There are many ways to raise share capital by a company one of which includes an issue of shares via private placement. A private placement is a method to raise share capital by offer or an invitation to subscribe for securities (which includes shares) of a company, made to a specific group of persons (as identified by the board of the company), however, it does not include a public issue through the issue of prospectus. As per a Reserve Bank of India’s (RBI’s) publication:
“In general, private placement is defined as the issuance of securities to less than 50 persons. Unlike a public offering, private placement is exempt from filing an offer document with the Securities and Exchange Board of India (SEBI) for its comments.”
Definition as per the Companies Act, 2013
Section 42 of the Companies Act talks about the offer or invitation for subscription of securities on private placement.
Section 42(3) defines Private Placement as, “Private Placement” means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in this section.
The other conditions include:
- The private placement can be made to a maximum of 200 people in a given financial year and 50 people at one time (i.e., for each kind of security). This however does not include qualified institutional buyers and employees of the company being offered securities under the employee stock option plan or employee share purchase plan.
- The money raised through private placement can be received only through legal banking channels, like through electronic transfer, through cheque or demand draft, and not by cash. It is noteworthy that the Law allows the issue of securities for consideration other than cash subject to necessary compliance.
- The money received for private placement should not be used for any purpose other than:
- For adjustment against Allotment of securities;
- For the repayment of money where the Company is not capable of allotting securities.
- The application money gotten for the private placement is required to be deposited in a separate bank account with a scheduled bank.
- Should be authorized by articles of association of the company.
- An offer or invitation to subscribe to securities (other than the non-convertible debentures) through private placement can be made only if the proposal has been previously approved by a special resolution for “each” of the offers or invitations.
In case of an offer or invitation for non-convertible debentures (NCD), if the proposed amount to be raised through such offer or invitation does not exceed the limit as specified in 180 (1) (c), a relevant board resolution is adequate. However, where limits under 180 (1) (c) are crossed, a previous special resolution for all the offers or invitations for such NCD during the year (Calendar year) is required. It is advisable to pass a special resolution at the beginning of the year in case such limits are to be crossed.
Note – Section 180 talks about the powers of the board. The board can exercise certain powers only with the approval of shareholders; Earlier while calculating the borrowing limits under the Section 180(1)(c) the limit was calculated as per paid-up capital and free reserves. Now along with paid-up capital and free reserves, the Securities premiums are also considered for calculations, as per the Companies (Amendment) Act, 2017, effective from 9th February 2018.
- It cannot carry any right of renunciation, that is the shares offered to a person say Mr. XYZ can be subscribed by him alone and he cannot transfer that right to any other person.
- A Company cannot make a fresh offer or invitation unless the previous allotment with respect to any securities is completed, withdrawn or abandoned by the Company.
(Exception) A Company may, at any time, make more than one issue of securities to persons as may be identified by the Board.
Time for completing the allotment of the shares issued through private placement
The time for allotment of securities is 60 days from the date of receipt of the application money.
Further, in case of failure by the company to allot the securities, all the money received needs to be repaid to the investors within 15 days post-completion of 60 days period. Post this period the company is liable to pay interest at the rate of 12% p.a. to the investors. For better understanding an example is given below:
- For filing a resolution of the board approving the private placement and a special resolution for private placement, Form MGT-14 is required to be filed. Note that Private Companies are exempted from filing of Board resolution in form MGT-14 for the issue of shares as per exemption notification dated 5 June 2015.
- The list of persons to whom the letter of offer is sent should be recorded in Form PAS-5 (record of private placement offers).
- A private placement offer letter is to be prepared in Form PAS-4. However, a company shall issue a private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the Registry.
- Although generally, a return of allotment is required to be filed in the MCA registry in e-form PAS-3 within 30 days, in case of a private placement, the return of allotment is required to be filed through e-Form PAS-3 along with a list of allottees and other specified details like their names, address, permanent Account Number, E-mail IDs, class of securities, date of allotment, the number of securities held, nominal value and amount paid on such securities; and particulars of the consideration received if the securities were issued for consideration other than cash, etc., within 15 days of allotment. The most important point here is, as per section 42 (4), a company shall not utilize monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar.
Prohibitions while issuing shares through private placement
The following is strictly prohibited in Private Placement
- Any general announcements,
- A general solicitation,
- Any form of marketing,
- Any form of advertising, and
- Any seminar or meeting whose attendees have been invited by a general solicitation or advertisement.
Maximum and minimum Offer size for private placement issue
There is currently no minimum or maximum offer size for raising capital through Private Placement.
Procedure for issuing shares through private placement
Note that the following procedure is for a private limited company wanting to issue shares through private placement.
1. Check if the articles of the company contain the provision for private placement. If not amend the article of the company to allow the same by passing a special resolution in the General Meeting of the company, subject to shareholders’ agreement, if any.
2. Appoint a registered valuer for the valuation of securities and if the consideration is other than cash, then the consideration should also be valued by a registered valuer eligible to evaluate that particular class of asset.
3. If the articles provide a green signal call for the Board Meeting. Provide 7 days’ notice. Other formalities of the notice as per the Companies Act, as well as the Secretarial Standards, should be complied with. The agenda for the board meeting should provide for the business to be transacted that is the issue of securities through a private placement.
4. In the board meeting check the quorum for the meeting. Once the quorum is complete the board should decide upon the capital to be raised by private placement, the Board should consider the valuation report issued by the valuer and decide the price of securities, approve the list of identified persons to whom the securities will be allotted.
5. The board should pass a resolution for approval of the Private Placement Offer and also approve the draft of the Form PAS-4 as discussed above.
A separate bank account needs to be opened/identified for the deposit of money received through the Private Placement. Accordingly, the Board can pass a suitable resolution to open a bank account in a scheduled bank
6. The board should then decide upon calling the general meeting of the company.
7. The passed board resolution is to be filed in Form MGT-14 within 30 days of passing of the board resolution. (This is applicable only if the company cannot claim exemption to file forms as per exemption notification dated 13 June 2017 – i.e. if the company makes a default in filing annual return the company loses its exemption to file form MGT-14, and subsequently, it will have to file Form MGT -14.)
8. The minutes of the board meeting needs to be recorded as per the requirements of the company’s activities and rules made there.
9. The notice for calling the general meeting of the company shall be circulated to the shareholders at least 21 clear days before the meeting that is, exclusive of the day of service of the notice and of the day on which the meeting is to be held. However, if the Articles of a private company may contain a period shorter than 21 days, in such cases, appropriate notice as per the Articles shall be provided. The explanatory statement attached to the notice shall state the following:
(a) particulars of the offer including the date of passing of the Board resolution;
(b) kinds of securities offered and the price at which security is being offered:
(c) basis or justification for the price (including premium, if any) at which the offer or invitation is being made;
(d) name and address of the valuer who performed the valuation;
(e) the amount which the company intends to raise by way of such securities;
(f) material terms of raising such securities, proposed time schedule, purposes or objects of offering, 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:
10. Other formalities of the notice as per the companies’ act should be complied with.
11. Subject to other procedural formalities of the general meeting as per the Companies Act such as the requirement of quorum, election of chairman, etc. the shareholders should approve the list of offerees and the offer letter in Form PAS-4 along with a special resolution for Issues of Shares through Private Placement.
12. As discussed above, a special resolution is to be filed in Form MGT-14 within 30 days of passing the Special Resolution in the general meeting.
13. The minutes of the general meeting need to be recorded as per the requirements of the company’s act and rules made there.
14. Simultaneously, the offer letter (specifying the offer period and other details), in form PAS-4, needs to be circulated amongst the identified persons as approved by the board within 30 days of recording the names of the persons identified.
The offerees then submit part B of PAS-4 to the Company and deposit money in the separate bank account maintained by the company for this purpose.
15. Once the offer period specified in the offer letter is closed another meeting of the board is to be held for passing a board resolution for the allotment of securities to the eligible investors. The minutes of the board meeting need to be recorded as per the requirements of the company’s activities and rules made there.
16. Form PAS-3 (for return of Allotment) is to be filed within 15 days of passing the board resolution.
17. The Register of Members is required to be updated after the completion of the allotment of the shares.
18. Post that duly stamped share certificates (in case the shares are in physical form) are to be issued to the shareholders within 2 months from the date of allotment.
19. The Form PAS-5 (the record of Private Placement) should be filled and maintained by the Company.
20. The Company can then transfer the funds from the specified bank account to its general bank account and can then utilize the money in terms of the offer letter.
This concludes the procedure of private placement of securities under section 42 of the Companies Act 2013.