Private Placement - Section 42 Of Companies Act 2013
Updated: Oct 4, 2022
Section 42 of the Companies Act, 2013, as altered by the Companies (Amendment) Act, 2017, and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 govern the sale of securities through a private placement. The term "Private Placement" refers to any offer of securities or invitation to subscribe to securities made to a small group of people (referred to as "identified individuals") as part of a securities issue. Only the proposed issuance is considered a Private Placement.
What is Private placement?
The sale of securities to a small number of private investors to obtain funds is referred to as a private placement. Mutual fund investors, banks, insurance firms, and other private investors are among them. Private placements differ from public offerings in that public offerings sell shares to anyone wanting to buy them on the open market, whereas private placements sell shares to specific investors.
Offer letter for private placement
Regulation related to private placement by companies have been given in Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 which state that the company should extend an invitation to subscribe to its securities through an offer letter in the Form PAS-4.
A private placement offer letter should be accompanied by an application form that is serially numbered and addressed, either in writing or electronically, to the individual to whom the offer is being made. Within thirty days of recording the person's name, the corporation should deliver the private placement offer letter to that person. The offer should be accepted by the individual to whom the private placement offer letter is addressed in the application form. Within thirty days of sending out the private placement offer letter; the company shall submit all of the offer's details with the Registrar of Companies ('ROC').
Threshold of Private Placement
The maximum number of selected persons to whom the company can make a private placement offer cannot exceed more than 50. Here, one should note that this number does not include the employees and institutional buyers of the company who have been offered securities in the financial year as per Section 62 of the Act. The invitation of private placement should not exceed more than 200 persons in the sum financial year, this limit will not include institutional buyers and employees who have been offered securities as per section 62 of the Companies Act, 2013.
The amount of private placement offer should not exceed more than an investment value of 20,000 rupees of the face value of the securities. Here, the exceptions to the number of select persons and value of private placement are-
i. Non-banking financial companies registered under the reserve Bank of India Act, 1934.
ii. Housing finance companies registered with the National Housing Bank under National Housing Bank Act, 1987.
Mode of Payment
Each identified individual who wants to subscribe to private placement should apply through the application given to them by the company along with the subscription money in the form of a cheque or a demand draft and not through cash.
Private Placement Allotment
Payment for securities subscriptions must be done solely from the bank account of the person who is subscribing to the securities. The company must preserve a record of the bank account from which such subscription payments were made. Rule 14(2)(d) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 states that money payable on subscriptions to securities to be held by joint holders must be paid from the bank account of the person whose name appears first in the application.
Within sixty days of receiving the application monies for the securities, a corporation making a private placement invitation or offer should allot its stocks. If the company is unable to allocate securities within sixty days, the corporation must reimburse the application money to the subscribers within fifteen days of the completion date. When a company fails to repay the application money within fifteen days after the sixty-day period has expired, it is obliged to repay the subscription money plus interest at a rate of 12% per year from the end of the sixty-day period.