Private Placement

"When a company issues financial securities such as shares and convertible securities to a particular group of investors (not more than 49 in number) it is known as private placement.

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    Why

    Why do companies go for private placement?

    Established companies may choose the route of an initial public offering to raise capital through selling shares of company stock. ... Private placement has advantages over other equity financing methods, including less burdensome regulatory requirements, reduced cost and time, and the ability to remain a private company.

    Reason

    The top 5 reasons to issue a private placement

    Private placements have become increasingly popular in recent years. In a private placement, a private or public company can sell a security to a small number of private investors without having to register the security with the Securities and Exchange Commission. Some CEOs and CFOs are interested in private placements, but have not yet issued any. In this post, we will examine five of the best reasons for issuing these transactions– and why they require caution.

    1

    They offer privacy and control

    Discretion is of utmost importance to many companies and investors. Private placements do not have to go through public filing or disclosures.

    2

    They have longer maturities

    For companies that wish to extend their refinancing obligations past the typical three to five years, private placement transactions can be ideal. They offer much longer maturities than most other financing arrangements.

    3

    No fluctuating interest rates

    Private placements have less interest rate risk, as companies generally offer them at a fixed rate. This grants much-needed reassurance in the event of rising interest rates.

    4

    The all-in cost is lower

    Between regulatory issues, legal documentation, underwriting expenses and bank fees, issuing a public offering can quickly become expensive. Companies can have a much lower all-in cost when issuing private placements.
    5

    The process can be much faster

    Because private placements do not have to go through the bureaucracy-filled regulation process, issuing them is much faster compared to public bonds.
    Intro

    Introduction

    We all know Companies Act, 2013 provides various options to issue Securities (Shares, Debentures or any other type of Securities). One of these options is Private Placement. The definition of Private Placement explains when the Companies have to follow the provisions. Let’s look into the Definition and the Provisions.


    List of Sections and Rules Applicable to Private Placement:

    Before go to the Provisions of Private Placement, it is apt to make the list of Sections and Rules which are applicable while issuing securities under Private Placement. Below is the list:

    1. Section 42 of the Companies Act, 2013
    2. Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014

    Definition of Private Placement procedure under Companies Act, 2013:

    Explanation -I to Section 42(3) defines the Private Placement;

    “Private Placement” means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in this section.

    Let us split the definition and make it easy to understand

    Private Placement is:
    – Any offer or invitation by a company
    – To subscribe or issue of securities
    – To a select group of persons,
    – Other than by way of public offer,
    – Which satisfies the conditions specified in Sec 42


    Provisions

    Now we understood what is the definition, but what are the provisions to be followed while issuing securities under Private placement (PP)?

    Procedure

    Step By Step Procedure for Private Placement

    1

    Hold Board Meeting

    To approve the list of identified persons
    To approve the draft offer letter
    To call GM
    2

    Hold General Meeting

    To pass special resolution approving PP and approving offer letter
    3

    File form MGT-14

    File the Special Resolution in Form MGT-14 within 30 days from the date of EGM
    4

    Circulate the Offer Letter (PAS-4)

    PAS-4 to be circulated to the identified persons.
    It can be circulated only after filing MGT-14
    5

    Receive the Application money

    The Application money to be received and kept in a Separate Bank Account
    6

    Allotment

    Allotment to be done within 60 days from the date of receipt of Application Money
    7

    File Return of Allotment

    The Return of Allotment in Form PAS-3 to be filed within 15 days from the date of allotment
    8

    Utilization of amount

    The amount can be utilized only after filing PAS-3
    9

    Other incidental matters

    Issue of Share Certificates within 2 months from he date of allotment
    Updating the Register of Members
    Documents

    What are the Documents required for the Issue of Shares through Private Placement?

    The documents required for the Issue of Shares through Private Placement are as follows:

    1. Valuation Report as on date of Allotment by a CS/CA/CMS in practice or SEBI registered Merchant Banker.
    2. Copy of outcome of Board Meeting.
    3. A true certified copy of Resolution passed by Members of Company.
    4. An Explanatory Statement of Resolution by members of Company.
    5. An approved offer letter of Private Placement.
    6. Form PAS-5 with a detailed list of Allotters.
    7. Letter of Consent from all the proposed Allotters.
    About

    What is Private Placement?

    Private Placement refers to direct sales of securities by a company to institutional investors like Mutual funds, Pension funds Insurance companies, Banks etc. The issuer can either be a Public Limited Company or a Private Limited Company. In this method a prospectus is not issued and shares are offered only to a select group of investors.

    Advantages

    Advantages of Private Placement

    The following are the advantages of private placement:

    Speed in raising finance

    If a company goes in for a fresh issue through public issue there are lot of procedures to be followed which take a lot of time. On the other hand, it is possible to raise resources through private placement within 1 or 2 months.

    Low Cost

    The company need not spend money in preparation and printing of prospectus, printing of application forms, transporting them to different places, advertisements of the issue in the media etc.

    Confidentiality

    The Company can maintain strict confidentiality. In the case of issue through prospectus many disclosures have to be made. But in the case of private placement disclosures made are less and they are made to a select few. Therefore confidentiality can be maintained.

    Small amounts can be raised

    Even small amounts can be raised through private placement.

    Stable market

    The private placement market is more stable when compared to the stock markets. Volatility is less and issues are marketed in a professional manner.
    The widely used instrument in the private placement market is Non-convertible Debentures.
    FAQ

    FAQs on Private Placement Provisions under Companies Act, 2013:

    1To whom securities can be issued under PP??
    The securities under PP can be issued /offered only to a select group of persons who have been identified by the Board.
    2Private Placement offer can be given to how may persons?
    The offer of securities or invitation to subscribe securities, shall be made to not more than 50 persons in a single offer or not more than 200 persons in the aggregate in a financial year (excluding qualified institutional buyers and employees of the company being offered securities under ESOP). This restriction would be read for all the securities combined together in a Financial Year.
    3What kind of Approval/Resolution to be passed for offer under Private Placement?

    Each Private Placement offer should be previously approved by the shareholders of the company, by a Special Resolution.

    In case of offer or invitation for non-convertible debentures, it shall be sufficient if the company passes the Board Resolution each time if such issue is within the borrowing limit specified under Section 180(1)(c) of the Companies Act. However, borrowing limits are to be approved by the shareholders of the issuer company first.

    For Private Companies issuing NCDs no need of Shareholder Resolution as there is an exemption granted for Section 180.

    4Is there any prescribed format for Offer Letter?

    The PP offer letter shall be in form of PAS-4 serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the name of such person.

    A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in form MGT-14 to the ROC.

    5Is there any minimum Offer size per person?
    Earlier there was a requirement of minimum offer size of Rs. 20,000 face value of the Security. However the same was dispensed off by Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 with effect from 7th August, 2018. So there is no minimum offer size for Private Placement.
    6Whether Separate Bank Account in scheduled Bank to be opened for each offer?

    There is always confusion regarding this question from the beginning of Commencement of Section 42.

    The provision reads as “the monies received on application under this section shall be kept in a separate bank account in a scheduled bank”.

    Hence there is no need of opening of Separate Bank account every time, it is sufficient if the Company maintains a Separate account with scheduled Bank, which is not used for regular or any other purpose.

    7When to make the payment for subscription?
    Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money.
    8Whether the person to whom the offer has been made can renounce the offer to other person?

    The proviso to sub-section 3 of Section 42 explicitly provides that the private placement offer and application shall not carry any right of renunciation.

    The person to whom the offer is made can either accept or reject the offer. There is no right for renunciation.

    9What are the acceptable payment modes?
    The subscription money shall be paid either by chesque or demand draft or other banking channel or not by cash.
    10Whether application money can be utilized by the Company before allotting the securities?
    No. the Application money received shall not be utilized for any purpose other than:
    (a) For adjustment against allotment of securities; or
    (b) For the repayment of monies where the company is unable to allot securities.
    11Within how many days the Allotment of Securities to be completed?
    Issuer Company shall allot its securities within 60 days from the date of receipt of the application money; and
    if the Company is not able to allot the securities within that period, it shall repay the application money to the subscribers within 15 days from the date of completion of 60 days; and
    if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of 12% per annum from the expiry of the sixtieth day.
    12Is there any record of Private Placement to be maintained?
    The Company shall maintain a complete record of private placement offers in Form PAS-5.
    13When to file Return of Allotment for Private Placement of Shares / Securities?
    A return of allotment of securities shall be filed with the Registrar within 15 days of allotment in Form PAS-3 along with a complete list of all the allotted.
    The amount should not be utilized before filing Form PAS-3 (Return of Allotment)
    14Whether the Company can make fresh offer under PP when one PP offer is pending?
    No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company
    15What are the consequences of non-compliance?

    Any private placement issue not made in compliance of the provisions of section 42 shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act and Regulations will apply.

    Contravention of Section 42 attracts penalty which may extend to the amount involved in the offer or invitation or Rs. 2 Core whichever is higher, and the company shall also refund all monies to subscribers within a period of 30 days of the order imposing the penalty.

    If a company defaults in filing the return of allotment within15 days, the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees

    Conclusion

    Private Placement of Shares is a means by which the Company can raise capital. The practical and procedural aspects of Private Placement of Shares under the Companies Act, 2013, are explained under Section 42 of the Act. The process of Issue of Shares through Private Placement is a time-taking and lengthy task. We at Vyapar Formations have experienced professionals who will help you with the process of Issue of Shares through Private Placement. Our professionals will help you and assist you with the process and assure the successful completion of your work.

    For more information on Private placement, consult Vyapar formations.

    Our team will guide you through the complete process of private placement required for your company.

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