Procedure of Private Placement of shares

In this article, we will discuss procedure for private Placement of securities specifically for private limited Companies.

Private Placement means any offer of securities or invitation to subscribe securities to a selected group of persons by a Company (other than by way of public offer) through issue of a private placement offer cum application letter and which satisfies the conditions specified in this section. 

A company may make an offer or invitation of securities through issue of a private placement offer cum application letter in Form PAS-4.

The Companies Amendment Act, 2017 has rewrapped the entire section 42 which governs the private placement by the companies. So, now we will look at the latest provisions of according to amended act.

Procedure to offer or Invite for subscription of securities on Private Placement:-

1. Hold Board Meeting:-

To grant in-principle approval for issue of securities on private placement basis;

To identify persons to whom securities are allotted;

To approve draft private placement offer cum application letter and record of private placement;

To open a separate bank account for receiving money;

To approve a notice of general meeting for approval of members;

2. The explanatory statement annexed to the notice for the general meeting required u/s 102 shall provide about the following disclosures:-

(a) particulars of the offer including date of passing of Board resolution;

(b) kinds of securities offered and the price at which security is being offered:

(c) basis or justification for the price (including premium, if any) at which the offer  or  invitation is being made;

(d) name and address of valuer who performed valuation;

(e) amount which the company intends to raise by way of such securities;

(f) material terms of raising such securities, proposed time schedule, purposes or objects of offer, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects; principle terms of assets charged as securities:

3. Hold the general meeting and pass the special resolution along with the resolutions to approve the offer letter and authorize an officer of the company to give effect to the private placement.

4. Send private placement offer cum application letter in Form PAS-4 to the proposed subscribers, whose names are recorded by the company prior to the invitation subscribe.

Provided further that the private placement offer and application shall not carry any right of renunciation.

5.  Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person alongwith subscription money paid either by cheque or demand draft or other banking channel and not by Cash:

Provided that a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar.

6. No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company: 

Provided that, subject to the maximum number of identified persons under sub-section (2), a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.

7. File Form MGT-14 along with the special resolution and explanatory statement to the Registrar within 30 days of passing the resolution.

A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in form MGT-14 to the ROC [as per Rule 14(8)]

8. If the said offer or invitation is for non-convertible debentures:-

a. where the proposed amount to be raised through such offer or invitation does not exceed the limit as specified in clause (c) of sub section (1) of section 180 and in such cases relevant Board resolution under  clause (c) of sub-section (3) of section 179 would be adequate: or

b. where the proposed amount to be raised through such offer or invitation exceeds the limit as specified in clause (c) of sub-section (1) of section 180, it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitations for such debentures during the year.

9. The offer or invitation shall not be made to not more than 200 persons in the aggregate in a financial year excluding Qualified Institutional Buyers and Employees offered securities under ESOP.

Further, it was clarified that the restrictions aforesaid would be reckoned individually for each kind of security that is equity share, preference share or debenture.

10. A private placement offer cum application letter shall be in the form of an application in Form PAS-4 serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the name of such person pursuant to sub-section (3) of section 42:

Provided that no person other than the person so addressed i.e. the private placement offer cum application letter shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid.

11. The company shall maintain a complete record of private placement offers in Form PAS-5.

12. The payment to be made for subscription to bank account of the person subscribing to such keep the record of the bank account from where been received:

Provided that monies payable on subscription to securities to be held by joint holders shall be paid from the bank account of the person whose name appears first in the application:

Provided further that the provisions of this sub-rule shall not apply in case of issue of shares for consideration other than cash.

13. Hold another Board meeting for allotment of securities.

14. A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day:

Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—

(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities.

15. No company issuing securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.

16. A company making any allotment of securities under this section, shall file with the Registrar a return of allotment within fifteen days from the date of the allotment in such manner as may be prescribed, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as prescribed.

17. A complete list of all the allottees shall provide about the following-

(i) the full name, address, permanent Account Number and E-mail ID of such security holder;
(ii) the class of security held;
(iii) the date of allotment of security ;
(iv) the number of securities herd, nominal  value and amount paid on such securities; and particulars of consideration received if tire securities were issued for consideration other than cash.

18. A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the Registry.

19. Issue corresponding Share Certificates; make respective entries in Register of Members along with confirming the Distinctive numbers and Certificate Numbers of the Shares allotted.

Some Thoughts

1. Each time a Company issues shares on private placement basis, the Company has to keep Sec. 62(1)(c) in compliance also.
But, particularly for the issue at preferential basis, the word shares' scope has been defined. It provides  the expression, “shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.


Formats of PAS-4




To know the summary provisions of private placements click here
This blog is authored by Company Secretary Ronak Gupta. He is author of many blogs and runs many websites and youtube channels. His work is dedicated to corporate laws, legal, secretarial, professional services and also in strategy formulations for corporates. Mail him at: csronakgupta23@gmail.com or call at :9910226715

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