Crux of Private Placement Under Companies Act, 2013 By CS Madhuri Pandey | Partner at Mamta Binani & Associates


BRIEF BACKGROUND

There’s more than one way to raise capital, and the very first option starts with you. If you’re not willing to invest in yourself, how can you expect anyone else to? Many successful entrepreneurs put nearly all their savings into their small business, and that helps catch the eye of investors because it’s clear you’re fully committed to the project. But what if you have hardly any capital to invest. Most of the time going by the classic approach, it is for the best to wait for the launch until there is something to offer. Getting that first round of funding is often the most difficult, and lenders want to see that you’re serious.

However, looking at the changing dynamics of the economy a Company can raise money through various resources. One of the best ways is through Private Placement. Private Placement (or non-public offering) is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors. Private placement offerings allow companies to raise money by selling stocks, bonds and other instruments. Such offerings may be exempt from federal securities registration requirements. This exemption allows a company to raise business capital without having to comply with the registration requirements of a public securities offering.

Private Placement:

As per Explanation II(ii) to Section 42(2):

Private Placement means any offer of securities or invitation to subscribe securities to a select group of persons by a company which satisfies the conditions specified in section 42”.

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 200 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 and shall accordingly be governed by the provisions of Part I of Chapter III of the Companies Act, 2013.
 
DIFFERENT MODE OF ISSUING OF SECURITIES

Companies can issue securities through the following modes:

I. Public Offer through prospectus (ONLY PUBLIC COMPANIES – Part I of Chap III of Companies Act, 2013) - Public Offer here includes initial public offer (IPO) or further public offer (FPO) of securities to the public by a company, or an offer for sale (OFS) of securities to the public by an existing shareholder, through issue of a prospectus.
 
II. Private Placement- means an offer of securities or invitation to subscribe securities (other than public offer) by a Company to selected people.
 
III. Rights Issue – means an issue of shares offered at a special price by a company to its existing shareholders in proportion to their holding of old shares.
 
IV. Bonus Issue – means an issue of additional shares to shareholders instead of a dividend, in proportion to the shares already held.
 
V. ESOP – Where at any time a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to employees under a scheme of employees’ stock option, subject to the special resolution passed by the company and subject to such conditions as may be prescribed.
 
VI. Sweat Equity - means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions.
 
In this write-up, the author intends to discuss specifically on the topic of Private Placement.

PRIVATE PLACEMENT & PRIVATE PLACEMENT OFFER LETTER

Before delving into the detailed procedure involved in Private Placement, we need to understand two most important terminologies:-

Private Placement - the offer of securities or invitation to subscribe securities (other than public offer) by a Company to selected people through Private Placement Offer Letter in compliance with Section 42 – Board of Directors to identify the select group of persons (identified persons) to whom Private Placement is to be made.

Private Placement Offer Letter (hereinafter referred to as ‘PPOL’) - to be accompanied by application Form serially numbered and specifically addressed to the intended offeree – other than the person addressed is not allowed to apply through the application form.

PPOL is to be circulated to the intended offeree within 30 days of recording their names. PPOL is to be sent to only such persons whose names are recorded by the Company prior to the invitation to subscribe.

The process of how Private Placement is to be made by issuing PPOL is in Format PAS-4.

Complete records of such offers shall be maintained by the Company in PAS-5 which is required to be filed with the Registrar of Companies (hereinafter referred to as ‘ROC’) within 30 days from the date of circulation of PPOL along with PAS-4. (Listed Companies to file the same with SEBI within 30 days).

Note:

Date of Private Placement Offer Letter shall be deemed to be the date of circulation of Private Placement Offer Letter.

Now, let us discuss the conditions needed to be complied with for raising funds through Private Company.

CONDITIONS FOR PRIVATE PLACEMENT

Section 42 of the Act, 2013 read with Rule 14 of the Companies (Prospective and Allotment of Securities) Rules, 2014, prescribes the following requirements:

1. Private Placement cannot be made unless it has been previously approved by a Special Resolution in respect of EACH OFFER that a Company makes.

However, in the case of non-convertible debentures, one such Special Resolution for all offers in a year shall suffice.

2. The offer of Private Placement not to be made to more than 200 persons in aggregate in a Financial Year.

Points to remember:

  • In the calculation of this limit of 200, offers made to QIBs and employees under ESOP scheme shall not be considered.
  • This limit of 200 shall be reckoned individually for each type of security that is Equity Shares, Preference Shares and Debenture.
  • However multiple securities can be offered simultaneously.
  • Any breach of this limit shall make the Private Placement offer to be a deemed Public Offer and shall accordingly then be governed by Part I of this Chapter.
3. Investment size per person shall not be less than Rs.20,000/- of the face value of securities.
In respect to the point no. 2 & 3 above, exemption has been extended to Non Banking Financial Companies registered with Reserve Bank of India ((hereinafter referred to as ‘RBI’) and Housing Finance Companies registered with National Housing Bank if they are complying with regulations made by RBI or NHB in respect of offer or invitation of offer on Private Placement basis.

4. No fresh offer or invitation for Private Placement can be made if allotment under any previous offer is pending.


5. Subscription money MUST be received by way of cheque, Demand Draft or other banking channels but NOT BY CASH.

Points to remember:

  • Subscription money should be received by the Company in a separate bank A/c with a scheduled bank.
  • The subscription money to be paid from the bank A/c of the person to whom the Application Form together with the Private Placement Offer Letter has been addressed. (In case of joint holders, subscription money to be paid from the bank A/c of the person whose name appears first in the application.)
  • The Company to keep a record of bank A/c from which each subscriber makes payment of subscription money.
6. No company issuing PPOL shall use any marketing or distribution channels to inform the public at large about the offer.

Further, if the company fails to make the allotment, then money should be refunded within 15 days from the expiry of 60 days, otherwise, interest shall be payable @ 12% p.a. and the share application money pending allotment shall also be deemed to be Deposits under Chapter V of the Act.
 
Penal Provisions for Non-Compliance of Section

Default in filing the Return of Allotment within 15 days

Company, Promoters, Directors: penalty of Rs 1000 for each day of default up to Rs 25 Lacs.

Contravention of Sec 42

Company, Promoters, Directors: Penalty - very high penalty of 2 Crores or amount of issue involved whichever is lower

AND

Refund all money within 30 days of the order imposing a penalty.

 
COMPLIANCE CHECKLIST FOR PRIVATE PLACEMENT WITH TIMELINE

1. Convene the Board Meeting for the following purpose:

  • To Prepare Offer Letter in PAS 4.
  • Make Proposal for Private Placement.
  • Prepare a list of persons to whom option will be given.
  • To call Extra Ordinary General Meeting (EGM), to fix the date, day, time and venue of the Meeting.
 
2. Draft the private placement offer letter.
 
3. Call Extra Ordinary General Meeting for the following purpose:

  • Passing Special Resolution (will be valid for 12 months only)
  • Approval of Draft Offer Letter (PAS 4) by Special Resolution.
4. File E- Form MGT -14 with the ROC within 30 days of passing Special Resolution.
 
5. Issue offer letter in PAS-4 within 30 days of record of the name of persons to whom the allotment is to be made.

6. Prepare complete record of Private Placement in PAS-5.
 
7. File Form PAS-4 and Form PAS-5 with ROC within 30 days of issue of offer letter in E- Form GNL-2.
 
8. Make Allotment of shares within 60 days of receipt of Money from the persons to whom the offer was made.
 
9. Call Board Meeting for allotment of shares and file E- Form PAS-3 with ROC within 30 days of Allotment of shares.
 
PAS-3 is to be accompanied by the complete list of security holders containing:

  • Subscribers Name, Address, PAN, email id;
  • Class of security held;
  • Date of allotment;
  • The number of securities, nominal value, paid-up value and particulars of consideration received if issued for consideration other than cash. 
10. Issue Share Certificates to the new Shareholders.
 
Note:

A very significant change which has been brought in vide the Companies Act, 2017, is that a Company cannot utilize the money raised through Private Placement unless allotment is made AND the return of allotment is filed with ROC.


Conclusion:

The Private Placement process is simplified by doing away with separate offer letter details to be kept by the company and reducing number of filings to Registrar. There would be ease in the private placement offer related documentation to enable quick access to funds. The Companies would be allowed to make an offer of multiple security instruments simultaneously. Restriction on the utilization of subscription money before making actual allotment and additionally before filing the allotment return to the registrar. Since the contract is concluding on the allotment and return filing is just a post conclusion compliance, there may be difficulty in compliance. The period for filing return of the return of allotment is proposed to be reduced to 15 days. There is virtually very little relief in case of issue of capital by private companies. The 2013 Act came with a highly restrictive regime in case of private placements. The provisions, in Sec. 42, were obviously inspired by Sahara. Every private placement requires a prior and separate special resolution, a separate bank account, offer letter, and so on. Instead, the same has been made a little bit chaotic particularly the utilization of the proceeds until the filing of PAS 3.

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