11 Steps of Private Placement

Meaning of Private Placement

Section 42 of the Companies Act, 2013 allows any Company, whether Private or Public to make offer of Securities or invitation (other than by way of Public Offer) to a selected group of person to make Private Placement of Securities through issue of a “Private Placement Offer Letter” subject to satisfaction of specific conditions mentioned u/s. 42.

Conditions for Private Placement of Shares

• A Company shall not make any Private Placement unless the same has been approved by Special Resolution.
• An offer cannot be made to more than 200 persons in aggregate in a financial year and not more than 50 people in each offer.
• The limitation is not just on the allotment to 200 people but even an invitation to subscribe can’t be made to more than 200 people.
• Qualified Institutional Buyer’s (QIBs) and employees offered Securities through ESOP are not to be included in the ambit of “200 person to whom the offer is made”.
• The minimum Investment size shall not be less than Rs. 20,000/- of face value of the securities per person and payment for subscription shall be made through the Bank Account of the Subscribers only.
• Neither public advertisements will be released nor any media, marketing or distribution channels or agents will be used to inform the public at large about such an offer.
• No fresh allotment or invitation shall be made unless the allotment or invitation made earlier has been completed or has been withdrawn or abandoned by the Company.
• The Company shall maintain complete record of Private Placement Offers in form PAS-5.
• The money so received shall be kept in a separate Bank Account of the Company and utilized only for allotment.
• The Company can allot shares only to those persons whose name is decided by the Board of Directors. The application form has to be numbered and addressed specifically to the person to whom the offer is made.
• A valuation report is required by a Registered Valuer to justify the price of the securities. The Registered Valuer can be a Company Secretary, Chartered Accountants or a Cost Accountants in Practice.

When treated as Public Offer

Any offer or invitation not in Compliance with the provisions of this Section shall be treated as a Public Offer and all the Provisions of Companies Act, 2013; the securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992 shall be required to be complied with.

Allotment of Securities

The Company shall allot Securities within 60 days from date of receipt of application money. If it does not allot within 60 days, then application money shall be repaid within 15 days after the expiry of 60 days without interest.

Further if the Company does not pay money after the aforesaid period, then the Company is liable to repay the money with interest @ 12% per annum from the expiry of the 60th day.

Steps involved in Private Placement

Step-1:  Call Board of Directors Meeting

• Issue Notice of Board Meeting to all Directors (at least 7 days prior to the date of meeting).
• Attach Agenda of Board Meeting along with Notice.

Step-2:  Hold Board Meeting

• Check quorum for Board Meeting.
• Identify the person(s) to whom the Private Placement Offer/ Invitation has to be made.
• Prepare Private Placement Offer Letter under PAS-4.
• Pass Board Resolution for approval of Offer Letter.
• Issue notice of General Meeting (at least 21 days before the meeting). The notice shall specify the place, date, day and time of the meeting and shall contain a statement of the business to be transacted at the meeting.

Step-3:  Hold Extra Ordinary General Meeting

• Check the quorum of the meeting.
• Present offer letter in PAS-4 before the members for their approval.
• Pass Special Resolution for Private Placement of shares (For every such offer separate Special Resolution is required).

Step-4:  Circulation of Offer Letter

• Offer Letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made.
• Offer Letter will be sent either in writing or in electronic mode.
• Issue Offer Letter within 30 days of General Meeting/ recording the name of such person(s).

Step-5:  File form with ROC

File MGT-14 with ROC within 30 days of passing of Special Resolution along with the following attachments:-

1. Notice of General Meeting with Explanatory Statement
2. Certified True Copy of Special Resolution.
3. Minutes of General Meeting.

Step-6:  Open Separate Bank Account

i. Monies received on application under this Section shall be kept in a Separate Bank Account in a Scheduled Bank and shall not be utilized for any purpose other than –

1. For adjustment against allotment of Securities; or
2. For the repayment of monies where the Company is unable to allot Securities.

ii. The Company shall keep the record of the Bank Account from which such payment for Subscription has been received.

Step-7:  File Form with ROC

File GNL-2 with ROC within 30 days of Circulation of offer letter along with the following attachments:-

1. PAS-4 (Offer Letter).
2. PAS-5 (Complete record of Private Placement).

Step-8:  Call Board Meeting after receiving of allotment money

• Issue Notice of Board Meeting to all Directors (at least 7 days prior to the date of meeting).
• Attach Agenda of Board Meeting along with Notice.

Step-9:  Hold the Board Meeting

• Check the quorum of the Meeting.
• Present list of Allotees before the meeting.
• Pass Board Resolution for allotment of shares within 60 days of receiving of money.
• Pass Board Resolution for issue of share Certificate.
• Authorize two directors and a authorized person to sign share certificate.

Step-10:  File form with ROC

File PAS-3 with ROC for allotment of shares along with the following attachments:-

1. List of Allotees
2. Board Resolution for allotment of shares.

Step 11: Issue share certificates and update minute book and register.

iii. Issue share certificate in Form SH-1 within 2 months from the date of allotment of shares.

Additional Points

• Date of Private Placement Offer Letter shall be deemed to be the date of circulation of Private Placement Offer Letter.
• Right to acquire shares under Private Placement Offer can’t be renounce in favor of any other person because as per Rule-14 sub rule 1 proviso, No person other than the person so addressed in the application form shall be allowed to apply through such application form.
• In case of offer or invitation for non-convertible debentures, it shall be sufficient if the company pass a single Special Resolution of all the offers or invitation made for debenture during a year. No need to pass Resolution time and time for the Private Placement of Debentures in a year.

Penalty

If conditions of Section 42 has not been complied with that can lead to a penalty of INR 2 Crore or the amount involved in the offer, whichever is higher.

The author can also be reached at lkpurohit29@gmail.com