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All You Need to Know About Private Placement of Securities

Deepti Shikha

| Updated: May 09, 2020 | Category: Compliances

Private Placement

In this competitive era, all the companies need to have adequate capital to run the business as well as to meet the working capital of the Company.  All the companies, irrespective of size, requires capital to grow their business and also to expand it. There is a sharp trend of startups in the country trying to bring new products and services in the market. Basically, all the startups need funding for expansion and also to meet their working capital requirements for the initial period of 4-5 years. There are many funding methods available, but mostly all the startups prefer issuing securities to the investors. Company may issue shares and securities by way of:

  • Prospectus
  • Private placement
  • Right issue and bonus shares

By way of Private Placement of Securities, companies can raise funds in a compliant manner. In this blog, we will cover the practical and procedural aspects of Private Placement of Securities

As per Section 42 of the Companies Act 2013 and Companies (Prospectus and Allotment of Securities) Rules, 2014, a Private Placement is defined as an invitation or offer to subscribe or issue the securities to a selected group of persons by a company ( not by way of public offer) through Private Placement Offer-Cum-Application

When the securities are not sold through a public offering, but rather by private offering, it is termed as Private Placement of securities. In this case, the Company offers securities to a small group of investors chosen by the Company. All monies Payable towards subscription of securities and shares shall be paid through demand draft, cheques, but not by cash. So, companies employing this type of financing do not need to comply with the same reporting and disclosure requirements as complied under the public offering. It has minimal regulatory compliances and standards, and the investment does not require prospectus like in case of the issue through IPO. Private placement securities do not require disclosure of detailed financial statements.

Who can be Offered Private Placement of Securities?

Private Placement offers can be made to the following listed persons:

  • A prospective investor
  •  Any person who intents to invest a specific amount of funds in the Company against the issue of securities.

Private placement offers cannot be made to more than 200 persons in a Financial Year. In case a company, whether it is listed or unlisted, makes an offer to invite or allot subscription or agrees to allot, securities to more than the prescribed number of persons, the same shall be deemed to be an offer to the public.

What is the Exemption to Issue of Private Placement Securities?

While computing the above 200 persons, the following persons must be excluded:

  • Qualified Institutional Buyers (QIBs), as explained in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
  • Securities issued to employees under the employee stock options scheme.

What is the Procedure for Issuance of Private Placement of Securities?

The companies should follow the below-prescribed procedure to issue securities under the Private Placement:

  • To send notice of meeting to the Board of Directors of the Company to offer securities on Private Placement.
  • To pass the Resolution of Board of Directors to issue shares under the Private Placement to specified individuals and then calling for Extra-Ordinary General Meeting of the Company to take the approval of its members.
  • Filing of Form MGT-14 regarding Board Resolution for issue of shares under Private Placement.
  • To issue notices to all the shareholders for Extra-Ordinary General Meeting of the Company as per the prescribed guidelines or with shorter consents.
  • Passing of special resolution for issue and allotment of shares in the shareholders meeting by way of special resolution under the Private Placement.
  • In Form PAS-4, sending the offer attached with the application letters to identified persons within 30 days of recording the names of identified persons. Such an offer, along with application letters, can be sent by e-mails or via post.
  • Receiving of allotment amount in a separate bank account within the offer period, as mentioned in the application cum offer letter.
  • The shares shall be allotted by the Company to the applicants who have subscribed for Private Placement through application letter and also deposited the subscription amount within the offer period.
  • After the closure of the offer period, a Board Meeting must be called to pass the Resolution for allotment of securities to the subscribers who are entitled.
  • In Form PAS-3 filing of return allotment within 15 days from the date of allotment i.e., after the passing of Board Resolution for allotment.
  • The Company must ensure that the securities are allotted within 60 days of the receipt of the Application Amount.
  • On allotment of securities, a stamp duty at the rate of 0.10% shall be paid through channels as available in the respective states. For instance, in Mumbai, it can be paid to ESBTR or GRASS MAHAKOSH site portal.
  • Only after the Return of Allotment is filed with the Registrar of Companies (ROC), the Company will be allowed to utilize the money raised through Private Placement.
  • In Form PAS-5 record of Private Placement must be maintained by the Company.
  • Upon completion of allotment of securities, the Company should properly update its Registrar of Members.

How to Take Approval of Shareholders for allotment of Private Placement?

A Special resolution must be passed in the meeting of the shareholders of the Company before issuance of shares under the private placement. The notice calling for Extra-Ordinary General Meeting of the shareholders must consist of an explanatory statement bearing:

  • All the particulars of offer
  • The date of passing of board resolution
  • Types of securities to be offered and its price
  • Justification or basis for the price
  • Name and address of valuer performing the valuation
  • Appropriate amount which the Company intends to raise
  • The material terms of raising such securities
  • The proposed time schedule
  • Purpose or objects of the offer
  • Contribution made by the directors or promoters.

Who can make the Subscription of Shares/Securities?

Every person to whom the offer of Private Placement has been made and if he is willing to subscribe to the shares of the Company may do so by:

  • Filing the application form attached with an offer cum application letter.
  • The application letter to be sent with the subscription money.

What should be the Mode of Payment of Subscription Money?

The following listed modes can be used to pay the subscription money:

  • Demand Draft
  • Cheque
  • Any other banking channels except cash

Separate Bank Account with Scheduled Bank

The payments received shall be kept in a separate bank account and must not be utilized for any purpose other than:

  1. For adjusting allotment of securities,
  2. Where the Company is unable to allot the securities to make repayment of monies.
  3. The Company will be permitted to move the funds in regular Bank account used for day to day transactions, after the completion of the allotment process.

Utilization of Payments Received

Company cannot utilize the funds raised from Private Placement of Securities unless it has allotted the shares to the subscribers and also it has filed a return of allotment in Form PAS-3 with the Registrar of Companies (ROC).

Allotment of Shares

The Company must allot the shares under Private Placement within 60 days from the date of receipt of the application money. In case if the Company fails to allot the shares within 60 days, it shall refund the payments received from the application within 15 days from the expiry of 60 days. If the Company fails to refund the monies, then it shall have to repay the amount with interest at the rate of 12% per annum from the expiry of the 60th day.

Advertisement

The Company cannot make any advertisements, media marketing, or distribution channels or agents to inform the public at large about such an issue.

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Private Placement of Securities

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What are the Pros and Cons of Private Placement of Securities?

Pros

  • Faster turnaround time: The investors can get proceeds from the sale in less amount of time as the security underwriting process is faster here.
  • Different assets: A Company does not need a credit rating from the bond agency and can sell the securities to accredited investors who understand a more complex offering of shares.
  • Privately owned status:  A Company can file for Private Placement and then remain privately owned, avoiding all the regulations and information disclosures of publicly owned companies.

Cons

  • Higher interest rates: Compared to other types of shares and securities issued by publicly traded companies, private placement securities provide a higher rate of interest.
  • Increased collateral: By not having a credit rating, a private placement securities offers little guarantee to the buyers. A company may have to offer some form of collateral to allure buyers.
  • Ownership: An investor in a private placement may want a larger percentage of ownership in the business or a guaranteed fixed dividend payment for each share of stock they own.

What information must be made available to potential investors Related to the private placement of securities?

  1. According to the Companies Act, 2013, private placements are required to be made through a private placement offer-cum-application letter in the format mentioned under the Rules. The format prescribed under the Rules includes :
    • disclosures relating to the business,
    • pending legal action or risk factors taken by any government department or statutory body during the past three years against the promoters as well as details of the significant and material orders passed by the regulators,
    • courts and tribunals are impacting the going concern status of the Company and its future operations.
  2. On the other hand, the ICDR Regulations also prescribes the contents of an offer document as per the form of private placement undertaken.
  3.  In a QIP, the placement document issued to the potential investors and filed with the stock exchanges. It must contain all the relevant information in relation to the issuer and the placement which includes the details of risk factors and the business, legal proceedings considered material as per the materiality policy framed under the Listing Regulations, management of the issuer and details of use of proceeds in relation to the placement.
  4.  In case of preferential issue of securities by a listed issuer as per the ICDR Regulations, No additional information needs to be prescribed by the potential investors. However, the members in a general meeting must approve the placement. They must provide certain details relating to the placement and also must disclose the willful defaulters.
  5. Relating to the debt securities as per the Companies Act,  issued on a Private Placement basis, the disclosure document must contain the following information:
    • Disclosures specified in the Debt Regulations, such as the details of the offer made and the terms of debt securities.
    • Brief details and objects of business and corporate history of the issuer.
  6. With regard to the listing of non-convertible redeemable shares as prescribed under the Companies Act for Private Placement, there must be a disclosure document containing:
    • Certain disclosures as prescribed in RPS Regulations,
    • The terms on which it is to be issued,
    • Key operational and financial parameters for the three audited years before issuing the securities.
    • A summary of the business of the issuer

What are the penalties that one can be expected to incur for non-compliance?

In case, the return on the allotment in the due form of PAS- 3 is not filed within the 15 days from date of allotment of securities, the directors and promoters of the Company, will have to pay a hefty fine of Rs. 1000 per defaulting day. This amount will be cut off at a maximum of Rs, 2,500,000.

Conclusion

Investing in securities that do not disclose their financial information can be confusing. In this situation, you can take help from financial advisors. They will help you in getting a clearer picture. You can find the best financial advisors in Enterslice who can guide you as per your needs. A Private Placement can also help small business owners to select investors. Enterslice can as well help the startups in getting new investors for their business.

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Private Placement of Securities

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Deepti Shikha

Deepti is a Law graduate with an avid interest in reading and very proficient in summarizing legal cases. She has enough experience in handling legal affairs of the company. In the initial days of her career, she has worked as a legal researcher and has 3+ years of experience.

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