PRIVATE PLACEMENT- ANOTHER WAY TO RAISE ADDITIONAL CAPITAL

Private Placement

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If you want to raise money in your company or have someone to invest, you need to follow a process as laid down under the Companies Act, 2013 and rules made thereunder. As per the Act, there are four ways to increase the share capital of a company namely-

  • Right Issue
  • Public Issue
  • Bonus Issue
  • Private Placement

In this article, we shall discuss the procedural aspect of Private placement of securities as per the Companies Act, 2013. The provisions related to Private Placement are mentioned under Section-42 of the Companies Act, 2013.

Private Placement means the sale of securities by all companies to a small selected group of persons or investors like banks, mutual funds, insurance companies and pension funds.

Please note that Private placement is applicable on all companies whether listed or unlisted. We shall cover the compliances for unlisted companies

Rules Applicability:

Rule – 9, 12 & 14 of Companies (Prospectus & Allotment of Securities) Rules, 2014 are applicable for Private Placement of securities.

E Forms:

  • PAS-4: Letter of offer
  • PAS-5: Record of private placement
  • PAS-3: Return of allotment

PRACTICAL PROCEDURE:

  • The process of Private placement starts with preparation of form PAS-4. It is the letter of offer along with an application form serially numbered, specifically addressed to the offeree (person to whom you want to sell shares of the company) either in writing or in electronic mode within 30 days of recording names of such person. (Rule-14).
  • Prepare form PAS-5 for record of private placement offer within 30 days of circulation of PAS-4.
  • Convene board meeting for:
    • Approval of form PAS-5
    • Draft PAS-4
    • List of allottees
    • Consideration of Valuation report
    • Issue of securities
    • Finalization of notice for EGM along with explanatory statement
    • Fix date, time, and venue of EGM.
    • Decide the offer period
  • E-form MGT-14 for filing the Board resolution with Registrar along with copy of Board resolution for issue of securities. (Exempted in case of private company, download notification Exemptions to Private Companies)
  • Convene EGM for-
  1. Approval of letter of offer in form PAS-4 by special resolution,
  2. Issue of securities on a preferential issue basis.
  • File E form MGT-14 for special resolution with Registrar within 30 days of passing the resolution for issue of securities along with-
  1. Certified true copy of special resolution
  2. Explanatory statement
  • Separate bank account to be maintained and fund not to be utilized for the purpose other than-
  1. For adjustment against allotment of securities; or
  2. For the repayment of monies where the company unable to allot securities.
  • Dispatch Letter of offer with application to the proposed allottees within thirty days of recording names of such person (thirty days from the date of Board meeting).
  • Letter of acceptance of offer from shareholders along with application form and application money.
  • Convene board meeting for-
  1. Final list of allotteess,
  2. Allotment of securities within 60 days of receipt of application money by board resolution.
  • Convene EGM for allotment of securities.
  • File E form MGT-14 for Board resolution (exempted in case of private company) & special resolution with Registrar within 30 days of passing the resolution for allotment of securities along with-
  1. Certified true copy of special resolution
  2. Explanatory statement
  • File E form PAS 3 for return of allotment within 15 days of allotment along with:
  1. List of allottees (separate list of each allottee) includes full name, complete address, number of securities offered and other relevant information required.
  2. Copy of Board or shareholders’ resolution approving allotment of shares.
  3. Valuation report from registered valuer.
  4. Copy of contract/complete particulars of contract duly stamped in case securities are issued other than cash.
  5. Complete record of private placement offer and acceptances in PAS-5.
  • Issue of share certificates in SH-1 within 60 days of allotment to the shareholder, under the common seal of a company or signed by two directors or by a director and the company secretary, specifying the shares held by any person, shall be prima facie evidence of the title of the person to such shares.
  • Stamp duty adjudication as per the rates applicable to relevant states within 30 days of issue of share certificates.
  • In case of allotment in demat form immediately intimation to depository. (Rule-9)
  • Entry in register of members in MGT-1 within 7 days of allotment as per section-88.

If the company fails to maintain such register under section-88, the company and every defaulting officer shall be punishable with minimum fine of Rs. 50,000 which may extend to Rs.3 lacs. In the case of continuing default fine up to Rs.1000/- per day can also be charged.

NUMBER OF LIMIT

 The maximum number of persons to which allotment can be done in a year shall not exceed 200 in a financial year. If the same exceeds the prescribed limit then it will be deemed to be a public issue and the Company has to follow the procedure of Public issue. As per the present scenario, if a Company, listed or unlisted, makes an offer of Securities to more than 200 persons during a year, whether it receives money or not, to any person whether in India or abroad and intends to get its Securities listed on a recognized stock exchange whether in India or abroad, shall be deemed to be a Public issue and the Company has to comply with the provisions of Public issue.

 

VALUATION REPORT

As per section-62(1)(c) if any company proposes to issue new shares (except a right issue to existing shareholders or to employees under employees stock options), the price of such shares should be determined by the registered valuer*.

Valuation report from a registered valuer is mandatory only in case of issue to existing non-resident shareholder where the price of such shares is determined by the valuation report. In case private placement the justification of the price should be mentioned in Letter of offer.

 

ALLOTMENT:

A company shall allot its securities within 60 days from the date of receipt of the application money and if it fails to do so within 60 days, it shall repay the application money to the subscribers within 15 days from the expiry of 60 days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of 12% p.a. from the expiry of the 60th day.

 

IMPORTANT POINTS:

  • There is no specific time period for which the offer is required to be kept open by the Company. Therefore, it is at the discretion of the Company to determine the offer period.
  • The value of offer per person shall be with an investment size of not less than Rs. 20,000/- of face value of the securities.
  • The application money to be received shall be either through cheque, Demand draft, or other banking channels except cash.
  • 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.

CASE LAW:

Sahara India Real Estate Corporation Ltd., V. Securities & Exchange Board of India, [2012] 174 Com Cases 154 (SC): [2012] 110 CLA 476 (SC)

BRIEF OF THE CASE:

Any public company which intends to issue shares or debentures to 200 or more is legally obliged to make an application for listing its securities on a recognized stock exchange. Whereas, Sahara have not followed any of those statutory requirements. It is clear that the Sahara had made an offer of optionally fully convertible debentures to 200 or more persons, consequently, the requirement to make an application for listing became obligatory leading to a statutory mandate (i.e., SEBI regulations, companies Act, SCRA) which they did not follow.

JUDGEMENT OF THE CASE:

In the above mentioned case, offer of securities by Sahara to 200 or more people deemed to be a public offer.

PENALTY:

If a company makes an offer or 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 raised through the private placement or 2 crores rupees, whichever is lower, and the company shall also refund all monies at the rate of 12% p.a. within a period of 30 days of the order imposing the penalty.

Comments (2)

  • Sugandha Reply

    So now there is no need to file form gnl2??

    March 27, 2019 at 7:36 pm
    • Mr.tax Reply

      No requirement of filing GNL- 2 with ROC because the requirement to file PAS-4 and PAS-5 with ROC in e form GNL-2 has been done away with. Earlier the company was required to file private placement offer letter and complete record of the private placement with the registrar within 30 days of circulation of the offer letter.

      April 1, 2019 at 11:11 am

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