Issue of Shares on Private Placement Basis: Understanding Section 42 of the Companies Act, 2013
Journal Press: In order for a company to sustain and flourish, it is crucial to raise capital for its functioning. Companies limited by shares often issue shares to raise the necessary capital required for their operations. There are various ways in which shares can be issued, including through the issuance of a prospectus and inviting the public to subscribe for the shares, or through private placements of shares. This article delves into the details of Section 42 of the Companies Act, 2013, which deals with private placement, along with the rules incorporated in the Companies (Prospectus and Allotment of Shares) Rules, 2014.
Understanding Private Placement
Private placement is a method of raising capital in which an offer to subscribe for securities is given to a selected number of people. Section 42 of the Companies Act gives power to companies for the private placements of securities. This provision has gained significant importance in recent years, with companies placing an overwhelming preference for private placements. According to statements by RBI deputy governor T Ravi Shankar, companies now prefer private placements for obtaining corporate bond insurance rather than public issuances.
Procedure for Private Placement
Section 42 of the Companies Act, 2013 depicts a complete procedure for the issuance of shares through private placement. The important aspects of this procedure are as follows:
- Number of identified persons: The board of the company can identify a maximum of 50 persons to whom an offer of private placement has to be made. Private placement offers can only be made to these identified persons and should not be offered to qualified institutional buyers or employees of the company.
- Details of identified persons: The company is required to maintain a record of the names and addresses of the identified persons.
- Payment of the subscription money: Identified persons who are willing to subscribe to the offered securities must apply for private placement and pay the subscription money through a cheque, demand draft, or any other banking medium. Cash payments are not allowed.
- Allotment of securities: Once the application money has been paid by the identified persons, the company must allot the securities within 60 days from the date of the application money.
- Repayment of application money: If the company is unable to allot the securities within the prescribed period, it must repay the application money within 16 days from the expiration of the 60-day period. Failure to do so will result in the company being liable to repay the amount with interest at 12% per annum.
- Filing the return allotment: The company is required to file a return allotment through the Registrar of the Company (ROC) within 15 days from the date of the allotment. The return allotment should contain a list of all the allottees with their names, addresses, number of allotted securities, and other relevant information.
- Prohibition on advertising: Private offers of securities are meant for a selected group of people, and therefore, any advertising in the media or elsewhere in the public domain is prohibited to maintain the sanctity of the private placement offer.
- Utilization of subscription money: After filing the return allotment, the company can start utilizing the funds collected through the subscription amount of the private placement. These funds must be kept in a separate bank account in any scheduled bank and can only be utilized for the adjustment against allotment of securities or the repayment of application money in case the company fails to allot securities.
- Fresh offer of securities: A fresh offer of securities on a private placement basis can only be made once the previous offer has been accepted and completed, withdrawn by the company, or abandoned by the company. However, this condition does not prohibit a company from issuing securities to one class of identified persons more than once, subject to the limit of identified persons mentioned earlier.
- When a private placement offer becomes a public offer: Contravention of the condition regarding the total number of identified persons for the issue of shares on a private placement basis would deem it a public offer. In such cases, the provisions of the Companies Act, the Securities Contracts (Regulation) Act, 1956, and the Securities and Exchange Board of India Act, 1992, would be applicable.
Section 42 of the Companies Act, 2013 provides a comprehensive framework for the issuance of shares through private placement. It is important for companies to adhere to the prescribed rules and regulations to ensure compliance and avoid penalties. Private placements have gained popularity among companies as an effective method of raising capital. By understanding the provisions of Section 42 and following the necessary procedures, companies can successfully raise funds through private placement and propel their growth and success in the market.
What is private placement?
Private placement is a method of raising capital in which a selected number of individuals or entities are offered the opportunity to subscribe for securities.
How many identified persons can a company offer private placement to?
A company can offer private placement to a maximum of 50 identified persons, as per Section 42 of the Companies Act, 2013.
Can private placement offers be made to qualified institutional buyers or employees of the company?
No, private placement offers cannot be made to qualified institutional buyers or employees of the company. They can only be offered to the identified persons chosen by the board of the company.