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Private Placement of Shares

A private company may issue securities through 3 methods to raise capital:-

a) Through the issue of bonus shares

b) Through the issue of right shares

c) Through private placement

 

Private Placement (Section 42) refers to an offer made to a particular group of persons by a company by way of a private placement offer letter.

 

Offer of Private Placement

As per the Companies (Prospectus and Allotment of Securities Rules, 2014), the maximum number of persons to whom allotment can be done shall not exceed 200 in a financial year (except for Qualified Institutional Buyers and employees given securities under the ESOP scheme)

 

Any offer or invitation which is not in compliance with this section will be treated as a public offer. Also, the Companies Act provides for a company to offer or invite multiple securities as a part of one offer.

 

Fresh Application

No fresh application can be made if allotment related to any offer or invitation has-

a) Not been completed

b) Been withdrawn

c) Been abandoned

 

Process of Private Placement

First the Company has to pass a special resolution in the General Meeting. In case of an issue of Non-Convertible Debentures (NCDs), if the aggregate borrowings of the Company do not exceed its aggregate Paid-up Share Capital & Free Reserves, a special resolution allowing the issue is not required.    

 

Next, the Company needs to issue a Private Placement letter of offer to the Identified persons by the Board. This letter shall not contain the Right to renunciation.

 

After the Private Placement Letter is prepared, the process is as such-

Issue of private Placement Letter

  • Receive the money towards subscription
  • Allotment of securities within 60 days from receipt of application money.
  • If the allotment is not done in given time, application money needs to be repaid within 15 days.
  • If the application money is not repaid in 15 days, the application money along with interest at 12% per annum needs to be paid.
  • Transfer to money in a separate bank account.
  • Return of allotment with the registrar with the complete list of security holders.
  • In case of contravention, promoter and the directors will be held liable and the penalty may extend to the amount involved in the offer or 2 Crore Rupees (whichever is higher). Company shall refund all monies to subscribers within 30 days of the order

Statutory Requirements

  1. Sending offer cum application letters in form PAS-4 to identified persons within 30 days of recording the names of the identified persons.
  2. Record of Private Placement should be maintained by the Company in prescribed Form PAS-5.
  3. Form PAS-3 has to be filed within 15 days from the date of the allotment and there is a daily penalty of Rs 1,000/- for each day of default.
  4. MCA has eliminated the requirement to file Form PAS-4 & Form PAS-5 with the Registrar of Companies. However, PAS-5 has to go as an attachment in Form PAS-3.
  5. The most important change that has been brought about by the Companies Amendment Act 2017, is that a Company will be allowed to utilize the money raised through Private Placement only after Return of Allotment in Form PAS-3 is filed with the Registrar of Companies.

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