Private Placement of Securities

As per Section 42 of the Companies Act, 2013 A Company may make private placement of securities only to select group of persons who have been identified by board (herein referred as (Identified Persons). Explanation 1 of Section 42 states that ‘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) private placement offer-cum application, which satisfies the condition specified in this section. This is a way to to maximise capital of the company and increase or expand the business.

COMPLIANCE UNDER COMPANIES ACT, 2013

1) While making private placement to the “identified persons” the following persons must be excluded:

a) Qualified Institutional buyer.

b) Employees of the Company being offered securities under ESOP in terms of provision of clause (b) of sub-section (1 ) of Section 62.

2) Every identified person willing to subscribe shares under private placement basis must have to pay money either through cheque or demand draft or banking channel and not by cash .

3) No fresh offer or invitation shall to be made unless allotment with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.

4) Private Placement offer letter shall be made to “Identified Persons” accompanied by application form serially numbered & address either physically or in electronic form within 30 days of recording of names of such invitees. The private placement offer and application shall not carry right of renunciation.

5) The Company is not allowed to advertise such issue in any form or or any form of media. It is strictly given on private basis.

6) The Company has to pass a general meeting in special resolution for such issue.

7) All the monies collected shall be kept in a separate bank account and can be issued only by way of cheques not by cash,

8) Rule 14 sub-section (3) of Company ( Prospectus and Allotment of Securities ) Rules 2014 states that offer letter of such issue shall be filed in form PAS-4 with ROC within 30 days from the date of circulation of private placement offer letter.

9) As per Section 42 sub-section (6) Allotment shall be made within a period of 60 days from the receipt of application. if not, than the money received shall be repaid after the expiry of 60 days . If the company fails to repay the application money within the aforesaid period , it shall be liable to repay the money with an interest rate of 12% per annum from the expiry of 60th day.

10) As per Rule 14 of Company (Prospectus and Allotment of Securities) rules 2014 sub-section (3) states that Return of allotment is required to be filed in form PAS-3 with the ROC along with the prescribed fee within 15 days of allotment.

11) The Company shall maintain a record of Private Placement in form PAS-5

12) The provisions of Section 42 is not applicable to NBFC and Housing Finance Company.

NOTIFICATIONS / AMENDMENT

1) Notification No. GSR 8(E),dated 4.1.2017 – In case of an unlisted public Company which is licensed to operate by RBI or SEBI or IRDA from the International Services Centre located in an approved multi services SEZ set up under SEZ Act, sub-section (7) of Section 42 shall not apply.

2) Notification No. GSR 9(E), dated dated 4.1.2017 – In case of private Company which is licensed to operate by RBI or SEBI or IRDA from the International Services Centre located in an approved multi services SEZ set up under SEZ Act , sub-section (7) of Section 42 shall not apply.

3) Notification No. GSR 465 (E) dated 5.6.2015 – In case of Nidhi Company Section 42 except sub-section 1, Explanation- ll to sub-section (2) , (4) , (6), (8), (9),(10) shall not apply.

LANDMARK JUDGEMENT

SAHARA CASE

Sahara took investment from the people belonging to the lower strata of the society who don’t have much idea about the working of financial institutions, fluctuations in the market and the skill to check the daily performance of the company.

Sahara contention – Sahara claimed that it was a private placement and only selected clients were intimated about the scheme. SEBI has no jurisdiction with respect to the same as its jurisdiction is restricted only to listed company. It also contended that OFCD’s issued by the company does not fall within the ambit of the definition of the “securities” as provided under the SEBI Act. The main contention raised by the Sahara was that SEBI has no jurisdiction over the unlisted companies and, therefore, objected its interference in the present case on the ground that the said company comes within the ambit of Unlisted Public Companies Rules 2003.

SEBI contention – SEBI contented that OFCD scheme is within the purview of the definition of securities as provided by SEBI Act 1992 and Sahara should be obligated to refund the deposits of more than Rs. 24000 crores to its investors as it was taken in contravention of the laws of the land.

Supreme Court Judgement – Supreme Court finally made an important observation that it was stated by Sahara company that its OFCD scheme was a kind of private placement and included only selective clients yet it failed to prove the same, and it is very well evident that it was a kind of public offer in which more than 23 million people invested over which SEBI has complete authority. In the case of private placement, the documents should be submitted by the company that its investors had some relation with the company which in this case was not proved by the Sahara group and thus it does not qualify the claim of the investment being a private placement. Also the Hon’ble Supreme Court ordered Sahara to refund the entire deposits collected by it through Red Herring Prospectus at an interest rate of 15% till the date of refund. It also authorised SEBI to take legal recourse in case the appellant i.e. Sahara fails to comply with the said order.

Conclusion

The private placement is a not expensive or cost-effective way of raising capital without going for public offering. As we know, a company needs funds for the purpose of setting up projects or new ventures of the existing business or for funding the working capital requirements. The company has various options to raise funds like debt funds such as a loan from banks/financial institutions/non-banking financial companies or by way of issue of debentures or bonds, or by issuing the share capital. The company will raise the additional capital or not depending on the current financial position of the company. Through private placement, companies generally seek to raise a small amount of capital from a limited number of investors. There is no need for financial reporting requirements if capital is raised through private placement. Marketing an issue may be more difficult for private placements, as these investments can be quite risky with lower liquidity than a public offering. But, companies still get liquidity maintaining privacy through private placement. An issuer can sell more complex security to accredited investors who understand the potential risk and rewards, which allows the firm to remain as a privately-owned company and avoid the need to file annual disclosures as per SEBI regulations.