This article has been written by Khushi Sarkhedi , a first year BA LLB student from AURO university

 Introduction

Public offer

Without financing, no firm can function. There are two ways for private corporations to raise money by issuing securities: either through a public sale of securities or a private placement. Rules for private placements are less scrutinized than those for publicly listed shares. Each provides capital, but the requirements for issuance, continuing financial reporting, and investor accessibility vary depending on the form of issue. The first securities issued for sale on the open market is known as an initial public offering, or IPO. The Securities and Exchange Commission regulates these issues, which require regular financial reporting in order for investors to trade them. Going public allows companies to raise funds for the start-up of a project, diversification/expansion, working capital, and even debt repayment or possible acquisitions. This is known as a fresh issue of capital, and the proceeds go to the company1. Businesses list on stock exchanges to give current shareholders, such as venture capitalists, a way to sell all or part of their shares in the business or to allow promoters to dilute their ownership of the company. When the proceeds of the issuance go to the selling shareholders rather than the company, this is referred to as an offer for sale. The issuer extends an invitation to new investors to join its shareholder family through a public offering. [1] The promoters of the firm, in cooperation with its investment bankers, establish the price at which the shares are made available to investors. The company’s shares are listed and can be traded at the specified stock markets when an IPO is successfully completed. 

Private placement

Without going public, a private placement is a cost-effective method of generating cash. Any offer of securities or invitation to subscribe for securities made to a select group of people by a company (other than through a public offer) through the issuance of a private placement offer letter and that complies with the requirements outlined in section 42 of the Companies Act, 2013, is referred to as a private placement. [17] Any offer of securities (not just shares) or invitation to subscribe for securities made to a small group of people by a company through the issuance of a private placement offer letter and which complies with the requirements outlined in section 42 of the Act is referred to as a private placement.

 A company will need to raise money in order to pay its working capital needs, set up initiatives, launch new businesses, or expand its current operations. The Corporation can choose to raise money by issuing bonds or debentures, issuing additional shares of capital, or by obtaining a loan from a bank, financial institution, or non-banking finance company. [18] After considering its internal financial dynamics, the company will decide whether to raise more cash through loan financing or through share capital based on its present financial condition. When combined with Rule 14 of the Companies (Prospectus and Allocation of Securities) Regulations, 2014, the provisions of Section 42 of the Companies Act of 2013, as amended by the Companies (Amendment) Act of 2017, address the issuance of securities by private placement. The term “Private Placement” refers to any invitation to subscribe for securities or offer to sell securities to a small group of people (referred to as “identified individuals” above), through the issuance of securities. Only the proposed issue shall be regarded as a Private Placement. There are essentially four ways to increase the share capital, according to the Companies Act of 2013. The four options are Private Placement, Right Issue, Bonus Issue, and Public Issue. One method of growing share capital is through private placement. It is crucial to comprehend the specifics of this, thus. In this article, we examine the 2013 Companies Act’s requirements for private placement.

Provisions of private placement

Maximum memebrs

In the case of a public corporation, the maximum number of people to whom offers may be made in a fiscal year is 200. The maximum number of members in a private corporation must not exceed 200.

 Records

Only people whose names have been registered by the firm prior to the invitation to subscribe shall receive any private placement offers.

Getting Payouts

The only acceptable forms of payment for the subscription of securities are checks, demand drafts, and other banking channels. Money shouldn’t be given to you in cash. The corporation must additionally retain a record of the bank account from which such payments have been received. The sum thus received should be held in a separate bank account. The money can only be used for allocation, and each person’s share of the offer’s face value in securities cannot be less than INR 20,000. Cash transactions are not allowed.

Sharing Allocation

From the day the application form is received, the allocation process must be completed within 60 days. The application fee must be returned within 15 days if the allocation is not completed by the deadline. If the application fee is not paid back within 15 days, it must be paid together with interest at a rate of 12% per year.

Regulatory Filing

Only people whose names have been registered by the firm prior to the invitation to subscribe shall receive any private placement offers. Form PAS-5 must be used by the company to keep an accurate record of all private placement offers. Within 30 days of the date of circulation, which includes the date of the offer letter, a copy of such records, a private placement offer letter in Form PAS-4, along with the names of the offeree, must be submitted with the Registrar of Companies.

Private Placement vs. Public Offer They differ from one other.

One way to sell assets to the broader public if there are many investors is through a public offering. While a private placement is one way to privately or directly sell shares to a small number of individual investors or institutional investors. Large-scale businesses use public offerings to raise money. Smaller businesses, meanwhile, choose raising capital through private placements. Investment bankers serve as middlemen to bring together long-term fund sources and customers in the capital market in the event of a public offering. Yet, as private placements include direct talks between the issuing business and the investors, there is no need for a mediator. As underwriters are needed in a public offering, flotation expenses must be taken into account. Nevertheless, as an underwriter is not required for a private placement, floatation costs are not included. 

Penalties for Non-Compliance with Private Placement Procedure: The firm shall always act in accordance with the Companies Act 2013 and the relevant rules (https://www.mca.gov.in/Ministry/pdf/Companies Act 1956 13jun2011.pdf). A fine of up to the amount involved in the specific offer or up to Rs. 2 crores, whichever is larger, shall be imposed if the corporation collects money or violates the Act’s requirements. The corporation then has 30 days from the day the penalty was imposed to reimburse the money contributed by subscribers.

Chapter 42 of the Corporations Act

Section 42 (10) of the Act states that if a corporation offers or takes money in violation of section 42 of the Companies Act, the company, its promoters, and its directors may be subject to a fine of up to two crore rupees or the amount of the offer or invitation, whichever is larger. The business also has a 30-day deadline after receiving the ruling imposing the fine to repay the full sum to subscribers. 

Conclusion

Without conducting an IPO, a private placement is a less expensive and more economical method of obtaining cash. As we all know, a company requires money to launch new initiatives or projects for its current operations or to cover its working capital demands. Good corporate governance has been firmly established in India thanks to the 2013 Companies Act. The aforementioned Act has made a number of modifications to create openness, accountability, and independence in a company’s activities.

Citation :

https://taxguru.in/company-law/private-placement-companies-act-2013-section-42.html

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