Private Placement is one of the mechanisms by which a company can receive money against the issue of share capital. Private Placement in lay man’s language is making an offer of securities to select group of persons and not to existing shareholders. In the life span of a company, whenever funds are raised in the form of equity shares, preference shares, debenture or even as share warrants from a group of investors, then the provisions of private placement should be complied with before raising the funds.
For funding via private placement, the company needs to fulfil certain conditions; they are as follows:
- An offer to invest cannot be made to,
- more than 50 persons at once, and
- more than 200 persons in a financial year (Qualified Institutional Buyers are outside the ambit of this 200 and are excluded from the coverage of private placement)
- employees of the company to whom shares can be allotted through preferential allotment route or employee stock options.
- The investment size per person shall not be less than Rs. 20,000 of face value of securities. For example, if the per share face value of shares is Rs. 10, then the investment size should not be less than 2,000 shares (the actual consideration, with premium, could be higher)
- The shares of the company will have to be valued by the Registered Valuer, before making the offer. The allotment shall be made only at this price or a price higher than valuation given by the Registered Valuer.
- An offer can be made only to those persons whose names are recorded by the company in the format PAS-5 prescribed under the Companies Act.
- The formal offer will have to made through PAS-4. Both PAS-4 and PAS-5 will have to be filed with the ROC within 30 days from the date of circulating the offer.
- The company shall not give any advertisement & shall not make a public announcement of such offering.
- Investment shall be made by the person only through normal banking channels (i.e. online transfer, cheque or demand draft). Further,
- No investment shall be made in cash.
- The investment shall be made only from the bank account of the person making the investment and not from any other account,
- The company shall keep a record of the bank account from which the investment is being made.
- The company should allot shares within 60 days of receipt of investment money. If shares are not allotted within 60 days, the investment money will have to be returned within 15 days of completion of this tenure (i.e. 75 days from date of receipt of investment money). Interest shall be payable at 12% if refunds are delayed beyond this period.
- All investment money shall be kept in a separate bank account designated for this purpose alone. This account cannot be used for any other purpose.
Amendment made on 07.08.2018:
MCA in its vide Notification dated 07-Aug-2018 introduced the following amendments to Private Placement Guidelines:
- A company shall not make an offer or invitation to subscribe for securities unless the offer has been approved by shareholders by way of a Special Resolution (i.e. 75% majority). The explanatory statement notice calling the meeting should contain the following points:
- Particulars of the offer, including the date of passing Board resolution.
- Type of securities offered.
- Justification for the share price.
- Name and address of the registered valuer.
- Amount intended to be raised by the company.
- Important terms of raising the investment, e.g. time lines, objective of the offer etc.
- The offer letter should be serially numbered and should be addressed to the person to whom the offer is made and shall be sent either electronically or in writing.
- Company shall issue Private Placement offer letter only after special Resolution or Board resolution is filed with Registry.
Punishment for a Contravention:
- If a company defaults in filing the return of allotment within the period prescribed that is within 15 days from the date of share allotment, 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.
- 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 two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in the act to subscribers within a period of thirty days of the order imposing the penalty.
- Notwithstanding anything contained in above clauses, any private placement issue not made in compliance of the provisions of Section 42 sub-section (2) shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be applicable.]. This would warrant the issue to be treated as a public offer (which a private company cannot do) and other penal provisions of the Act will get triggered.