Private Companies to raise funds through Private Placement

private placerment

Funds, life cell of a business, are required all the time during its lifetime. Initial capital comes from subscribers to the memorandum. Additional capital requirement can be fulfilled by borrowings or issue of securities.    Public and private companies can issue securities through right shares, bonus issues or through ‘Private Placement. “Private Placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter (Form PAS 4) and which satisfies the conditions specified in section 42 of the Companies Act, 2013 The Companies Act, 2013 has made significant changes in the provisions relating to private placement of securities, which was an important route for raising the funds by the companies. Under the Act, 1956 the conditions relating to private placement were applicable only to public companies. On the contrary Act, 2013 provides various conditions for private placement of shares and debentures which apply to both private companies and public companies. It is to be noted that the provisions for private placement applies to issue of “securities” and not “shares”. Thus, the scope has been widened to cover shares, debentures, bonds and other marketable securities. For Private Placement, private companies have to follow various conditions for issue of securities.   CONDITIONS FOR ISSUE OF SHARES

  1. Offer can be made to not more than 200people in a financial year and not more than 50 people in an offer.

Note: a) Invitation to subscribe also cannot be made to more than 200 people. b) Limit of 200 excludes Qualified Institutional Buyers and Employees.            c) Limit of 200 shall be calculated individually for each kind of securities.

  1. Offer to be previously approved by Special Resolution for each of the Offer of Invitation.
  2. No further offer till completion of earlier offer.
  3. Separate Bank Account

             a)       The payment for subscription should be through the bank account of the person subscribing to the securities.              b)       The company should keep a record of the bank account from where such payments have been received.              c)       No cash transaction is permitted.              d)       The money so received shall be kept in a separate bank account of the company and utilized only for allotment (or                           repayment).

  1. Minimum amount of offer for an individual shall be INR 20,000 of ‘face value’ of securities.
  2. All offers shall be made only to those persons whose names are recorded by the company prior to the invitation to subscribe.
  3. The company shall not release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.
  4. Valuation Report: Theprice of the security has to be justified through valuation report by a Registered Valuer.

  5. Allotment shall be carried out within 60 days of receiving of money. If allotment is not made within 60 days then it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty 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% p.a. per annum from the expiry of the sixtieth day.

  STEPS INVOLVED IN PRIVATE PLACEMENT

  1. Call Meeting of Board Director.
  2. In the Board Meeting:

a)       Identify the person to whom shares shall be issued. b)       Prepare list of such persons. c)       Prepare Draft offer letter under PAS-4. d)       Pass Board Resolution for approval of offer letter. e)       Issue Notice of General Meeting.

  1. Hold Extra Ordinary general Meeting and pass Special Resolution for Private Placement of Shares.
  2. Circulate Letter of Offer in form PAS-4
  3. File Form MGT-14 with Registrar within 30 days of passing of Special Resolution.
  4. Open Separate Bank Account.
  5. File GNL-2 with Registrar within 30 days of circulation of offer letter.
  6. Call Board Meeting after receiving of allotment of money.
  7. File PAS-3 with Registrar of Company.
  8. Issue Share Certificate.

  If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.  

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Disclaimer: This article is intended to provide a general guide to the subject matter and is written with utmost care to disseminate the true and correct view and does not accept liability for any errors or omissions.

 

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