Private Placement of Shares/Securities – Companies Act, 2013

Section 42 of the Companies Act, 2013 provides that a company may be able to create a private placement for a particular group of people. Private placement by companies means giving away their securities or inviting them to register their securities for a select group of people without the process of issuing public securities by providing a private placement offer letter. This article will talk about the private placement of shares under the Companies Act, 2013.

Requirement for Private Placement of Shares

• Opening a Different Bank Account: –The Company must, before any offer is made, open a separate current account at the Scheduled Bank for Private Placement. Funds from investors should be deposited into this bank account and kept until such allocation is made. The Company will not be able to make a new collateral offer until the previous offer is terminated or canceled by the Company. 
• No Public Advertisements: – A company is not required to advertise a promise in any way that may lead to knowing what is offered to the general public. 
• Validity of Approved Decision: – A special resolution passed by members authorizing a pledge of securities shall remain valid for 12 months from the date of the adoption of the resolution. 
• Obtaining a Valuation Report: –The Company is required to obtain a valuation report from a registered valuer for private placement. 
• Offer price: – The transaction value of an offer should not be less than the amount claimed according to the Registered Auditor’s Evaluation Report.

Private placement Offer Letter

Private securities’ placement can only be made to selected people or identified people (as identified by the company board). A private placement company may not provide its collateral for any public ads or use any marketing, media, or distribution agents or channels to inform the public about such an offer. If the offer is advertised or sold, it will be regarded as a public offering and not a private placement by the company.

Rule 14 of the Companies Act (Prospectus and Allotment of Securities), 2014 provides regulations relating to the private placement of shares. The rules state that a company must provide or invite to register its securities in the form of a private placement offer letter on Form PAS-4.

All such offers should only be made to those people whose names were recorded by the company before inviting to register. People whose names are recorded will receive an offer, and the company must keep a complete record of the offers in Form PAS-5. The company must send the offer letter of private placement with an application number through the form in written or in electronic format, especially to the person to whom the offer is made. The company must send the offer letter to a specific person within 30 days of the person’s name being recorded.

The person to whom the letter of offer for a private placement is applied in the application form must accept the offer. The company must submit the full details of the contribution to the Registrar of Companies (‘ROC’) within 30 days of circulating the offer letter.

Offer Letter for Private Placement of Share Allocation

The company making the offer of securities must distribute its securities within 60 days of receiving the securities application. The company must refund the application fee to the subscribers within 15 days from the expiry date of the sixty days if the company is unable to distribute the securities within 60 days. If the company fails to pay the application fee within fifteen days after the expiry of the sixty days, it is liable to pay the registration fee at an interest rate of 12% per annum from the end of the sixty days.

The company must keep the application money in a separate bank account in a designated bank and should not use it for any purpose other than the following:

• Adjustments against collateral distribution.
• Reimbursement of the application where the company is unable to distribute the securities.

Maximum Private Placement Limit

The nominees for a private placement shall not exceed fifty persons or such maximum number as may be specified by the Rules in the financial year. The 50-person limit does not include qualified institutional buyers and company employees who are granted collateral in the financial year under the stock option scheme in terms of Section 62 of the Act.

The rules state that an invitation for private placement should not exceed two hundred people in a combined financial year. The limit of two hundred persons shall not exclude qualified buyers of employees and employees of the securities company in the financial year under the stock option scheme in terms of Section 62 of the Act.

The value of the private placement offer or invitation per person must be an investment size of Rs.20,000 of the face value of the securities. However, the maximum number of selected people and the value of the private placement do not apply to the following:

• Non-bank financial companies which are registered under the Reserve Bank of India Act, 1934.
• Under the National Housing Bank Act, 1987, the registered Housing finance companies.

Penalty for Private Placement Non-compliance 

The company, its directors, and promoters will be liable for fines if the company receives funds or makes a promise in contravention of the Act and the Rules. The penalty may exceed the amount involved in the invitation or offer or Rs.2 crore, depending on the excess. The company must also refund all payments to subscribers within 30 days of the order issuing the fine.

Final words

Thus it can be concluded that the concept of the private placement is governed by section 42 of the Companies Act, 2013 which is read with Rule 14 of the Companies Act (Prospectus and Securities Allocation Act), 2014, where securities are granted to select a group of people through a private placement offer letter instead of going to public affairs. It is a way for companies to raise more money and meet their operating needs. Hope the article helped to understand the private placement of shares under the Companies Act, 2013.