Meaning and procedural requirements
Q1: What is the meaning of private placement?
Ans: As per Section 42 of the Companies Act, 2013 (“Act”) “private placement” is an invitation or offer to a select group of persons (identified persons) to subscribe the securities of a company.
Q2: What Kinds of securities are covered under Private Placement?
Ans: Following securities can be issued under Private Placement by complying with all the relevant provisions:
Equity shares:
- Section 42 of the Act read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
- Section 62 of the Act read with Rule 13 of the Companies (Share Capital and Debentures) Rule, 2014
Preference shares:
- Section 55 of the Act in case of private placement of preference shares
- Section 62 of the Act read with Rule 13 of the Companies (Share Capital and Debentures) Rule, 2014 in case of private placement of convertible preference shares
Debentures:
- Section 71 of the Act in case of private placement of debentures
- Section 62 of the Act in case of private placement of convertible debentures
- Section 180(1)(c) of the Act w.r.t limits upto which Non-Convertible Debentures can be raised without shareholders’ approval
- Provisions of deposits shall also be complied with in case Debentures are treated as deposits.
Q3: What is the mode of making an offer of private placement?
The invitation or offer of private placement may be made by way of a private placement offer cum application letter (PAS 4). The same may be viewed here. The enabling Section 42(2) requires issue of a private placement offer cum application letter instead of a prospectus.
Q4: What are the contents of offer letter?
Ans: The contents of the offer letter may be viewed here.
Q5: Which documents are required for the issue of securities through Private Placement?
Following documents are required to issue securities through Private Placement
- Valuation Report
- Private Placement Offer cum Application Letter
- Certified copy of Board Resolution approving the Private Placement offer.
- Notice of General Meeting along with the Explanatory Statement of Special Resolution.
- Records of private placement offers in Form PAS-5.
- Application form along with subscription money from all the proposed Investors.
- List of Allotees containing-
(i) the full name, address, PAN and E-mail ID of Allottees;
(ii) the class of security;
(iii) the date of allotment;
(iv) 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.
Q6: Which Forms are required to be filed in case of Private Placement?
- MGT 14 pursuant to passing of Board Resolution for issue of securities within 30 days of passing Board Resolution.
- MGT-14 pursuant to passing of Special Resolution within 30 Days.
- PAS-3 within 15 days of passing of Board Resolution for allotment of securities.
Q7: Whether Private Companies are required to file MGT 14.
Ans: As per Rule 14(8) of PAS Rules, private companies shall file with the Registry copy of the Board resolution or special resolution with respect to approval under clause (c) of subsection (3) of section 179. Therefore, Private companies have been specifically required to file MGT 14 within 30 days of passing Board Resolution for issuance of securities.
Q8: What is the procedure of making Private Placement?
Ans: The detailed procedure of Private Placement may be viewed here.
Q9: What is the difference between private placement and preferential allotment?
Ans: The difference between private placement and preferential allotment may be viewed here.
Offer to proposed investors
Q10: What is the limit on number of persons to whom offer can be made?
As per Section 42(2) of the Act read with Rule 14(2) of the PAS Rules, a private placement offer may be made to not more than 200 persons in aggregate in a financial year. In computing such 200 invitees, Qualified Institutional Buyers (QIBs) and employees to whom stock options are issued are excluded. The QIBs and employees shall be excluded irrespective of the kind of security proposed to be issued.
Q11: Can Private Placement be made to existing shareholders?
Section 42 nowhere specifically mentions offer of securities to existing shareholders. However, point 2(ix) of PAS 4 ask for the intention of promoters, directors of key managerial personnel to subscribe to the offer. It is amply clear that in most of the cases promoters and directors are also the shareholders of the company. Thus, it becomes amply clear that shares can be issued to existing shareholders under Private Placement.
Further, offer of securities to the existing shareholders is an offer to a ‘select group of persons’ and not open to public. This also supports the statement that private placement offer can be made to existing shareholders.
Q12: Is it mandatory to accept all the shares in a private placement offer letter? Can the proposed investor accept lesser number of shares?
Ans: Firstly, the number of shares to be offered to proposed investors is pre-decided even before the issue of offer letter, in most of the cases. However, if that is not the situation or post issuance of offer letter, the investor decides to accept less number of shares, it is allowed to do so. There is no restriction on acceptance of entire number of shares mentioned in the offer letter.
Q13: Can Company pass one special resolution for allotment of shares in two tranches at different times?
Ans: There is no bar on allotment of shares in two tranches at different times. However, Section 42(6) of the Act states that the company shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days. Therefore, irrespective of the number of tranches in which allotment will be made, the same must be completed within the tenure of 60 days.
Q14: Can different securities be issued at the same time? OR Can the company make more than one private placement offer at the same time?
Ans: As per proviso to section 42(5) of the Act, subject to the maximum number of identified persons under Section 42(2), a company may, at any time, make more than one issue of securities to the identified persons. Therefore, simultaneously, a company can offer issue of different securities to identified persons. For instance, issue of 10,000 preference shares and 5000 debentures at the same time. This proviso is an exception to the general rule that securities cannot be offered unless the previous offer of securities has been completed or withdrawn.
Q15: In case of issue of more than one kind of securities, whether the limit of 200 persons be considered for each kind of security or jointly for all securities.
Ans: As per explanation to Rule 14(2) of PAS Rules, it is hereby clarified that the restriction of 200 persons would be reckoned individually for each kind of security that is equity share, preference share or debenture. For example, offer of Equity shares to 200 persons and debentures to 200 persons in a single Financial Year is completely valid.
Conditions of Private Placement
Q16: What is the minimum period of Private Placement Offer cum Application Letter?
Ans: As per Section 42 of the Act, no minimum period for offer letter has been prescribed. Therefore, the company can open the offer for even 1 day.
Q17: Can Private Placement offer by renounced?
Ans: Proviso to Section 42(3) of the Act clearly provides that the private placement offer and application shall not carry any right of renunciation. The reason being private placement is an offer to pre-identified persons and not to public in general which implies that both the identified person and the company has a mutual understanding with respect to the number of securities to be allotted. Therefore, a person to whom offer letter has not been issued is not allowed to apply.
Q18: Whether new bank account is required to be opened every time company opt for private placement?
Ans: Proviso to Section 42(6) states that monies received on application under private placement 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.
The above provision only requires opening of a separate bank account under section 42, therefore, a single bank account can be used every time company offer securities through private placement by complying with the above conditions.
Q19: Can money received from private placement be utilized before filing PAS-3?
Ans: As per Proviso to Section 42(4), a company is not allowed to utilise monies raised through private placement unless allotment of securities has been made and the return of allotment (PAS 3) has been filed with the Registrar. Section 42(8) provides a time limit of 15 days from the date of the allotment for filing PAS 3. Therefore, if the company fails to file PAS 3 it shall not be eligible to utilize the money raised through private placement.
Q20: Can the Private Placement offer be advertised to attract proposed investors?
Ans: No, as per Section 42(8) of the Act, no company offering securities under private placement shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.
Q21: If Special Resolution was passed for approving conversion of debentures into shares at the time of issuing debentures, whether at the time of conversion, company need to comply with Section 42?
Ans: In case of issue of convertible securities, Section 62(3) of the Act also becomes applicable which states that there is no requirement of complying with Section 42 again at the time of conversion of loan into shares only if the terms of issue of such debentures or loan containing such an option of conversion have been approved before the issue of debentures or the raising of loan by a special resolution passed by the company in general meeting.
Q22: Can the terms of PAS-4 be revised?
Ans: Yes, the terms of private placement cum offer letter (PAS 4) be revised by passing Special Resolution. Reason being the offer letter was approved by way of Special Resolution therefore, to modify the same, Special Resolution shall be passed.
Valuation Report
Q23: Who can issue valuation report in case of private placement?
Ans: As per Section 247 of the Act, only Registered Valuer appointed by the Board of Directors of the Company can provide valuation report.
Q24: What is the validity of the valuation report?
Ans: Validity of valuation report is nowhere mentioned in the Companies Act, 2013. Valuation report is obtained for a particular purpose/event and should remain valid for that particular purpose/event.
Q25: Can shares be issued at a price lower than the price mentioned in the valuation report?
As per Rule 13(3) of the Companies (Share Capital and Debentures) Rules, 2014, price of shares or other securities shall not be less than the price determined on the basis of valuation report of a registered valuer.
Q26: Can shares be issued at a price higher than the price mentioned in the valuation report?
Ans: There is no bar on issue of shares at a price higher than the price mentioned in the valuation report.
Q27: If the valuation of shares is less than face value, can shares be issued at a price less than face value?
As per Section 53 of the Act, a company cannot issue shares at a discount and must be offered at nominal value. Therefore, the minimum price per share shall be its face value only.
Q28: Whether audited balance sheet is required for valuation or provisional balance sheet will also be valid?
Ans: Valuation can also be done on the basis of provisional balance sheet.
Penal Provisions
Q29: What are the consequences of defaults in filing the return of allotment within the prescribed time period?
Ans: According to Section 42(9) of the Act, if a company defaults in filing the return of allotment (PAS 3) within fifteen days from the date of the allotment of securities, the company, its promoters and Directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.
Q30: What are the consequences if company makes private placement offer or accepts monies in contravention of provisions of Section 42?
Ans: The company, its promoters and 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. The company shall also refund all monies with interest at the rate of twelve percent per annum to subscribers within a period of thirty days of the order imposing the penalty.
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