Section 42- Offer or invitation for subscription of securities on private placement
Updated: Mar 3
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.
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').
Maximum limit of individuals to whom private placement can be made
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.
The company must retain the application money in a separate bank account at a designated bank and use it only for adjusting securities allotment or in the event that the company is unable to allot securities, the application fees will be refunded. The return of allotment of securities must be filed by the company with the ROC after allotting the securities within a time period of 30 days from the allotment in the Form PAS-3 with the fees as stated in the Companies (Registration Offices and Fees) Rules, 2014. Further, the if the form has been filed by a company which is neither a One-person company nor a small company, the form should be pre-certified by a practicing Certified Management Accountant, a Chartered Accountant or a Company Secretary.
Private Placement record
A complete record of the private placement offers shall be made by the company in the Form PAS.5., whose copy along with the private placement offer letter in the Form PAS.4. shall be filed with the registrar with prescribed fees within the time period of 30 days from the date of the private placement offer letter. In the case that the company is listed, a copy of the record will have to be submitted within 30 days from the date of the private placement offer letter to the SEBI under Rule 14(3) of Companies (Prospectus and Allotment of Securities) Rules, 2014.
Punishment for the Non-compliance of Private placement
If a company takes money or makes an offer in violation of the Act and Rules, the company, its directors, and promoters will face a penalty. The penalty could be up to Rs.2 crore, or the amount involved in the invitation or offer, whichever is higher. Within thirty days after the penalty order, the corporation should reimburse all funds to the subscribers.