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Allotment of Securities under Private Placement

Hitherto, raising Capital by Private Limited Companies was a simple affair under the

Companies Act, 1956, since there were certain procedural exemptions. However, the

Companies Act, 2013 and rules thereunder now require specific compliance under the

Private Placement provisions which have come into force in order to safeguard the interest

of the existing shareholders in the Company and also to secure the money put in by the

investors. These provisions are applicable to both Private and Public Companies.

Pursuant to Section 42 of Companies Act, 2013, Private placement - means any offer of

securities or invitation to subscribe to securities to a select group of persons by a

company (other than by way of public offer) through issue of a private placement offer

letter.

Select group not to exceed 200 and excludes Qualified Institutional Buyers & Employees under ESOP. Steps involved:

• Approval of the Shareholders by special resolution is required.

• Notice of General Meeting shall contain an explanatory statement which justifies the offer price (including premium if any).

• Valuation certificate by a Valuer is mandatory.

• No public advertisement to inform an offer.

• Complete details of Private Placement offer to be recorded in the Form PAS 5* by the Company.

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• Within 30 days of recording the details of the offer by the Company, placement offer letter Form PAS 4* along with application from to be sent to all the persons whose name is recorded either in the written or electronic form (No person other than the person mentioned in the application form shall subscribe, if done then it is treated as invalid allotment.). No specific format prescribed for Share Application Form.

• Subscription money received on application under this section shall be 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

• Subscription amount shall be paid through cheque / demand draft / other banking channels but not by cash

• Investment size per person shall not be less than Rs. 20000/- of face value of securities.

• Along with the copy of record maintained in PAS 5*, Form PAS 4* needs to be filed with ROC within 30 days of circulation of placement of offer letter.

• No fresh offer or invitation under this section shall be made unless the allotments to any earlier offer or invitation is completed / withdrawn / abandoned by the company.

• Allotment to be done within 60 days of receipt of the application money. If the Company fails to allot such securities within the said 60 days it shall repay the application money to the subscribers within 15 days from the date of completion of 60 days. Further, failure to refund shall result in interest @ 12% p.a. from the expiry of the 60 days.

• A return of allotment of securities under section 42 shall be filed with the Registrar within 30 days of allotment in Form PAS 3* and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of all security holders.

• If a company makes an offer / accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or Rs. 2 crore, whichever is higher, and the company shall also refund all monies to subscribers within a period of 30 days of the order imposing the penalty.

It can be noted that further issue of shares under the Private Placement route has to be

properly planned and procedure adhere to. This is only a brief note on the subject as

information to Entrepreneur’s / Business owners and shall not be treated as any legal

advice.

Divya Joshi CS Professional Student