What is Private Placement of securities?

Pooja , Last updated: 12 August 2020
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Private Placement

Company needs funds to run its activities/business smoothly. Initially, the money comes from the subscription of the members but as the company grows, it needs more funds. The company then raises funds through various methods. One of them is that of Private Placement. It is governed by the provision of the Companies Act, 2013 read with the Rules and the SEBI (Issue of Capital and Disclosure Requirements) Regulation 2018. When this type of issue is done by a listed company, we call it as a preferential allotment while the issue of securities to identified or a select group of persons by an unlisted public company or a private company, we termed it as private placement of securities.

Definition as per section 42 of the Companies Act, 2013

"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 section 42 of the Companies Act, 2013.

Private Placement of securities- Detailed Analysis

To whom the offer can be made?	It is hereby clarified from the definition that Private Placement Offer can be made only to pre-selected investors or to the person or a select group of persons who are identified by the Board. And as such, the company shall not release any kind of public advertisements, utilizes media marketing or distribution channels or agents to inform the public at large about such issue of securities.
Maximum No. of Person for the Offer	The offer of securities or invitation to subscribe securities, cannot be made to more than 200 persons in aggregate in a financial year (excluding qualified institutional buyers and employees of the company being offered securities under ESOP). This restriction would be read for all the securities combined in a Financial Year. If a company allot securities to more than the prescribed number of persons, the same shall be deemed to be a public offer.
Which Securities can be offered?	Shares (Equity Shares & Preference Shares) Debentures (Convertible Debentures & Non-Convertible Debentures) Note: The restrictions of 200 persons would be reckoned individually for each kind of security i.e. 200 for equity share, 200 for preference share, 200 for debentures.
Whether Separate Bank Account in scheduled Bank to be opened for each offer?	There is no need of opening a Separate Bank account every time, it will be sufficient if the Company maintains a separate bank account with scheduled Bank, which is not used for regular or any other purpose.
Who will make payment and how?	The payment must be made through the bank account of the subscriber. However, if monies payable on subscription to securities to be held by joint holders then it shall be paid from the bank account of the person whose name appears first in the application. The subscription money shall be paid either by cheque or demand draft or other banking channels or not by cash.
Whether there is a right of Renunciation?	The offer cannot be re-announced in favor of any other person unlike in right issue. The person to whom the offer is made can either accept or reject the offer. No person other than the person so addressed i.e. the private placement offer cum application letter shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid.
Whether application money can be utilized by the Company before allotting the securities?	No. the Application money received shall not be utilised for any purpose other than: (a) for adjustment against allotment of securities; or (b) for the repayment of monies where the company is unable to allot securities. Once the allotment process completed, the application money can be utilised.
Within how many days the Allotment of Securities to be completed?	Company shall allot its securities within 60 days from the date of receipt of the application money. If the Company is not able to allot the securities within that period, it shall repay the application money to the subscribers within 15 days from the date of completion of 60 days; and If the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of 12% per annum from the expiry of the sixtieth day.
Whether the Company can make fresh offer under PP when one PP offer is pending?	No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.

LET US TAKE A LOOK ON HOW THE WHOLE PROCESS OF PRIVATE PLACEMENT ISSUE TAKE PLACE:

Steps	Heading	Contents
1	Hold a Board Meeting	To approve the list of identified persons To approve the draft offer letter To call General Meeting for members approval
2	Form MGT-14	To File MGT-14 for the Board Resolution for the issue of shares under Private Placement
3	Issue Notice for General Meeting	Issuing notices to the shareholders for Extra-Ordinary General Meeting of the Company as per timelines or with shorter consents.
4	Hold a General Meeting	To pass a special resolution for approving Private Placement and offer letter. Note: In the case of Non-Convertible Debentures, separate Special Resolution is not required if the issue is within the limits u/s 180(1) (c)
5	Circulate Offer Letter (PAS-4)	Circulate the Offer Letter in Form PAS-4 within 30 days of recording names of identified persons. Such Offer cum Application Letters shall be sent either in writing or in electronic mode.
6	Application Money	Open a separate bank account in a scheduled bank where monies received on application shall be kept. The identified person shall make subscription money either by cheque or in demand draft or by any other banking channel, but not by cash
7	Allotment of Securities	After the closure of the offer period, hold another board meeting to pass resolution for allotment of securities to the entitled subscribers. Record of Private Placement should be maintained by the Company in prescribed Form PAS-5. Allotment of securities to be made within 60 days of receipt of application money
8	File Return of Allotment	File form PAS- 3 within 15 days of allotment of securities (money cannot be utilised unless return in the said form is filed)
9	Issuance of Share Certificate	Issue share certificate within 2 months from the date of allotment (As Per Section 56(4) of the Companies Act, 2013
10	Entry in Register of Member	Make entry in the register of members on completion of allotment.

Important: Any private placement issue not made in compliance of the provisions of Section 42(2) of the Companies Act, 2013 shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be applicable.

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Disclaimer: The entire contents of this article have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. We assume no responsibility for the consequences of use of such information. This is only a knowledge sharing initiative and the author does not intend to solicit any business or profession.