Understand the Private Placement of Shares under the Company Law in Detail

If you are an organisation and are thinking of raising further capital without going for an initial public offering, then you must know the basics of the private placement of the shares under the Company Law. So, let’s get into the details of them.

Introduction to Private Placement of Shares

The Private Placement of the Shares is the method of raising the capital where an offer to subscribe to the securities of the company is provided to a select number of people. The private placement of the shares has been provided under Section 42 of the Companies Act, which gives the power to the listed companies to go for the private placement of the shares. 

The Explanation I to Section 42(3) defines the Private Placement as any offer or any kind of invitation to subscribe for the securities of the company to a selective group of the people and this selective group is known as the Identified Persons.

What are the Advantages of a Private Placement of the Shares? 

• Economical way to raise the Capital of the Company: A Public Ofering of the shares involves alot of steps right from advertising to making public disclosures of the reports, documents, and meetings, making the public aware about the financial status of the organisation. These steps are not only time-consuming but also create a hole in the company’s pocket. This is why Private Placement is preferred as an economical option as it only requires the passing of a Board Resolution. 
• Offers Control: The issuing of the securities at an initial stage or at the mature stage is at the discretion of the company offering their shares at the Private Placement. This allows the companies enough room not to undergo financial scrutiny. 

• Lesser Compliances: This benefit is an added advantage of the first one as the issuance of the securities through Private Placement does not require following a alot of legal compliances with the Securities and Exchange Commission or with Public Trade. Besides, the Private Placement is not required to be registered with the Securities and Exchange Board of India (SEBI). 

• Ensures Confidentiality: With the issuance of the securities with the Private Placement, the company enjoys a great amount of confidentiality as it is not required to make any sort of advertisements to the general public. Sometimes, an unpopular opinion regarding the transparency of the Private Placement of Shares also runs through, but from the perspective of an organization it works as a boon. 

• Zero Advertisements: This advantage is the expansion of the above-mentioned advantage as the company is not required to make any kind of public advertisements and disclosures related to the financial or operational of the organisation. 

• Expert Assistance: We are very much aware that the securities through Private Placement are offered to a selected group of people and onboarding the experienced private equity players in the organsaition brings alot of financial guidance to the organisation as a whole. 

• Attracting More Investors: With the help of the Private Placement of the Securities, more investors can be onboarded in the organisation, particularly the Venture Capitalists and the Private Equity Investors. 

What are the Disadvantages of a Private Placement of the Shares? 

• Limited Pool of Investors: The biggest disadvantage of issuing the securities through Private Placement is having a very limited pool of investors because of the fact that it is being issued to a selective group of people and this is why companies always choose to issue the securities at a substantial discount for a longer duration and at a great risk of the investment. 

• Less Opportunity to Resell: The investors in a Private Placement have a very limited opportunity to resell their securities in an open market. This drawback makes the option of Private Placement a less favourable option. 

• Total Dependency on the Private Players: One of the key advantages of issuing the securities through Private Placement is the authority of the company to issue their shares at either the mature stage or at the initial stages, but this sometimes becomes the biggest disadvantage as investors demand more shares of the profits in the company. The investors also try to be involved in the decision-making process of the company, which often futilely the idea of obtaining funds from them. 

• Transparency: As discussed in the advantages section, the transparency attached to the Private Placement of the Shares is very minimal as the company is not required to make any kind of disclosures to the general public. 

• High Risk: This is the continuation of the above disadvantage where the risk associated with the Private Placement of the Shares is very high due to the lesser number of the disclosures being made. 

• Stringent Regulations: Though as such no disclosures are required to be made to the SEBI but the companies going through the Private Placement of securities has to go through alot of stringent regulations. 

Private Placement of the Shares to a Public Company 

Private Placement of the Shares is the practice followed by the companies that offer their securities to a selective group of people for raising further capital. The concept of the Private Placement is not only limited to the private companies, but even the public companies can also go for the Private Placement of the Shares. 

In order for the public companies to issue their shares with the Private Placement, they are required to appoint an agent or broker who will help the company in finding a suitable person for subscribing to their securities. 

Threshold for issuing the shares via a Private Placement 

• Number of People: The securities through a Private Placement can be offered to only 200 persons. 

• Exclusivity of other Categories: The Private Placement that is made to the exclusive group of the people is required to exempt the Qualified Institutional Buyers and the employees under the Employee Stock Option Plan. 

• Consideration of a Public offer: If the offer is made to more than 200 people, then such an offer will be considered a Public Offer rather than a Private Placement offer. 
• Investor: The Private Placement of the Securities is issued to the group of people who are considered as the accredited investors and at the same time are exempted from the registration under the Regulation D of the Securities Act, 1933. 

What are the Requirements of a Private Placement? 

• Opening of a Bank Account: The most important condition that is required to be fulfilled before going for a Private Placement is the opening of a bank account by the company in a Scheduled Bank as the money from the investors is required to be kept in a separate account until the completion of the allotment.

• Special Resolution: The second important criteria that a company must meet is the passing of a special resolution, which is valid for a period of 12 months from the date of the passing of the same. 

• Preparation of a Valuation Report: A Registered Valuer is required to be appointed for preparing a Valaution Report that will depict the financial status and the financial position of the company in the market and whether it is worth to make an investment or not. 

• Value of the Shares: The value of such shares in the Private Placement is to be determined in accordance with the Valuation Report so prepared. 

What are the Types of Investors for the Private Placement of the Securities? 

Qualified Institutional Placement 

Qualified Institutional Placement, also known as “QIP,” is a type of Private Placement where the offer is made by the listed companies to their investors. This type of Private Placement is considered the most cost-efficient and time-saving method as it allows the company to issue the shares by following lesser regulations and this method is also developed by the SEBI in order to reduce the dependency of the companies upon the Foreign Capital Resources for raising the funds as compared to the Follow Up Offer. 

Preferential Allotment of Shares 

As the name of the type of allotment implies, a Preference has been given to a group of the people for subscribing to the securities of the company. These groups of investors are usually chosen based on their net worth and their overall experience. Generally, these investors in the Preferentail Allotment of Shares are institutions instead of the general public. 

What are the Rules of the Companies (Prospectus and Allotment of Shares) Rules, 2014 applicable to the issuance of the Private Placement of the Shares?

Private Placement Offer Letter 

Under Rule 14(1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the rules and the legal compliances involved in the process of the issuance of the securities are discussed. This Rule states that the Private Placement Offer Letter is to be made in FORM PAS-14. The offer letter shall be required to be addressed to the persons whose names are recorded within 30 days of recoding of the person’s name and the company is also required to maintain a record of these offers under FORM PAS-15. 

Apart from the offer, the organisation is also required to send a separate application form with different serial numbers and addressed to the specified group of the people selected as investors in electronic mode or in writing.  Lastly, the company is required to file the return of the complete information with the Registrar of the Companies within 30 days of the circulation of the offer letter. 

The Offer Letter is required to incorporate the below-mentioned information:

• General Information about the company
• The Particulars of the Offer
• The Disclosures with regard to the interest of the directors
• The Financial Position of the Company 
• A Declaration by the Director of the Company 
• Undersigned 

Special Resolution for the Issuance of the Private Placement of the Shares

As we have already discussed, the importance of passing a Special Resolution for the issuance of the securities under the Private Placement of the Shares. Under Rule 14(2)(a) for issuing of the securities under the Private Placement, the approval of the shareholders by passing of a special resolution is required.

Limitation on the Private Placement Offer 

Rule 14(2)(b) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, provides that the offer for the Private Placement of the Shares shall not be made to more than 200 people in a financial year, but the Qualified Institutional Buyers and the Employee Stock Option Plan are excluded from the pool of these 200 investors. 

The Rule of having 200 investors is only applicable to one set of the securities and the company can also issue another set of the securities after the completion of the process of the allotment of the first batch. 

Value of the offer of the Private Placement of the Securities 

Rule 14(2)(c) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, states that the value of the offer made to the investors shall not be less than Rs. 20,000, but this rule has some exceptions where this limit value is not applicable and these are:

• The Housing Finance Companies registered with the National Housing Bank under the National Housing Bank Act, 1987 

• The Non-Banking Financial Companies are registered with the Reserve Bank of India under the Reserve Bank of India, 1934. 

Payment of the Subscription Amount 

Rule 14(2)(d) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, states that the investor who wants to subscribe to the securities of the company is required to make the payment of the subscription amount directly from their own accounts either by demand draft, cheque, banking channel but not cash. 

If the securities are to be held jointly, then the bank account of the person named first in the securities is to be provided. This is because the companies are required to keep a record of the source of the funds of the securities. 

Allotment of the Private Placement Securities 

The company is required to allot the securities within 60 days of receiving the application money for the securities and if the company is unable to allocate the securities, then it is required to return the application money along with an interest of 12% per annum on the application money within 15 days after the lapse of the 60 days. 

The company is required to use the application money only for the purpose of making any sort of adjustments towards the allocation of the securities and repaying of the application money in the case where the company is unable to make any sort of allotment. 

Record of the Private Placement of the Shares 

Under the Rule 14(3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the company issuing the securities under the Private Placement is required to maintain a completed record of the offer in the FORM PAS – 5 and the copy of the record and the offer letter in FORM PAS – 4 and these are required to be filed to the office of the Registrar of the Companies within the 30 days of the circulation of the offer under the provisions of the Comapnies (Registration Offices and Fees), 2014. 

Return of the Allotment of the  Private Placement of the Shares 

Under the Rule 14(4) of the  Companies (Prospectus and Allotment of Securities) Rules, 2014 and Section 42(8) of the Companies Act, 2013 the Return of the Allotment is an expansion of the above rule that the companies are required to file with the Registrar of the Companies within 30 days of the allotment in FORM PAS – 3 along with the fees as prescribed by the Companies (Registration Offices and Fees) Rules, 2014. The Information that must be supplied is: 

• The list of the Security Holders
• Full Names along with the PAN, address, and email address of the security holders
• Classes of the Securities Held by the Investor
• The date of the allotment of the Securities
• The number of securities held by the investor, along with the amount and the nominal value of the securities
• Any particulars of the consideration received if securities are issued for consideration other than the cash 

Procedure for the Issue of the Shares under the Private Placement 

• Calling of the Board Meeting: The Company is required to convene a board meeting with a prior notice of 7 days by supplying the notes and the agenda to the notes of the board meeting. An earlier meeting before the board meeting can be convened by calling the Directors to discuss the agenda. The offer letter for the private placement of the securities, the valuation report and the notice of the General Meeting must be approved in the Board Meeting. 

• Calling of the General Meeting: After the board meeting, a general meeting is also required to be called for the approval of the private placement by passing of a special resolution. The members of the general meeting are to be intimated at least 21 days in advance. 

• Filing of the MGT-14: The company is required to file the FORM MGT-14 with the registrar of the companies within 30 days after the passing of the special resolution for the issuance of the securities in the Private Placement.  

• Private Placement Offer Letter: The offer letter for the Private Placement is to be circulated under FORM PAS – 4 to the group of the investors to whom it is required to be issued. 

• Receiving of the Application Money: As we have already discussed, the company is required to issue the securities within 60 days of them receiving the application money.

• Conveying of the Board meeting: A second board meeting is required to be conveyed for authorising the allotment of the shares. In the same meeting a Director is also authorised to file the return of the allotment within 30 days of passing of the special resolution under FORM PAS – 3, for the issuing of the securities and paying the Stamp Duty. 

• Issue of the Share Certificates: After the completion of this procedure, the organization issues the Share Certificates to the investors, which bears the signature of the two directors and the common seal of the company. 

• Payment of the Stamp Duty: Lastly, the organsation is required to file the Stamp Duty according to the applicable State Regulations. 

What is the Penalty for Non-Compliance of the Private Placement of the Shares? 

If the company issuing the securities under the private Placement does not adhere to the provisions specified under the Companies Act, 2013, then the company has to suffer a penalty that is equivalent to the value of the securities or Rs. 2 crores, whichever is higher.  Besides, if the company fails to file the return of the allotment, the company, its directors, and the promoters will be liable for Rs. 1000  per day, the maximum of which can be Rs. 25 lacs. 

Conclusion 

The Private Placement of Securities has been chosen as a safe option by the companies for issuing securities to a selective group of people without going public. As every coin has two sides, so does this scheme, as it lacks liquidity and transparency and is also less marketable. Therefore, the security in a Private Placement can only be issued by taking into consideration the pros and cons of it. 

Frequently Asked Questions on Private Placement of Shares Under Company Law

Q1. What is Private Placement as per the Companies Act?

Ans 1. A Private Placement is any offer or invitation for subscribing or issuing securities to a select group of persons.

Q 2. What is Private Placement?

Ans 2. The Private Placement is the sale of shares of the company to a pre-selected group of investors other than going for an IPO or public offer.

Q 3. What is an example of a private placement company?

Ans 3. The institutional investors that generally participate in a private placement company are mutual funds, pension funds and insurance companies.

Q 4. Is Private Placement limit 50 or 200?

Ans 4. The limit for private placement of the shares is 200.

Q 5. What is Section 62 of the Companies Act?

Ans 5. This Section governs the allotment of the securities under the private placement.

Q 6. What is the meaning of the QIP?

Ans 6. QIP stands for the qualified institutional placement, which allows the listed companies to raise the capital without submitting any pre-issue filings.

Q 7. Is a private placement a good thing?

Ans 7. Yes, private placement is a good thing as it avoids the need for the disclosure requirements along with the need for a prospectus.

Q 8. What is the Rule 14 of Private Placement?

Ans 8. Rule 14 of the private placement states that the application and the offer letter is required to be tested within 30 days of recording the names of the investors.

Q 9. What is the full form of IPO?

Ans 9. IPO stands for the initial public offering by which a private company sells its shares for the first time to the general public.

Q 10. Is Right issue a private placement?

Ans 10. No, the Right Issue and private placement are two different things.