Introduction

In the Companies Act of 1956, the term “private placement” was not defined. Interestingly, the Act of 1956 did not use the phrase “private placement” at all. It was created by Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited, which issued Optionally Fully Convertible Debentures based on a so-called private placement basis and raised Rs. 27,000 crores from 3 crore investors. The Supreme Court affirmed that the SEBI’s decision that it was a public offer was correct. 

After receiving the approval of the company’s shareholders for the proposed offer or invitation to subscribe for securities by passing a Special Resolution for each offer or invitation, the company may make a private placement of its securities.

“Private placement” is defined as any offer or invitation to subscribe for or issue of securities to a select group of persons by a company (other than by way of a public offer) through a private placement offer-cum application that satisfies the conditions outlined in this section, according to Explanation 1 of Section 42 of the Companies Act, 2013. For instance, it is a private placement if an offer to subscribe for shares is given to a select and small group of friends, clients, or connections.

Thus, private placement offer can be made only through issue of a Private Placement Offer Letter.

The following securities can be issued under private placement:

• Debentures
• Equity shares
• Preference shares

Private Placement Offer Letter

The rules for a company’s private placement are outlined in Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (the “Rules”). According to the Rules, a private placement offer letter in Form PAS-4 must be used by the company to offer or invite investors to subscribe for its securities.

Only those people whose names have been registered by the company before delivering the invitation to subscribe shall get any private placement offers. The offer will be made to the individuals whose names are on record, and the company is required to keep a detailed record of all offers in Form PAS-5. 

A private placement offer letter should be sent along with an application form that is serially numbered, addressed in writing or electronically, and expressly addressed to the individual to whom the offer is being made. Within thirty days of registering the name of the specific individual, the Company shall deliver the Private Placement Offer Letter to such person.

The offer should be accepted by the individual to whom the private placement offer letter is addressed in the application. Within 30 days of circulating the private placement offer letter, the business must file the full details of the offer with the Registrar of Companies (‘ROC’).

Documents Required to issue securities through Private Placement

The following documents are required to issue securities through private placement:

• Application form along with subscription money from all the proposed investors.
• Certified copy of board resolution approving the private placement offer.
• List of allottees containing full name, address, PAN and e-mail ID, class of security, date of allotment and number of securities held, nominal value and amount paid on such securities.
• Notice of general meeting along with the explanatory statement of special resolution.
• Private placement offer cum application letter
• Records of private placement offers in form PAS-5.
• Valuation report

Legal Provisions on Private Placement

The following is a summary of the legal requirements for private placement as outlined in Section 42 of the Companies Act:

1. Offer to select group of persons

In view of the Supreme Court’s decision in Sahara India Real Estate Corporation Ltd. v. SEBI, the number of people to whom an offer may be made in a financial year has been restricted. According to Section 42(2), a private placement must be made to a select group of individuals the Board has selected (referred to as “identified persons”), whose size cannot exceed fifty or any other limit that may be set. The prescribed number is 200, according to Rule 14 of the Companies (Prospectus and Allotment of Shares) Rules, 2014. Consequently, private placement can be made to a small group of no more than 200 people. However, a private placement can be given to as many employees under a scheme for employee stock options as well as to qualified institutional buyers (hereinafter referred to as “QIBs”).

The maximum number of offers and allotment shall not include offers made to QIBs or employees.

Each individual should be given a private placement offer or invitation for Rs. 20,000, which is equal to the face value of the securities. The following, however, are exempt from the maximum number of chosen persons and the value of private placement: 

1. Non-banking financial companies registered under the Reserve Bank of India Act, 1934.
2. Housing finance companies registered with the National Housing Bank under National Housing Bank Act, 1987.
3. Process of Offering Securities

Private placement offers and applications must be made by the company making the private placement in the format that may be prescribed to identify persons. The offer must include the names and addresses of the recipients. No right of renunciation shall exist.

• Deemed Public Offer

In light of the Sahara case, the Companies Act of 2013 added the notion of a considered public offer. The offer will be regarded as a public offer if the conditions below are met:

1. A company, whether it is listed or not, makes an offer.
2. More people than the required number of people are given the offer, and
3. The offer does not adhere to Section 42(2)’s requirements.

In this situation, the public offer rules will apply to the offer.

• Application Money and Banking Channels

Each person who has been identified and is willing to subscribe to a private placement issue must submit an application on the private placement form that has been given to them. Cash payments are not permitted; the application fee must be paid by cheque, demand, or another banking method. The funds for the application must be stored in a distinct bank account at a Schedule Bank. In the Sahara case, the application fee was paid in cash, which is why this provision was made. Consequently, a potential route for money laundering has been blocked.  

• Period of completion of Allotment

The completion of the securities allocation must occur within 60 days of the day the application money was received.

• Interest on delayed refunds

If the company is unable to allocate the securities within 60 days, it must reimburse the applicants for their application fees within 15 days of the 60-day period’s expiration. If the company does not return the application money within the specified time frame, it will be required to do so along with interest starting on the 16th day at a rate of 12% per annum.

• Utilisation of application money

Money obtained in response to an application may only be used to: (a) defray the allotment of securities; or (b) reimburse money in the event that the company is unable to allocate securities.

• Restrictions on fresh offer

Before and until allotments to any prior private placement offer or invitation have been completed or that offer or invitation has been withdrawn or abandoned by the company, a new private placement offer or invitation may not be issued.

• Ban on advertisement and publicity

In order to educate the general public about such a problem, a company is not permitted to release any public advertisements or use any media, marketing, or distribution channels or agents.

1. Return of Allotment
2. Within 15 days of the date of the allocation, as may be prescribed, a return of allotment must be filed with the Registrar. The following information must be submitted in Form PAS-3 and be paid in accordance with the Companies (Registration Offices and Fees) Rules, 2014.
3. A complete list of all holders of securities.
4. The security holders’ full names, addresses, PANs, and email addresses.
5. Security type held.
6. The date the security was allocated.
7. The total number of securities held, the cost of such securities, and their nominal value.
8. Specifics of the payment made if the securities were issued in lieu of cash.. 

Other than One Person Companies and Small Companies, the Form PAS-3 submitted by the company shall be pre-certified by a CMA (Certified Management Accountant), CA (Chartered Accountant), or CS who is currently in service (Company Secretary).

A company, its promoters, and its directors will be held liable for a penalty for each default of one thousand rupees for each day the default persists, up to a maximum penalty of twenty-five lakh rupees, if the company fails to file the return of allocation within the allotted time.

1. Consequences of Contraventions

A company, its promoters, and its directors may be subject to fines up to the amount raised through the private placement or two crore rupees, whichever is lesser, if it makes an offer or accepts money in violation of any provisions. Additionally, within 30 days of the order imposing a penalty, the company in this situation must reimburse all subscriber funds with interest at a rate of 12% per year.

Conclusion

Both the public issue and the private placement are successful ways for companies to raise capital. The former approach is typically used by big businesses that need a lot of money for their venture, but the latter approach is better suited for startups and small businesses that only need a small sum to grow their enterprise.

The best option for an enterprise will depend on the advantages and downsides of both public issues and private placements.