P R I VAT E P L AC E M E N T
Chapter 5
CONTENTS
o Introduction to Private Placement of Shares
o Return of Allotment
o Penalty
o Conditions applicable to Private Placement
o Summary
Ms. Shamim Shaikh, DBC
MEANING:
As per Section 42(3), "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 this section.
P R I VAT E P L AC E M E N T
O F F E R - C U M - A P P L I C AT I O N :
Section 42(1) provides that a company may, subject to the provisions of this
section, make a private placement of securities, Section 42(3) reads, a company
making private placement shall issue private placement offer and application in
Form PAS-4 serially numbered and addressed specifically to the person to
whom the offer is made and shall be sent to him, elther in writing or in
electronic mode within 30 days of recording the name of such person pursuant
to sub-section (3) of section 42.
DETAILS OF IDENTIFIED PERSONS
[SECTION 42(3)]
o Further, the company has to make a record of the
names and addresses of the identified persons. In
the case of Mrs. Proddaturi Malathi vs. SRP Logistics
Pvt. Ltd (2018), directors of the respondent company
allotted shares on a private placement basis without
following the necessary procedure. It was held by
the National Company Law Appellate Tribunal that
the increase in share capital and subsequent
allotment of shares are invalid and thus, can be set
aside.
Ms. Shamim Shaikh, DBC
MAXIMUM NUMBER OF PERSONS TO WHOM
O F F E R C A N B E M A D E A N D O T H E R I N C I D E N TA L
M AT T E R S :
The board identifies not more than 200 persons to whom an offer of private
placement has to be made. Private placement offers shall be made to these
identified persons in such form and manner as may be prescribed. This cap of
200 people can be altered upon prescription under any rules or regulations of
the government. Any non-compliance with this condition would lead to the
conversion of the private placement offer into a public offer.
Offer of private placements cannot be offered to qualified institutional buyers
or employees of the company. In this regard, Explanation II of Section 42 states
that the meaning of “qualified institutional buyer” is the same as defined in
the Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009.
FURTHER SUB - RULE (7) PROVIDES
T H AT T H E P ROV I S I O N S O F S U B -
RULE (2) SHALL NOT BE
APPLICABLE TO:
(a) Non-banking financial companies which are registered with the Reserve
Bank of India under the Reserve Bank of India Act, 1934; and
(b) Housing finance companies which are registered with the National Housing
Bank under the National Housing Bank Act, 1987.
If they are complying with regulations made by the Reserve Bank of India or the
National Housing Bank In respect of offer or invitation to be issued on private
placement basis.
A P P L I C AT I O N T O P R I VAT E
P L AC E M E N T :
o As per section 42(4) states that Section 42(6) states that a company:
every identified person willing to
subscribe to the private o Allot the securities within 60 days
placement issue shall apply in the from receipt of application
private placement and money.
application issued to such person
along with subscription money o If not allotted, Repay the
paid either by cheque or application money within 15 days
demand draft or other banking from the expiry of 60 days.
channel and not by cash, o If not repaid, liable to pay interest
However, a company shall not @12% p.a. from the expiry of
utilise monies raised through the 60th day.
private placement unless
allotment is made and the return
of allotment is filed with the
Registrar.
Ms. Shamim Shaikh, DBC
SUBSCRIPTION MONEY TO BE KEPT IN A
S E PA R AT E B A N K AC C O U N T
Provision to Section 42(6) states that monies received on application received
by the company shall kept in a separate bank account in a scheduled bank and
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.
Ms. Shamim Shaikh, DBC
NO INFORMATION TO PUBLIC ABOUT ISSUE:
Section 42(7) states that no company issuing
securities under this section shall release any public
advertisements or utilize any media, marketing or
distribution channels or agents to inform the
public at large about such an issue.
RETURN OF ALLOTMENT
Filing with the Registrar a return of allotment (FORM PAS-3) within fifteen days
from the date of the allotment, including a complete list of all allottees, with
their full name, address, PAN No. and e-mail of security holder, the class of
security held, the date of allotment of security, the number of securities held,
nominal value and amount paid on such securities and particulars of
consideration received if the securities were issued for consideration other than
cash.
PENALTY FOR NON -FILING
F O R M PA S - 3 :
The company, its promoters and directors shall be liable to penalty for each
default of one thousand rupees for each day during which such default
continues but not exceeding twenty-five lakh rupees.
P E N A LT Y
According to section 42(10), if a company
makes an offer or accepts monies in
contravention of section 42, the company, its
promoters & directors shall be liable for a
penalty which may extend to the amount raised
through the private placement or two crore
rupees, whichever is lower, and the company
shall also refund all monies with interest to
subscribers within a period of thirty days of the
order imposing the penalty.
CONDITIONS APPLICABLE TO
P R I VAT E P L AC E M E N T
o Special Resolution of Shareholders:
A Company shall not make an offer or invitation to subscribe to
securities through private placement unless the proposal has been
previously approved by the shareholders the company, by a special
resolution for each of the offers or invitation.
Ms. Shamim Shaikh, DBC
The Explanatory Statement Annexed To The Notice For Shareholders'
Approval Shall Contain The Following Disclosure:
a) particulars of the offer including date of passing of Board Resolution;
(b) kinds of securities offered and the price at which such security is being
offered;
(c) basis or justification for the price (including premium, if any) at which the offer
or invitation is being made:
(d) name and address of valuer who performed valuation;
(e) amount which the company intends to raise by way of such securities:
(f) material terms of raising such securities, proposed time schedule, purposes or
objects of offer contribution being made by the promoters or directors either as
part of the offer or separately in furtherance of objects; principle terms of assets
charged as securities:
