Under the Companies Act, 2013, companies can raise funds in three primary ways: public offers, private placements, and rights or bonus issues. Private placement refers to the sale of shares to a specific group of investors instead of the public at large.
Regulatory Framework for Private Placement
Private placements are governed by Section 42 of the Companies Act, 2013, along with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. These rules have undergone changes through the Companies Act 2017 and the Companies (Amendment) Rules 2018.
Applicability
A private placement offer can only be made to a maximum of 200 individuals in a financial year, separately for each type of security (equity shares, preference shares, or debentures).
Special Resolution Requirement
The company’s shareholders must approve the offer or invitation through a special resolution. However, for non-convertible debentures, the company can pass a board resolution as long as the borrowing remains within the limit set by Section 180(1)(c) of the Companies Act.
Private Placement Offer Letter (PPOL)
A private placement offer letter, in Form PAS-4, is sent to the chosen investors. It must be addressed to each investor individually and sent within 30 days of recording their names. The letter cannot include any renunciation rights.
Payment and Banking Requirements
Investors must pay for the securities through their bank accounts, and the company must keep a record of these payments. Additionally, the issuer must open a separate bank account in a scheduled bank to receive the funds.
No Public Advertisement Allowed
The company is prohibited from promoting the private placement offer through advertisements or using any media or agents to publicize the offer.
Allotment Timeline
The company must allot the securities within 60 days of receiving the application money. If it fails to do so, the application money must be refunded within 15 days, with interest at 12% per annum if the refund is delayed beyond the 60-day period.
Return of Allotment
A return of allotment must be filed with the Registrar of Companies (ROC) within 15 days of the allotment. This return is filed using Form PAS-3, and it must include the names, addresses, PAN, and other relevant details of all allottees.
ROC Filing and Utilization of Funds
The company cannot use the money raised through private placement until the allotment has been made and the return of allotment has been filed with the ROC.
Record Keeping
The company is required to maintain a record of the private placement offer in Form PAS-5.
Penalties for Non-Compliance
If the company fails to comply with the provisions of Section 42, the private placement will be considered a public offer, and the company will face penalties. A penalty equal to the amount raised or Rs. 2 Crore (whichever is higher) can be imposed, and the company must refund the money to investors within 30 days.
Conditions for Private Placement
- Private placement offers can be made to 50 to 200 investors in a financial year.
- Qualified Institutional Buyers (QIBs) and employees are excluded from the 200-person limit.
- Offers must be made only to individuals listed by the company before issuing the invitation.
- The minimum investment size for each individual must be Rs. 20,000 or more.
- All payments must be made through demand draft, cheque, or banking channels (no cash transactions).
- The price of the securities must be justified with a valuation report from a registered professional.
Penalties for Violations
If a company violates the rules of Section 42, both the company and its directors may face penalties. In case of non-compliance, the penalty is either the amount raised or Rs. 2 Crore, whichever is higher, and the company must refund the money to investors within 30 days.
Provisions Under FEMA (Foreign Exchange Management Act)
For foreign investors, equity instruments must be issued within 180 days of receiving the inward remittance. If the equity instruments are not issued within this period, the money must be refunded to the foreign investor. Non-compliance with this provision can result in penalties under FEMA.
By following these guidelines, companies can effectively raise capital through private placements while ensuring compliance with the law.
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