Private Placement companies act 2013 under Section 42: Process, Provisions, Forms, and Rules

Section 42 i.e. Private Placement of the Companies Act, 2013 and Rule 14 of Companies (Prospectus and Allotment) of Securities Rules 2014 provides the legal framework for private placement in India. Private placement is a crucial mechanism for companies to raise capital without going through the rigorous process of a public issue. Let’s delve into the details of this essential provision.

What is Private Placement?

Private Placement means any offer or invitation to subscribe or issue of securities to a select group of persons by a company through private placement offer cum application which satisfies the conditions specified in section 42 of Companies Act. It means offer to subscribe or issue securities other then way of public offer. The rules and provisions under section 42 of private placement is applicable to both private and public companies.

Key Provisions of Section 42 and Rule 14 (Private Placement)

Offer Letter and Record Keeping:

• Private and Public Companies making private placements must use a private placement offer letter (Form PAS-4) to invite subscriptions.
• The company should maintain a complete record of the offers in Form PAS-5. The offer letter should be sent specifically to the identified persons within thirty days of recording their names.
• The private placement offer and application shall not carry any right of renunciation.

Approval by Shareholders

• Before making a private placement, the company must obtain approval from its shareholders through a Special Resolution for each offer or invitation.
• This ensures transparency and accountability.

Maximum Limit

• The number of select persons to whom a company can make private placements should not exceed fifty persons in a financial year.
• The Rules state that the offer or invitation of private placements should not be more than two hundred persons in the aggregate financial year. The limit of two hundred persons will exclude the qualified institutional buyers and employees of the company offered securities in the financial year under a scheme of employees stock option as per Section 62 of the Act.
• This limit excludes qualified institutional buyers (QIBs) and employees offered securities under employee stock option plans (ESOPs).
• Every identified person willing to subscribe to private placement shall apply in the private placement and pay either by cheque or demand draft or any other banking channel nut not cash.

No Public Advertisements

• Companies cannot advertise or market private placements.
• Any such attempt would convert the private placement into a public offer.

Utilisation of Application money

• The money received on application under section 42 of company act 2013 shall be kept in a separate bank account in a scheduled bank.
• The money shall not be utilised for any purpose other than-

• Adjustment against allotment of securities
• Repayment of monies where the company is unable to allot securities.

The Private Placement Procedure:

Identify & Select Persons

• The board identifies the persons to whom the private placement will be made.
• These persons should be recorded by the company before sending out invitations.

Prepare & Send Offer Letter

• The company prepares a Private placements offer letter (Form PAS-4).
• The letter includes details of the securities being offered, terms, and conditions.
• The company sends the offer letter to the identified persons either in writing or electronically.

Allotment of securities:

• The company shall allot securities within 60 days from the receipt of application money.
• If company is not able to allot securities within that period, it shall repay the application money to subscribers within 15 days from the expiry of sixty days.
• It shall be liable to repay that money with interest at the rate of 12 percent per annum.

Filing with ROC:

• The company shall file with the ROC a return of allotment within 30 days from the date of allotment with full details of allottees.

Penalties

• If company fails to file return of allotment within 15 days to ROC, the directors and promoters of the company shall be liable to pay 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 any company makes offer and accept monies through private placement in contravention to provisions of private placements under section 42, its directors and promoters shall be liable to pay a penalty which may extend to amount raised through private placement or two crore rupees, whichever is lower.
• Any private placement issue if not made in compliance with section 42 shall be deemed to be a public offer and all the provisions of Companies Act 2013, Securities Contracts (Regulation) Act 1996 and Securities Exchange Board of India, 1992 shall be applicable.

Benefits of Private Placement

• Efficiency: Private placements allow companies to raise capital quickly without the lengthy process of a public issue.
• Control: Companies can choose their investors selectively.
• Confidentiality: Private placements maintain confidentiality, unlike public offerings.

Conclusion

Section 42 of the companies act 2013, strikes a balance between capital raising and investor protection. Thus, every company to avoid criminal liablities and penalties for non-compliance of rules and provisions of Section 42 must adhere to the provisions so that both public and private companies can efficiently raise funds through private placement while ensuring transparency and compliance. Make your private placement hassle free with team Legal Window. In case of queries feel free to reach us at admin@legalwindow.in.