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Statutory Framework Governing Private Placement

Offer or Invitation for Subscription of Securities on Private Placement [Section 42 of the Companies Act, 2013 read with Rule 14]

• • Section 42, subject to Section 26 of the Act, permits a company to make an offer or invitation to subscribe to its securities by way of private placement through issuance of a Private Placement Offer cum Application Letter (Form PAS-4), strictly in accordance with the Act and the Rules.
  • Rule 14 prescribes the procedural requirements, approvals, limits, forms, and compliance obligations necessary to operationalise Section 42.

Eligible Offerees and Numerical Limits

Select Group of Persons [Section 42(2) read with Rule 14(2)]

A private placement offer or invitation shall be made only to a select group of persons, whose names are recorded by the company prior to the issuance of the offer letter.

The total number of persons to whom such offer or invitation is made shall not exceed 200 persons in aggregate for each kind of security (equity shares, preference shares, debentures) during a financial year.

Exclusions from Numerical Limit

The following categories shall not be counted while computing the limit of 200 persons:

• • Qualified Institutional Buyers (QIBs)
  • Employees of the company offered securities under an ESOP scheme pursuant to Section 62(1)(b)

Deemed Public Offer [Explanation I to Section 42(2)]

• • If a company, whether listed or unlisted, makes an offer to allot or invites subscription to securities to more than the prescribed number of persons, such offer shall be deemed to be a public offer, irrespective of:
  • Whether consideration has been received or not; or
  • Whether the company intends to list its securities.

Approvals and Authorizations

1. 1. Board Approval [Section 179 read with Rule 14]

The Board of Directors shall:

• • • Consider and approve the proposal for private placement;
    • Approve the draft private placement offer cum application letter (PAS-4);
    • Approve calling of a general meeting, wherever a special resolution is required;
    • Approve appointment of a registered valuer, wherever valuation is mandated.

1. 2. Shareholder Approval [Section 42(3) read with Rule 14(1)]

A Special Resolution of shareholders is mandatory for each private placement offer or invitation.

Note: A company shall file Form MGT-14 for Allotment of Securities through Private Placement within 30 days of passing the Special Resolution in the General Meeting

Exceptions

• • • For non-convertible debentures within the borrowing limits of Section 180(1)(c), a Board Resolution is sufficient.

• • • For non-convertible debentures exceeding the limits under Section 180(1)(c), one special resolution per financial year shall suffice.
    • For offers made exclusively to QIBs, one special resolution per year is adequate.

1. 3. Disclosures in Explanatory Statement [Rule 14(1)]

The explanatory statement annexed to the notice seeking shareholder approval shall disclose:

• • • Date of the Board resolution;
    • Kind and price of securities offered;
    • Basis and justification for valuation (including premium);
    • Name and address of the registered valuer;
    • Amount proposed to be raised;
    • Objects of the offer and proposed time schedule;
    • Contribution by promoters and directors;
    • Material terms of assets charged, if any.

1. 4. Restrictions on Advertisement and Marketing [Section 42(8)]

No company making a private placement shall:

• • • Issue public advertisements;
    • Utilise marketing, media, or distribution channels; or
    • Inform the public at large about such offer or invitation.

1. 5. Foreign Person Restrictions [Third Proviso to Rule 14(1)]

No private placement offer shall be made to:

• • • A body corporate incorporated in, or
    • A national of, a country sharing a land border with India,

unless prior Government approval under the FEMA (Non-Debt Instruments) Rules, 2019 has been obtained and attached with Form PAS-4.

Issue Procedure and Compliance Timeline

Step 1 – Identification of Offerees [Section 42(7)]

The company shall identify eligible persons and record their names before issuing the offer letter.

Step 2 – Filing of Resolutions

Relevant Board or Special Resolution shall be filed with the Registrar before issuance of PAS-4.

Step 3 – Issuance of Offer Letter [Section 42(7) read with Rule 14(3)]

• • • Issue Form PAS-4, serially numbered;
    • Addressed specifically to identified persons;
    • Sent within 30 days of recording their names.

No person other than the addressee may apply.

Step 4 – Receipt of Subscription Money [Section 42(5) read with Rule 14(5)]

Subscription money shall:

• • • Be received only through banking channels;
    • Be paid from the subscriber’s own bank account;
    • Not be received in cash.

Step 5 – Separate Bank Account [Section 42(6)]

Application money shall be kept in a separate scheduled bank account and used only for:

• • • Allotment of securities; or
    • Refund of monies where allotment is not made.

Step 6 – Allotment of Securities [Section 42(6)]

Allotment must be completed within 60 days from receipt of application money.
Failure results in:

• • • Refund within 15 days; and
    • Interest at 12% per annum

Step 7 – Filing of Return of Allotment [Section 42(9) read with Rule 14(6)]

Form PAS-3 shall be filed within 15 days of allotment, containing:

• • • Complete list of allottees;
    • Security details;
    • Consideration details.

Step 8 – Record Maintenance [Rule 14(4)]

The company shall maintain complete records of private placement offers in Form PAS-5.

Exemptions [Rule 14(7)]

The limit of 200 persons shall not apply to:

• • • NBFCs regulated by RBI;
    • Housing Finance Companies regulated by NHB,

provided they comply with applicable regulatory norms.

Shelf Prospectus – Information Memorandum [Section 31(2) read with Rule 10]

Any company issuing securities under a shelf prospectus shall file an Information Memorandum in Form PAS-2 with the Registrar at least one month prior to making a second or subsequent offer.