PRIVATE PLACEMENT:

A company may need to raise funds for setting up new projects, expanding existing business, or
meeting working capital requirements. The company has the option to raise funds either by taking on
debt, such as loans from banks, financial institutions, or non-banking finance companies, or by issuing
debentures or bonds, or by issuing additional share capital. The choice of raising funds through debt
or equity will depend on the company’s current financial position and internal financial dynamics.

Part II of Chapter III of the Companies Act, 2013, addresses Private Placement. A private placement
is a capital-raising event that involves selling securities to a select group of investors.

The provisions of Section 42 of the Companies Act, 2013, along with Rule 14 of the Companies
(Prospectus and Allotment of Securities) Rules, 2014, govern the issuance of securities through
Private Placement. Private Placement refers to any offer of securities or an invitation to subscribe to
securities to a select group of persons (referred to as “identified persons”) by way of issuing
securities. Only such issues will be considered Private Placement.

1. Number of Persons to whom the offer shall be made:

A Private Placement shall be made only to Identified Persons not exceeding fifty or such higher
number as may be prescribed (200 persons in aggregate have been prescribed), excluding Qualified
Institutional Buyers (QIBs) and employees offered securities under a scheme of ESOP, in a financial
year subject to the prescribed conditions.

 The limit of 200 in aggregate shall be considered individually for each kind of security, such
as equity shares, preference shares, and debentures.
 If a company, whether listed or unlisted, makes an offer to allot or invites subscription or
enters into an agreement to allot securities to more than the prescribed number of persons, it
shall be deemed to be a public offer.

2. Subscription of Securities:
Any person who has been offered Private Placement and is willing to subscribe to the shares of the
Company may do so by completing the application form attached to the offer cum application letter
along with the subscription money.
A fresh offer or invitation for Private Placement shall not be made unless any previous offer or
invitation has been completed, withdrawn, or abandoned by the Company. [Section 42(5)].

3. Mode of Payment of Subscription Money:

Subscription money can be paid in any of the following modes:

1. By cheque
2. By demand draft
3. By other banking channels, except cash. [Section 42(4)]

4. Separate Bank Account with Scheduled Bank:

Monies received must be kept in a separate bank account and shall only be utilized for:
-Adjustment against the allotment of securities, or
-Repayment of monies where the company is unable to allot securities.

After the allotment process is completed, the Company may transfer the funds to the regular bank
account used for day-to-day transactions.

5. Time Limit for Allotment of Securities:

A company making an offer or invitation under this section shall allot its securities within 60 days
from the date of receipt of application money. If the Company is unable to allot the securities within
60 days, it must refund the application money to the subscribers within 15 days from the expiry of 60
days. If the Company fails to repay the application money, it shall repay it with interest at 12% p.a.
from the expiry of the 60th day. [Section 42(6)].

If the application money is not refunded within 15 days of the completion of 60 days, the amount
pending for refund will be treated as a Public Deposit under Section 73 of the Companies Act, 2013.

6. Stringent Conditions on Utilisation of Funds: The amendment stipulates that an issuer cannot
utilize any funds raised through private placement until the allotment is completed, and the return of
allotment (PAS 3) is filed with the Registrar of Companies (ROC) within 15 days of allotment. The
timeline for filing the return of allotment has been shortened to 15 days, compared to the previous
provision of 30 days. The requirement of keeping money in a separate bank account remains
unchanged.

7. Relaxation in Filing of PAS-4 and PAS-5 with ROC:

The Offer Letter in Form PAS-4 and the record of persons to whom the Offer Letter is issued in Form
PAS-5 must be maintained by the Company but are no longer required to be filed with the ROC. The
requirement to file the Offer Letter with the Securities and Exchange Board of India (SEBI) for listed
issuers has also been eliminated.

7. Can a company make any Advertisement?

No company issuing securities under this section shall release any public advertisements or utilise any
media, marketing or distribution channels or agents to inform the public at large about such an issue.

8. Simultaneous Issue of Different Securities Permitted:

As a general rule, no fresh issue of securities can be undertaken unless the previous offer of securities
has been withdrawn, or securities have been allotted according to the previous offer. However, it has
been clarified that the Company may simultaneously issue more than one type of security (e.g.,
debentures and equity shares) if they are different types. The 200-person limit is applicable for each
kind of security individually.

9. No Minimum Allotment Size:

The PAS Rules previously stipulated a minimum investment size of INR 20,000 in face value of
securities. This requirement has been removed.

10.Penalties:
If the return of allotment in Form PAS-3 is not filed within 15 days from the date of allotment of
securities, the Company, its promoters, and directors will be liable to a penalty of INR 1,000 for each
day of default, capped at INR 2,500,000. Additionally, for non-compliance with the private placement
provisions, the penalty is capped at the amount raised through the private placement process or INR
20,000,000, whichever is lower. Previously, the penalty was capped at the higher of the two amounts.

RULE 14: Prospectus and Allotment Rules, 2014

14(1) Under Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014,
companies must issue a private placement offer letter in Form PAS-4 for private placements. The
offer can only be made to persons pre-recorded by the company, and a complete record of offers must
be kept in Form PAS-5.

The offer letter, along with a serially numbered application form, should be sent directly to the
identified person, either in writing or electronically, within thirty days of recording their name. The
recipient must then accept the offer, and the company must file details of the offer with the Registrar
of Companies (ROC) within thirty days of distribution.
Special Resolution for Making Private Placement:
14(2)(a) The company can make a private placement of its securities after approval of shareholders of
the company for the proposed offer or invitation to subscribe to securities by passing a Special
Resolution for every offer or invitation.

Offer for non-convertible debentures [Proviso to Rule 14(2)(a)]:

When an invitation is made for subscribing to non-convertible debentures, relaxation is provided to
the company to pass a resolution for it. A special resolution has to be passed only once a year for all
such shares to be issued throughout the year. Further, it is provided that when non-convertible
debentures are offered within 6 months of the commencement of the rules, the above-mentioned
special resolution may be passed within that period.
Limit on private placement offer [Rule 14(2)(b)]

Rule 14(2)(b) of the rules provides that offers of private placements can be made to no more than 200
people in a given financial year. Similar to the provision of Section 42, the rules further state that
qualified institutional buyers and employees of the company are excluded while calculating the cap of
200 people.
It is pertinent to note here that the limit of 200 people is for each kind of security. Provided that a
company can issue another kind of share only when the allotment of previously offered securities has
been made.

Value of private placement offer [Rule 14(2)(c)]:

Rule 2(c) states that the value of the offer made to each person must not be less than Rs. 20,000.
Further, sub-rule 5 states that such a value of the offer need not be fixed in the following cases:-

 Non-banking financial companies registered with the RBI under the Reserve Bank of India
Act, 1934.
 Housing finance companies registered with the National Housing Bank under National
Housing Bank Act, 1987.

If RBI or National Housing Bank has not made similar regulations to govern the above-mentioned
companies then only the rule mentioned in rule 14(2)(c) would be applicable.

Payment for subscription [Rule 14(2)(d)]:

This sub-rule states that the person subscribing to the securities has to make payment from his bank
account only. The emphasis on the source of payment can be judged by the fact that companies have
to keep a record of bank accounts from which payments are received. In the case of the joint holder of
the security, the payment shall be made from the bank account of the person appearing first in the
application.

Definition of Qualified Institutional Buyer (QIB):

Qualified Institutional Buyers (QIBs) include:

1. Mutual funds, venture capital funds, Alternative Investment Funds, and foreign venture
capital investors registered with SEBI.
2. Foreign portfolio investors (other than Category III foreign portfolio investors), registered
with SEBI.
3. Public financial institutions as defined in Section 4A of the Companies Act, 1956.
4. Scheduled commercial banks.
5. Multilateral and bilateral development financial institutions.
6. State industrial development corporations.