Private Placement refers to the issuance of securities by a Company to a select group of pre-identified investors (such as individuals, bodies corporate, or institutions) rather than through a public offer. It serves as an alternative to an Initial Public Offering (IPO), especially for startups and private Companies seeking to raise capital for business expansion, acquisition of assets, or to meet working capital requirements. This mode of fundraising has become particularly popular in the information technology and startup sectors.
Statutory Reference :
Private Placement is governed by Section 42 of the Companies Act, 2013(“The Act” or “Act”), along with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. Valuation is also guided by Section 247, which mandates the involvement of a Registered Valuer (“RV”).
Eligible Companies for Private Placement :
The following types of companies are eligible to make a private placement:
- Listed Companies(In the case of listed companies, private placements must also comply with SEBI (ICDR) Regulations, 2018)
- Unlisted Companies
- Public Companies
- Private Companies
Procedure for Private Placement :
The process for making a private placement under the Act, involves the following steps:
1. Valuation Report
- The Company must get a valuation report from a Registered Valuer, who should be appointed through a Board resolution. (This appointment can also be made via a circular resolution, provided it is noted at the next Board meeting). The Registered Valuer, as defined under Section 247 of the Act, will determine the fair value per share.
- The issue price of the shares must not be lower than the value determined in this report.
2. Board Meeting & Approval
- Convene a Board Meeting to approve the proposal for issuance of securities via private placement.
- Pass a Board Resolution approving the offer and identifying the class of investors.
3. Special Resolution by Shareholders
- Call an Extraordinary General Meeting (“EGM”) to obtain shareholder approval by passing a Special Resolution under Section 42(2) of the Act.
- The explanatory statement in the EGM notice must contain disclosures as required under Rule 14 of the Prospectus and Allotment Rules.
4. Filing of Form MGT-14
- File Form MGT-14 with the Registrar of Companies (ROC) within 30 days of passing the Special Resolution. (30-day deadline is strict, and delays attract additional fees and penalties)
- Attachments:
- Certified copy of the Special Resolution passed in the EGM
- Notice and explanatory statement of the EGM
- Valuation Report issued by RV
- Consent for shorter notice (if applicable)
5. Issue of Offer Letter (Form PAS-4)
- Issue a private placement offer letter in Form PAS-4 to the identified investors (each offer letter must be serially numbered and addressed individually to each investor).
- The offer shall not be made to more than 200 persons in a financial year per kind of security, excluding Qualified Institutional Buyers (QIBs) and employees under ESOPs.
6. Receipt of Subscription Money
- Investors must remit the subscription amount through banking channels (not in cash) to a separate bank account opened by the company in scheduled bank for this purpose.
- This account should be used only for receiving money against the issuance of securities under private placement.
7. Allotment of Securities
- The company must allot the securities within 60 days of receiving the application money.
- Hold a Board Meeting and pass a resolution for allotment.
8. Filing of Return of Allotment (Form PAS-3)
- File Form PAS-3 (Return of Allotment) with the ROC within 15 days of the allotment.
- Attachments:
- List of allottees (in the prescribed format)
- Certified copy of the Board Resolution for allotment
- Terms and conditions of issue, if any
9. Payment of Stamp Duty
- Pay stamp duty on the consideration amount in accordance with the rates specified under the respective State Stamp Act.
- In the absence of clarity under the State Act, reference may be made to the Indian Stamp Act, 1899.
10. Issuance of Share Certificates
- Issue duly stamped and signed share certificates to the investors within 2 months from the date of allotment as per Section 56(4) of the Act.
Important Notes:
- The offer must not be made via public advertisements or through marketing/solicitation to the general public.
- The entire private placement process must comply strictly with the disclosures, limits, and procedural requirements laid down by the Act and related rules.
- Non-compliance may lead to penalties under Section 42(10) of the Act.
- Record of Private Placement Offer: The company must maintain a complete record of the private placement offer in Form PAS-5.
- Use of Funds Restriction (Until Allotment): The company cannot use the subscription money until the securities are allotted and PAS-3 is filed.
Happy Reading...
NarendrAA
⚠️ Disclaimer / Cautionary Note :
This article has been prepared based on my personal understanding, interpretation, and knowledge of the Companies Act, 2013, and related rules, as of the date of writing. It is intended solely for informational and educational purposes. Readers are advised to refer the Companies Act, relevant rules, notifications, and seek professional advice before acting upon any information mentioned herein. The author assumes no responsibility or liability for any errors, omissions, or consequences arising from the use of this content.
