Share Application Money under Private Placement

According to the Companies Act 2013, a company raises money through three ways which are public offer, private placement, right or bonus issue. The method of private placement refers to the issue of shares to select group of investors rather than inviting the public.

Regulatory Framework

Section 42 of the Companies Act, 2013 along with Rule 14 of the Companies Rules, 2014 governs the provision of private placements of securities. However, Section 42 and Rule 14 has undergone revisions by way of the Companies Act 2017 and the Companies Second Amendment Rules 2018.

Applicability of Private Placement

The offer of securities or invitation to subscribe securities applies to not more than 200 people in the aggregate in a financial year. This restriction is calculated individually for each kind of security namely equity share, preference share or debenture.

Special Resolution for Private Placement

The offer has to be approved by the shareholders of the company, by a Special Resolution, for every offer or invitation. If an offer or invitation is made for non-convertible debentures, it would be sufficient if the company passes the Board Resolution every time if such issue is within the borrowing limit given as per Section 180(1)(c) of the Companies Act. The borrowing limits, initially, have to be approved by the shareholders of the issuer company. A company issues private placement offer cum application letter only after the relevant special resolution or Board resolution is filed in the ROC.

Private Placement Offer Letter

A Private Placement Offer Letter (PPOL) in form PAS-4 would be accompanied by an application form that is numbered and explicitly addressed to the person to whom the offer is made and is sent to him either in written format or electronic mode within 30 days of recording the names of such people. PPOL has to contain any right to renunciation.

Payment Through Banking Channel

The fee to be made for a subscription to securities would be made from the bank account of the individual subscribing to such securities, and the company keeps a record of the Bank account from where the payments for subscriptions have been received.

Separate Bank Account in Scheduled Bank

Issuer company has to open a separate bank account in a scheduled bank to receive amount against the issuance of securities under the private placement.

No Advertisement for Private Placement of Shares/ Securities

No company offering securities under the section releases any public advertisements or utilises any media, marketing or distribution channels or agents to inform the public at large about the offer.

Allotment of Shares/ Securities

Issuer company allows its securities in a span of 60 days from the date of receiving the application money for such securities and if the company is not able to allot securities within the given time, it has to refund the application money to the subscribers within 15 days after the completion of sixty days. In case the company fails to repay the application money within the stated period, it would be liable to refund the money with interest at the rate of 12% per annum from the expiry of the 60th day.

Return of Allotment for Private Placement of Shares/ Securities

A return of allotment of securities has to be filed with the Registrar in a span of 15 days of allocation in Form PAS-3 along with a complete list of all the allottees mentioning the following details.

The full name, address, PAN and E-mail ID of the security holder.
The class of security held.
The date of allotment of security.
The number of nominal value, securities herd and amount paid on such particulars and securities of consideration received if the securities were issued for consideration besides cash.

ROC Filing

The Companies Amendment Act 2017 withholds the issuers from utilising money that is raised through private placement until the allotment is made and the return of allotment is filed with ROC.

Record of Private Placement

The company would maintain a complete record of private placement offer in Form PAS-5.

Non-Compliance

Any private placement issue that is not made in compliance of the provisions of Section 42 will be deemed to be a public offer, and all the requirements of the Act and the Securities (Regulation) Act, 1956 and the Securities and Exchange Board of India Act and Regulations will be applicable. Infringement of Section 42 draws a penalty that extends to the amount mentioned in the offer or invitation or Rs. 2 Crore whichever is higher. The company also refunds all the money to the subscribers within 30 days of the order imposing the penalty.

Conditions for Private Placement

Private placement offer can be made to 50-200 individuals in the aggregate in a financial year. Qualified Institutional Buyers and Employees are disbarred from the count of 200 people.
All offer has to be made only for those names that are recorded by the company before subscribing to the invitation.
Allotments can be made by an individual addressed to another individual to whom the offer is made.
The value of such an offer or invitation for every individual shall be with an investment size that is not below Rs. 20,000 of the face value of the securities.
All outstanding money towards the subscription of securities under this section would be remitted through demand draft or cheque or other banking channels but not by cash.
The price of the security has to be justified, and it also requires a valuation report by a Registered value (which can be a Company Secretary, Chartered Accountant or Cost Accountant).

Penalty

If a company violates the provisions of Section 42, the company along with its promoters and directors would be liable to pay a penalty that is mentioned in the offer or invitation or Rs. 2 Crore, whichever is higher. The company refunds all the collected amount to the subscribers within 30 days of the penalty order. According to the Companies (Acceptance of Deposit) Rules 2014, if the securities for which the application money received is not allotted within 60 days from the date of receipt of the application money, then such application money would not be refunded to the subscribers within fifteen days from the date of completion of 60 days. This amount would be treated as a deposit under these rules. Any adjustment of the amount for any other purpose will not be treated as a refund.

Provisions of FEMA

The equity instruments have to be issued in a span of 180 days from the date of receiving the inward remittance or by debit to the FCNR (B)/ NRE/ Escrow account of the non-resident investor.
If the equity instruments are not issued in a span of 180 days from the date of receiving the inward remittance or date of debit to the FCNR (B)/ NRE account, the amount of consideration so received has to be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the FCNR (B)/ NRE/ Escrow account.
Non-compliance with the above provision would be assumed as an infringement under the FEMA and could attract penal provisions.