of meeting in the specified mode (as per Section 101 of the Companies Act, 2013 and Rule 18 of the Companies (Management & Administration) Rules, 2018). A shorter notice can be issued with the consent is given as specified under Section 101 of the Companies Act, 2013.
    • The Notice shall be sent to all the directors, members and auditors of the company.
    • The notice shall specify the day, date, time, full address of the venue, and include a statement on the business to be transacted.
    • The General Meeting shall pass a special resolution for issue of securities through private placement along with the following disclosures for each offer or invitation:
      • Particulars of the offer along with the date of passing of Board resolution.
      • Kinds of securities and the offered price.
      • Justification of the offered price inclusive of premium if any.
      • Name and address of the valuer who performed valuation.
      • Intended amount that is to be raised by the company.
      • 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.
    • Minutes of meeting shall be prepared with the specified procedure.
  • Company shall again file the form MFT-14 with ROC within 30 days of passing of Special Resolution along with the fees and details specified under Companies (Registration Offices and Fees) Rules, 2014.
  • Separate bank account shall be opened by the company in a scheduled bank for receiving the money.
  • The company shall make the Private Placement offers letter and maintain the records as specified:
    • A private Placement offer cum application letter to be send in the Form PAS-4 either in writing or in electronic mode within 30 days of recording the name of such person.
    • An application for private placement shall only be made by the addressed persons and all other applications shall be treated as invalid.
    • A company has to prepare a complete record under PAS-5.
  • After receiving the amount in the specified manner, the company shall allot the securities by private placement by convening a board meeting within 60 days from the date of receipt of the application money. The company shall:
    • Repay the application money within 15 days from the expiry of 60 days period if the company fails to allot the security.
    • Be liable to repay the money with interest at the rate of 12% per annum from the date of expiry of 60 days period if the company fails to repay with 15 days period.

Meeting of Board

  • Notice of the Board Meeting shall be issued to all directors at their registered addresses by post or hand delivery or by electronic means at least 7 days before the date of the board meeting, with provision for shorter notice in case of urgent business.
  • The notice shall include Agenda, Notes to Agenda, and Draft Resolution.
  • The Board Meeting shall pass resolutions to:
    • Consider the allotment of securities by private placement.
    • Authorizing the Director/Company Secretary to file the return of allotment with ROC.
  • Draft Minutes shall be prepared and circulated within 15 days from the conclusion of the Board Meeting and signed and entered in the Minutes Book within 30 days of conclusion of meeting

Post Allotment Requirements

  • A Private Company shall make necessary entries in the Register of Members in Form MGT-1 within 7 days of board meeting in which allotment of equity shares was approved if the shares are not allotted in demat.

 

[Rule 9 A of the Companies (Prospectus and Allotment of Securities) 2014 prescribes that every unlisted public company except a Nidhi, a Government Company and a Wholly Owned Subsidiary shall issue the securities only in dematerialised form.

Rule 9B of the Companies (Prospectus and Allotment of Securities) 2014 prescribes every private company other than small company to issue shares only in demat form and facilitate demat of all securities by 30.09.24. This date has been further extended till 30.06.25 for Private companies other than Producer Company which is not a small company vide MCA File no: F. No.1/21/2013-CL-V dated 12.02.25]

  • A company shall make necessary entries in the register of debenture holders in form MGT-2 within 7 days of the board meeting in which the allotment of debentures was approved.
  • A return of allotment to be filed with the registrar within 15 days of allotment in Form PAS-3 along with the specified fees and details.
  • In case the company has not allotted the shares in demat mode, the company shall issue the certificate of shares in Form SH-1 within a period of 2 months from the date of allotment of the shareholders. (Rule 5 of the Companies (Prospectus and Allotment of Securities) 2014)
    • The debenture certificate is to be issued and delivered within a period of 6 months from the date of allotment.

Punishments & Penalties:

  • As per Section 42 of the Companies Act, 2013:
    • If a company defaults in filing the return of allotment within the prescribed period 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.
    • 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 as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing the penalty.

Note: In addition, Listed Companies have to adhere with the SEBI Regulations (LODR/ICDR) for issuing shares on private placement basis

Disclaimer: The information contained in this Article is intended solely for personal non-commercial use of the user who accepts full responsibility of its use. The information in the article is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. We make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, reliability or completeness of any information on our page/article. 

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