15-May-2020 Detailed study on Fund Raising by Companies through Private Placement

The term “private placement” refers to the sale of securities to a small number of private investors to raise capital. These private investors include mutual fund investors, banks, insurance companies etc.

Private placement means any offer of securities or invitation to subscribe securities to a selected group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and conditions stated in Section 42 of the Companies Act, 2013.

Ø  STRUCTURE:

The structure of private placement involves the following, based on their types:

The offering structure is based on company’s power for negotiation and investor’s capability to invest. 

Ø  HOW IS PRIVATE PLACEMENT DIFFERENT FROM PUBLIC ISSUE:

Private placements are different from public issue since in the latter one, the shares are sold in the open market to anyone willing to buy them whereas in private placements the shares are sold to specific investors.

If a company (whether listed or unlisted) issues shares to more than 200 investors, whether in India or abroad in a Financial Year and whether it intends to get its securities listed on a recognized stock exchange or not, it will be deemed to be a public issue and the Company has to follow the procedure of Public Issue.

Ø  CONDITIONS FOR PRIVATE PLACEMENT:

> Number of persons to whom the offer shall be made: A Private Placement shall be made only to Identified person not exceeding 200 persons in aggregate [excluding the Qualified Institutional Buyers (QIBs) and employees of the Company being offered securities under a scheme of ESOP], in a Financial Year subject to the prescribed conditions.

*The limit of 200 in aggregate shall be reckoned individually for each kind of security viz. equity shares, preference shares and debentures etc.

> Persons to whom an offer can be made: All offers shall be made only to those persons whose names are recorded by the company prior to the invitation to subscribe and allotments can be made only to such persons who have been addressed and the offer is made along with the Offer Letter.

> Mode of Payment: All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash.

> No advertisement of offer: No company offering securities under private placement shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.

> Bank Account: The application money received from the private placement offer shall be deposited in a separate bank account in a scheduled bank.

> Rights of Renunciation: There is a restriction on any right of renunciation of the private placement offer that is been made by the issuer company.

> Allotment: Securities are to be allotted within 60 days from the date of receipt of the application money and if the company fails to allot securities, has to repay the application money to the subscribers within 15 days from the date of completion of 60 days. In case the company fails to repay the application money along with interest at the rate of 12% p.a. from the expiry of the 60th day.

Every unlisted public company making any offer for issue of any securities, before making such offer has dematerialized its securities held by its promoters, directors, key managerial personnel in accordance with provisions of the Depositories Act, 1996 and regulations made thereunder.

Ø  PRIOR CHECKING POINTS:

> Whether authorized share capital is sufficient for issue of shares through private placement and if authorized capital not enough, then first alter the capital clause of the memorandum of association of the company.

> Whether articles of Association authorise for issue of shares through private placement and if not, then first alter the articles of Association to include provisions for issue of shares through private placement.

> Confirm that shares which are to be issued through private placement are fully paid up shares.

Ø  PROCEDURE FOR ISSUING SHARES THROUGH PRIVATE PLACEMENT:

1. Convene the meeting of the Board of Directors of the Company to approve the following:

-          Issue of securities by  Private Placement basis

-          Finalization and Identification of persons (Identified person).

-          Number of securities to be issued.

-          Take note of the Valuation Report and decide the price of security

-          Draft offer letter in Form PAS-4

-          Approve the notice of calling for Extra-Ordinary General Meeting of the shareholders of the Company to take members approval

-          Opening of a separate Bank Account for keeping the application money received.

2. Convene Extra-Ordinary General Meeting for the following purpose:

-          Pass Special Resolution to approve Private Placement

-          Approve the Offer Letter to be sent to the Identified Persons.

3. File Form MGT-14 with ROC within 30 days of passing the Special Resolution approving the Private Placement.

4. Send Offer cum Application Letters in Form PAS-4 to Identified Persons within 30 days of recording the names of the identified persons. Such Offer cum Application Letters can be sent in electronic mode (emails) or by post.

5. Prepare the complete record of private placement offer in Form PAS-5.

6.Depositing application money in a Separate Bank Account with Scheduled Bank within the offer period as mentioned in the Offer cum Application Letter.

7.After closure of Offer Period call a Board Meeting and pass Resolution for allotment of securities and issue securities certificate.

8.File the return of allotment in Form PAS-3 within 15 days from the date of the allotment made i.e. after passing Board Resolution for allotment of securities.

9.Make sure the securities are allotted within 60 days of the receipt of Application money by the Company

10.Within 30 days of issue of securities, the Company shall pay stamp duty on share certificates as per the respective Stamp Act of the State.

11.The Company will be allowed to utilize the money raised through Private Placement only after Return of Allotment in Form PAS-3 is filed with the Registrar of Companies.

12.The Company should update its Register of Members in case of issue of share or Register of Debenture holders or Securities holders, in case of any other security.

Ø  CONSEQUENCES OF NON-COMPLIANCE FOR ISSUE OF SHARES THROUGH PRIVATE PLACEMENT:

1.       Failure to comply with Section 42

 > Company + Directors + Promoters will be penalized with Rs. 2 Crores or the amount involved in the offer, whichever is lower.

 > Within 30 days from the date of the order imposing the penalty, the Company is required to return the entire amount to subscribers.

2.       Failure to file PAS-3 on time

 > Promoters + Directors + Co. = Rs. 1,000 each day up to maximum of Rs 25 Lakhs

Ø  CONCLUSION:

Private Placement is good way of raising funds in the company as it allows choosing the investors along with providing flexibility in determining the amount and type of funding. It allows the company to remain private rather than having to go public at large for it’s funding. Although there are limited number of potential investors and covers a smaller market for its funding, private placement has been considered to be a good source of raising substantial capital, especially for more risky ventures and new businesses.

Please feel free to write to us on ruchi@apmh.in / info@apmh.in for any further queries on the above blog.

Author

Ruchi Mehta

Associate

Secretarial  & Legal