Private Placement
A corporation may need to raise money for a variety of reasons, including starting a new project, expanding an already successful operation, or meeting working capital needs. A corporation decides whether to raise money through debt financing after evaluating its present financial situation. This may involve issuing debentures, obtaining loans from banks, financial institutions, or NBFCs, or issuing bonds, equity shares, or preference shares.
By providing stocks to a select group of investors via a private placement offer cum application letter, corporations can raise money without having to make a public offer by using the private placement method. Companies of all sizes, both public and private, can use this strategy.
It is not necessary for businesses to raise money through private placement, though. The Companies Act 2013 (Section 42) and Rule 14 of the Companies (Prospectus and Allotment of Securities Rules) 2014 must be followed if a company selects this course of action.
Conditions for private placement:
With the exception of Qualified Institutional Buyers and employees of the company receiving stocks under the ESOP program, private placements may only be made to a small number of individuals who have been recognized by the Board and are not to exceed 200 in any given financial year. The aforementioned restrictions, which apply to equity shares, preference shares, and debentures, would be calculated separately for each type of security. The following are exempt from the maximum number of select individuals and value of private placement restrictions:
- Non-Banking financial companies under the Reserve Bank of India Act, 1934.
- Housing finance companies registered with the National Housing Bank Act, 1987.
A private placement company is required to send a private placement offer/application letter to individuals whose names and addresses are on file with the company. No one else may apply through such a form other than the individual to whom the private placement offer or application letter is addressed. Securities subscription payments must be paid via a bank account, and the corporation must retain track of the bank account from which these payments were made. Money received through subscriptions by the company must be stored in a separate bank account at a designated bank and used only for the following:
- Adjusting against the allotment of securities.
- For the repayment of monies where the company is unable to allot security.
Before the initial offer letter is finished or withdrawn, a new one cannot be given. To let the public know about such a deal, the corporation is prohibited from using any marketing, media, or distribution channels, or from releasing any public advertisements.
Compliances and Disclosure related to private placement:
In Form PAS-5, the company is required to keep an accurate record of all private placement offers. For any offer or invitation to purchase securities through a private placement, the corporation should obtain the prior consent of the shareholders by passing a special resolution. The following must be included in the EGM notice’s explanatory statement:
- Particulars of the offer.
- Kinds of securities offered and price.
- Basis or justification of price.
- Names and addresses of valuer who performed valuation.
- Amount which the company intends to raise by way of such securities.
- Material terms of raising, proposed time schedule, purpose, and contribution made by promoter or director.
Within 30 days of the distribution of the private placement offer letter, the private placement offer cum application letter must take the form of an application in Form PAS-4 and be filed with the ROC along with applicable costs. Within 30 days of disseminating the private placement offer letter, a listed company must register the record of private placement offers and the private placement offer letter with the Securities and Exchange Board of India. The ability to renounce is not included in the private placement offer or application.
The private placement offer cum application won’t be released by the company until the pertinent special resolution or board resolution has been registered with the Registrar of Companies. A company issuing a private placement invitation or offer must distribute its stocks within 60 days of receiving the application fee. If the company doesn’t return the application money within 15 days of the 60th day having passed, it will be required to repay the subscription money plus interest at a rate of 12% per year. Within 15 days of the allotment, Form PAS-3, along with the appropriate fees, must be filed with the Registrar as a return of the securities issued under Section 42 having the following information.
- Complete list of all security holders.
- Full name, address, PAN, and E-mail of such security holders.
- Class of security held.
- Date of allotment of security.
- Number of securities held, the amount paid, and nominal value of such securities.
- Particulars of the consideration received if the securities were issued for consideration other than cash.
Penalties for non-compliance with provisions related to private placement:
The offer will be regarded as a public offer and not a private placement if it is promoted or advertised, and if the number of identified persons exceeds the permitted limit then also it will be regarded to be a public offer and subject to the applicable provisions of this Act, the Securities Contract (Regulation) Act of 1956, and the SEBI Act of 1992.
The company, its promoters, and its directors will be held liable for a penalty for each default of 1000 rupees for each day during which such default persists, up to a maximum penalty of 25 lakh rupees, if the company fails to file the return of allocation within the required time frame. If the company violates this section, it, its promoters, and its directors could be fined up to 2 crores rupees or the amount raised through the private placement, whichever is less. In addition, the company would be required to return all funds to subscribers with interest within 30 days of the order issuing the fine.
