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Private Placement of Shares

By Bhavneet Vohra July 29, 2016


Introduction

One thing we need to understand is that no company can run and carry out its operations without the usage of funds. Raising investment is an important part of every modern enterprise. Capital is needed by every business to commence its business operations and even for the purpose of expansion and growth.

Private Placements- Then and Now!

In this article, we will basically cover and compare the changes introduced in the Private Placements as from the Companies Act, 1956 to the newly enacted Companies Act, 2013.

The expression “Private Placement” is defined under the Explanations of Section 42 of the Companies Act, 2013 which means “any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section.”

In a layman’s language, when the securities are offered to the selective group of persons by issuing private placement offer, it is known as the Private Placement.

Section 42 of the Companies Act, 2013 read along with the Rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014 regulates the Private Placement of Shares.

What are the changes that have been introduced to the Private Placement of Shares?

The changes that are introduced are as follows:

  1. Initially the rules related to Private Placement were applicable only to the Private Companies, but according to the provisions of the Companies Act, 2013 some rules also applies to both public and private companies as well.
  2. Earlier the shares could be issued to any person or authority automatically by the directors of the private company without taking any approval from the shareholders. But according to the new act, it has now become mandatory to seek approval of the shareholders for the same. Rule 14(2)(a).
  3. Earlier the limit was restricted up to 49 investors which have now been relaxed to 200 investors.

What are the Restrictions that are imposed on Private Placement Securities?

  1. A Private Placement offer must be prepared.
  2. Offer should not be made to more than 200 people.
  3. It authorizes to issue only one kind of securities at a time.
  4. The amount of subscription in either case should not be less than Rs. 20,000.
  5. The valuation of securities should be done by a registered merchant or Chartered Accountant with at least 10 years of practise.

One thing must be noted that according to Section 42(10), if the directors or promoters of the company don’t comply with the provisions then they may be fined with an equal amount involved in the offer or Rs. 2 crores whichever is higher.

What steps can be taken by companies to comply with the new provisions of the Companies Act, 2013 to issue securities through Private Placement?

Step 1: Identification of the persons to whom the offer is to be made

As per Section 42(7) of the Act, all offers shall be made only to those persons whose names are already recorded by the company prior to the invitation to the subscription is made.

Step 2: Preparation of the Offer letter

As per the requirements of Form No. PAS 4 the offer letter should be made. Rule 14 (1)(a)

Step 3: Approval of the shareholders shall be taken regarding the offer.

By passing a special resolution, the shareholders may approve the offer of securities. The offer shall be made within a period of 12 months from passing the resolution. Rule 14 (2)(a).

Step 4: Maintenance of records

A complete record of private placements offers in the Form PAS- 5, offer letter in Form PAS-4 along with the name of the persons who are identified as prospective offerees had to be filed with the Registrar of Companies within 30 days. Rule 14(3).

Step 5: Separate Account must be opened for keeping the Subscription amount.

It is covered under Section 42(6) of the Act.

Step 6: Allotment of Securities and Issue of the Share certificates.

As per Section 42(6), the allotment should be made within 60 days on receipt of the application money. In case of failure, the company must repay the collected amount within 15 days from the end of 60 day period. An interest of 12% will be charged from the 60th day if the company fails to repay the money.

Step 7: Filing of return of allotment with the Registrar.

As per Rule 14 (4), a return of allotment of securities must be filed with the Registrar within 30 days of allotment in the Form PAS-3, with the relevant fees with a complete list of security holders containing:

  • Full name, address, PAN and E-mail Id of such Security Holders.
  • Class of security held.
  • Date of becoming security holder.
  • Number of securities held, nominal value and amount paid up on such securities and particulars of consideration received.

Conclusion:

Since as per the new provisions of the Act, the raising of funds have become more complex and strict as per the Private placement, so for the companies, the burden to increase the funds have increased as it involves a lot of steps and procedures to be followed.

Sources:

http://www.mondaq.com/india/x/305626/Securities/PRIVATE+PLACEMENT+UNDER+COMPANIES+ACT+2013

Author- Bhavneet Singh Vohra

Vivekananda Institute of Professional Studies

 

 

Tags: private placement , shares , Companies Act 2013 , companies act 1956 , securities , section 42 of companies act


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