Private Placement – Section 42 of Companies Act 2013

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Private Placement Section 42 of Companies Act
2013 Procedure key points
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• This Article focus on Private Placement under
  section 42 of the Companies Act, 2013 and Rule 14
  of the Companies (Prospectus and Allotment of
  Securities) Rules, 2014, it provides that a
  company can make a private placement to a
  selected group of persons/ identified persons (or
  either to a person) or we can say company
  offering its securities or inviting to subscribe
  its securities other than by way of a public
  issue through a private placement offer letter up
  to 200 person (exclude QIB and employee of
  company under ESOP) in aggregate in a Financial
  year for each kind of securities. However unless
  allotment with respect of one kind of security is
  completed, another kind of security shall not be
  issued. HIGHLIGHTS All private placement offers
  should be made only to those persons whose names
  are recorded by the company before sending the
  invitation to subscribe. The persons whose names
  are recorded will receive the offer, and the
  company should maintain a complete record of the
  offers in Form PAS-5. The Rules state that the
  company should offer or invite to subscribe its
  securities through a private placement offer
  letter in Form PAS-4. A company should send a
  private placement offer letter accompanied by an
  application form serially numbered and addressed
  either in writing or electronic mode,
  specifically to the person to whom such an offer
  is made. The company should send the private
  placement offer letter to the specific person
  within thirty days of recording the persons
  name. In case of offer or invitation for
  non-convertible debentures, it shall be
  sufficient if the company passes the Board
  Resolution each time if such issue is within the
  borrowing limit specified under Section 180(1)
  (c) of the Companies Act. However, borrowing
  limits are to be approved by the shareholders of
  the issuer company first.

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• PROCEDURE 1. Conduct a Board Meeting and pass
  Board Resolution to approve list of identified
  person, draft offer letter for offer and issue of
  securities on preferential basis through private
  placement 2. Issue Notice with Explanatory
  Statement and conduct EGM or AGM and pass Special
  Resolution to take approval of shareholder to
  approve offer letter and issue securities on
  private placement basis and then file Form MGT-14
  with Registrar of Companies within 30 days of
  date of General Meeting 3. Call Board meeting
  and pass Board Resolution for circulation of
  offer letter under private Placement (skip this
  Meeting, if same is mentioned in 1Board meeting
  to circulate offer letter subject to approval of
  shareholders)

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• 4. Received Subscription money within closing of
  open offer by any mode except cash 5. After
  receiving Subscription money, call a Board
  meeting and pass Board Resolution for allotment
  of securities to that selected group of persons
  6. File return of allotment in the Form PAS-3
  with Registrar of Companies within 15 days of
  allotment 7. Call Board Meeting and pass Board
  Resolution to issue share certificates (skip this
  Board Meeting if it was mention at the time of
  allotment of securities) 8. Issue share
  certificates within 2 months from date of
  allotment. POINTS TO REMEMBER 1. DSC of the
  Director or Professional should be associate with
  V3 portal of M CA 2. The value of the private
  placement offer or invitation for each person
  should be of an investment size of Rs.20,000 of
  the face value of the securities. 3. Circulation
  of offer letter to identified person should be
  made after filling Form MGT-14

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• 4. Company shall maintain a complete record of
  private placement offers in Form PAS-5 5.
  Company can withdrawn its issue by giving notice
  to identified person before closing the open
  offer. 6. If company not received any
  subscription money within offer period, the issue
  get automatically cancelled. 7. Subscription
  money is received only from the account of
  identified person only within open offer 8.
  Subscription money shall be kept in a separate
  Bank account in a Scheduled Bank 9. Company cant
  use the subscription money until return of
  allotment is filled with Registrar of Companies
  10. Subscription money should be used for
  business purpose only 11. Company shall make
  allotment within 60 days of receipt of
  subscription money otherwise repay subscription
  money within 15 days from expiry of 60 days, if
  fails to do so, repay it with interest _at_12 per
  annum calculated after 60 days 12. Form MGT-14 is
  not a STP form for this purpose and Form PAS-3 is
  a STP 13. Any offer in non-compliance of
  provisions of Section 42 will be deemed to be a
  public offer.

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• Attachments to Forms M GT-14 1. Copy of Board
  Resolution for offer and issue of securities on
  preferential basis through private placement 2.
  Copy of Notice of EGM/ AGM with Explanatory
  Statement 3. Copy of Special Resolution 4.
  Consent of Shareholders, if general meeting
  called at shorter notice. 1. Copy of Board
  Resolution for allotment of securities 2. Copy of
  Valuation Report 3. List of allottees 4. a
  complete record of private placement offers and
  acceptances in Form PAS-5 is required 5. Any
  additional information can be included as an
  optional attachment (s). v If the company is a
  listed company then, it should file the record of
  private placement offers along with the private
  placement offer letter with the Securities and
  Exchange Board within thirty days of circulating
  the private placement offer letter. v And if the
  identified person is a listed company then the
  listed company give disclosure about the
  acquisition or agree to acquire the acquisition
  of securities with the Securities and Exchange
  Board.

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• PENALTY FOR NON-COMPLIANCE OF PRIVATE PLACEMENT
  A company, its directors and promoters will be
  liable for a penalty if the company accepts
  monies or makes an offer in contravention of the
  Act and Rules. The penalty may extend to the
  amount involved in the invitation or offer or
  Rs.2 crore, whichever is higher. The company
  should also refund all monies to the subscribers
  within thirty days of the order imposing the
  penalty.
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