Private Placement of Shares – Boon for Entrepreneurs
Any Company having Share Capital, have an inherent right to infuse funds in the Company by increasing the amount of paid-up capital via Right Issue, ESOP/ESPS, Bonus Issue and Sweat Equity Shares under prescribed regulatory ambit. Besides this, Companies Act 2013 also provides for the issue of securities to a selected group of persons by a Company (other than by way of the public offer) through a private placement.
Section 42 of Companies Act 2013 and Rule 14 of The Companies (Prospectus and Allotment of Securities) Rules, 2014 deals with the provision of Private Placement. It is an arrangement to issue shares to selected people besides employee, director, existing shareholders as decided by the Management and approved by the shareholders.
This section has been modified to a great extent via amendment through Companies Amendment Act, 2017 and The Companies (Prospectus and Allotment of Securities) second amendment Rules, 2014 which came into effect from 7th August 2018.
KEY POINTS FOR PRIVATE PLACEMENT AS PER AMENDED COMPANIES ACT
- Every proposal of Private Placement is to be approved by Shareholders by Special Resolution.
- However, in case of issue of non-convertible debentures, when the value of issue exceeds the limit under section 180(c), only a prior single special resolution for all offers and invitations during the year can be passed.
- The offer shall be made only to a selected group of persons, identified by the Board, through Private Placement Offer cum Application to not more than 200 people in aggregate during a financial year.
- Qualified Institutional Buyers’s (QIB’s) and Employees of Company under the Scheme of Employee Stock Option under Section 62(1)(b) are excluded while calculating the above 200.
- Offer letter shall be in Form of PAS-4, serially numbered and specifically addressed to the Person and to be circulated, either in writing or through electronic mode, within 30 days of recording the name (PAS-5).
- No person other than the person to whom the offer is made shall apply. If any person other than the person addressed make the application, then it shall be treated as invalid.
- Offer letter cannot be circulated unless Special Resolution/Board Resolution is filed with Registrar.
- Payment for securities to be made by allottees from their own bank account and the Company has to maintain a proper record for the same.
- A separate scheduled bank is required for depositing money under private placement and cannot be used for another purpose except for:
- adjustment against allotment of securities
- to repay the money in case of non-allotment of shares
- Private Placement can be also used to issue shares for consideration other than cash. For the issue of shares in cash, money received only through banking channel shall be accepted.
- Company shall not utilize monies raised through private placement unless allotment is made and PAS-3 is filed.
- If the allotment is not made in 60 days then Company will return the money within 15 days from the expiry of 60th day else will be liable to repay the money with interest of 12% p.a.
- Return of allotment PAS-3 to be filed with 15 days of allotment else the Company, its directors and promoters shall be liable to pay a penalty of Rs. 1000 per day for each such default continues but up to Rs. 25 lakh.
- Contravention of applicable provision will make directors and promoters liable to pay penalty up to the amount raised through the offer or Rs. 2 crore rupees, whichever is lower and Company will refund all monies with interest of 12% within 30 days of penalty order.
- Further, contravention may lead to treating the offer as Public Offer and the provision of public offer shall be applicable.
STEPWISE PROCEDURE OF PRIVATE PLACEMENT
- Check Articles of Association for the provision of Private Placement.
- Conduct Board Meeting: The Board meeting shall be convened to discuss the following Agenda items:
- Approval of the Valuation Report
- Consider Issue of Shares
- Consider the opening of separate Scheduled Bank Account
- Approve draft offer letter
- Finalize list of Identified Person
- Approve Notice of Extraordinary General Meeting
- To Call Extra Ordinary General EGM
- The Board meeting has to be convened as per Secretarial Standards -1. Notice and agenda to be circulated at least 7 days before the meeting. However, in case the period of intimation is less than 7 days, approval for shorter notice is to be obtained.
- Issue notice for General Meeting: The notice shall be issued to the members by giving 21 days clear notice. However, General Meeting can also be conducted at a shorter notice by taking approval of more than 95% of shareholders entitled to vote.
- Convene and hold General Meeting: Convene General meeting as per provision of Secretarial Standard. Take necessary approval from Members by passing Special Resolution for the proposal of Private Placement draft offer letter (consent of at least 75% of total persons present).
- File form MGT-14: Once the Special Resolution is passed at the general meeting, the Company would be required to file MGT-14 with Registrar of Companies (ROC) within a period of 30 days from the date of passing of special resolution at General Meeting with the following attachments and along with the fee as prescribed under the Companies (Registration Offices and Fee) Rules:
- Certified True Copy of Notice of General Meeting along with explanatory statement;
- Certified True Copy of Resolution passed at the General Meeting.
- Certified copy of Special Resolution
- Approve PAS-5 in the Board Meeting.
- Circulate offer letter in Form PAS-4 within 30 days of recording of the name of such person.
- Application money received shall be kept in separate account and allotment shall be made within 60 days of receipt of application money.
- Convene Board Meeting for Allotment: Convene another Board meeting for allotment of bonus shares and the issue of share certificate in regard to the said allotment.
- File for PAS-3: The Company would be required to file PAS-3 with Registrar of Companies (ROC) within a period of 15 days from the date of allotment with the following attachments and along with the fee as prescribed under the Companies (Registration Offices and Fee) Rules,
- Board Resolution of Allotment
- Special Resolution
- List of Allottees
- PAS 5
- The issue of Share Certificates within 2 months of allotment and payment of relevant stamp duty thereupon.
|Companies Act 2013 The Companies (Prospectus and Allotment of Securities) Rules, 2014||Companies Amendment Act of 2017 The Companies (Prospectus and Allotment of Securities) Second amendment Rules, 2014|
|Investment Size||Rule 14(2) (c) Value of offer per person with an investment size of not less than Rs. 20,000 of the face value of the securities||Omitted|
|Utilization of Money||No Provision||The proviso to Section 42(4) Only after the filing of PAS-3|
|Filing of Return of Allotment||Rule 14(b) 30 days from the date of allotment||Section 42(8) 15 days from the date of allotment|
|The penalty for default in filing PAS-3||No Provision||Section 42(9) 1000 Rs per day up to Rs. 25 Lakh: By promoter and directors|
|Time Period and condition to circulate offer letter||No Provision||Rule 14(3) 30 days from the date of recording name of proposed allottees i.e. date of EGM Rule 14(8) Company including private company shall issue offer letter only after special resolution or Board resolution has been filed|
|Penalty for Contravention||Section 42(10) The amount involved in the Offer or Two crore Whichever is higher and Refund Money||Section 42(10) The amount involved in the Offer or Two crore Whichever is lower and Refund Money with interest of 12%|
Summarising the Article, It can be easily interpreted that Regulators had clear intentions to make Private Placement more transparent and disclosure based procedure. From prescribing time limits to the filing of necessary details with registry, introducing penalty on director and promoter for noncompliance to bringing modification in format of offer letter, all these amendments will create check on money transfer on account of private placement and will ensure compliance on greater part by Companies offering securities by way of Private Placement.