Prospectus and Allotment - Private Placement

Section 42. Issue of shares on a Private placement basis.

42(1)

• A company can issue securities through private placement, subject to the rules and conditions in this section.

• A private placement is an offer made privately and not to the general public under strict control and record-keeping.

42(2)

• Private placement can be made only to a select group of persons, known as “identified persons”, chosen by the Board of Directors.

• The number of identified persons cannot exceed 50 persons in a financial year, or a higher number prescribed.

• Exclusions:

  1. Qualified Institutional Buyers (QIBs).

  2. Employees who are offered securities under an Employee Stock Option Scheme (ESOP) under Section 62(1)(b).

• Any offer to more than this limit is automatically treated as a public offer (explained in sub-section 11).

42(3)

• The company must issue a private placement offer-cum-application form to each identified person, in the prescribed format and manner.

• The names and addresses of these persons must be recorded by the company beforehand.

• The offer cannot be renounced or transferred to another person.

Explanations

Private Placement

• Private Placement means any offer or invitation to subscribe to securities made privately to a select group.

• This is done through a private placement offer-cum-application, fulfilling all the legal conditions.

Qualified Institutional Buyer

• Qualified Institutional Buyer (QIB) means institutional investors as defined by SEBI (ICDR) Regulations, 2009.

• These include mutual funds, insurance companies, banks, etc.

• If a company is listed or unlisted and then offers or allots securities to more than the prescribed number of persons, whether or not:

  1. (a). It receives payment for them.

  2. (b). Intends to list them on a stock exchange.
     

• Then the offer is deemed to be a public offer, and the provisions of Public Offer , the Securities Contracts (Regulation) Act, 1956, and the SEBI Act, 1992 will apply.

42(4)

• Every identified person must apply only through banking channels such as cheque, demand draft, or electronic transfer and not cash.

• The company cannot use the money raised until:

  1. The allotment is completed.

  2. The return of allotment is filed with the Registrar of Companies (ROC).

42(5)

• A company cannot make a new private placement until:

  1. Allotment from the previous offer is completed or that offer has been withdrawn or abandoned.

• However, within the limit of the maximum number of identified persons (50), a company may make more than one issue to different classes of investors.

42(6)

• The company must allot securities within 60 days of receiving the application money.

• If it fails to do so, it must refund the money within 15 days after the expiry of the 60-day period.

• If it fails to refund within those 15 days, then it must pay interest @12% per annum from the 61st day onwards.

•  Money received must be kept in a separate bank account in a scheduled bank, and used only for:

  1. (a). Adjusting against allotment.

  2. (b). Refunding where allotment cannot be made.

42(7)

• A company cannot advertise or use media, marketing, or agents to inform the public about its private placement.

• The offer must remain strictly private, without public promotion.

42(8)

• After allotment, the company must file a return of allotment with the Registrar of Companies within 15 days.

• This return must include a complete list of all allottees, their names, addresses, number of securities allotted, and other prescribed details.

42(9)

• If the company fails to file the return of allotment within 15 days:

• The company, its promoters, and directors will be liable to pay a penalty of ₹1,000 per day during which the default continues,

• But the total penalty shall not exceed ₹25 lakh.

42(10)

• If a company makes an offer or accepts money in contravention of this section:

• The company, its promoters, and directors are liable to a penalty up to the amount raised or ₹2 crore, whichever is lower.

• The company must also refund all money to the subscribers with 12% interest, within 30 days of the penalty order.

42(11)

• If a company does not comply with the rules and makes an offer to more than the permitted number of persons, or breaches the private placement limits, then:

• The offer will be treated as a public offer, and all the provisions of:

  1. The Companies Act, 2013 (Part I of this Chapter),

  2. The Securities Contracts (Regulation) Act, 1956, and

  3. The SEBI Act, 1992, will automatically apply.