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Tuesday, 17 November 2020

Private Placement of Securities (Learning No. 10)

Learning no.  10

Month: Nov, 2020

 

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PRIVATE PLACEMENT OF SECURITIES

Any corporates can raise fund in the form of equity or debt, depending upon the requirement of fund, size, stage of business, its payout capacity, industry or business risks and so on. Private Placement of securities have always been considered one of the most favored modes used by corporates among other modes of issue like Public issue and Rights issue. It has got publicity due to the reason of ease available to companies and their managements, in terms of less legal hassles, choice available for selecting the allottees in advance or amounts to be raised etc.

 

As per Sec 42 of the Companies Act, 2013 (“the Act”), "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) through private placement offer-cum-application, which satisfies the conditions specified in this section. In most simple words, private placement refers to an offer or invitation to subscribe of securities to a select group of people on preferential basis. Meaning thereby, any issue/ allotment other than a Public Issue or a Rights Issue shall be a private placement.




 

REGULATORY FRAMEWORK

Under the Act, there are three major sections which governs issue of securities by private placement by any company:


1.  Sec 23: the modes of issue of securities which a company uses to issue securities. The Private Placement is an available mode for both public as well as private companies.

 

2.  Sec 42 read with the Companies (Prospectus and Allotment of Securities) Rules, 2014, which prescribes detailed procedural guidelines for offer or invitation of securities by way of private placement. This section covers offer of all kind of securities as defined under Section 2 (h) of the Securities Contracts (Regulation) Act, 1956.

 

3.  Section 62 of the Act read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014. This section prescribes certain additional requirements/ compliances in case the securities being issued are equity shares or securities convertible into equity shares on preferential basis (“preferential offer”).

 

‘Preferential Offer’ means an issue of equity shares or convertible instruments, by a company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities.

 

For instance, if a company issues equity shares or other securities convertible into equity on preferential basis, in addition to the requirements of Section 42 as discussed above, companies are required to comply with the provisions of Section 62 as well as respective rules. Where the preferential offer of shares or other securities is being made by any listed entity, then the provisions of the above rules shall not be applicable but such companies shall comply with SEBI prescribed Regulations in this respect.

 

The key provisions governing Preferential Offer have been given hereunder:

·    The offer must be authorized by Articles of Association of the Company.

·    Pass a special resolution in the general meeting of the Company.

·    However, in case of Non-Convertible Debentures(NCD) it will be sufficient if the Company passes a special resolution once in a year for all the Private Placements to be made by the for the NCD during the year. [Rule 14(2)].

·  The Company has to issue a Private Placement letter of offer in the form of PAS-4 to the Identified persons by the Board to whom the allotment is to be made. 

·    However, it is to be noted that the Private Placement letter of offer shall not contain Right to Renunciation.  

·     The Company also has to keep the records of private placement in a format PAS-5 and file the details with the ROC within 30 days from the date of issue of Private Placement letter of offer. [Rule 14(3)].

·     Once the Company receives the allotment money, the Company shall allot the Securities within 60 days and if it fails to do so then refund the money within the next 15 days. If the Company fails to do so then interest @12% will be charged from the expiry of 60th day.

·  The Company has to file return of allotment in Form PAS-3 within 15 days of allotment. Company cannot utilize the Application money until it has filed Return of allotment with the ROC.




 

Following points are to be noted

·  The Application money to be received shall be either through Cheque, Demand Draft or other banking channels except cash.

·    Private Placement shall not be done unless any previous offer or invitation has been completed or withdrawn or abandoned by the Company.  

·    The Company shall not advertise about the Private Placement to the public.

·   If a Company makes contravenes the provisions of this Section, then the Company, Promoters and its Directors shall be liable for a penalty which may extend to the amount involved in the contravention or rupees two crores, whichever is higher. Further the Company also has to refund all monies to subscribers within 30 days of the order.

·      Restriction of 200 is for each kind of a Security [explanation to Rule 14(2)(b)].

·      No partly paid securities shall be issued.

·      Allotment to be made within 12 months from the date of Special Resolution.

·      Mandatory disclosures in the Explanatory Statement to the Notice calling General Meeting to be included.

 

Additional Compliance in case of Private Placement of shares and other Convertible Securities

·    The issue is authorized by its articles of association;

·    Pass the special resolution  

 

in case of any preferential offer made by a company to one or more existing members only, the provisions of sub-rule (1) and proviso to sub-rule (3) of rule 14 of Companies (prospectus and Allotment of Securities) Rules, 2014 shall not apply. 

·    The price of shares to be issued on a preferential basis by a listed company shall not be required to be determined by the valuation report of a registered valuer. 

·     The allotment of securities on a preferential basis made pursuant to the special resolution passed shall be completed within a period of 12 months from the date of passing of the special resolution.

·      if the allotment of securities is not completed within twelve months from the date of passing of the special resolution, another special resolution shall be passed for the company to complete such allotment thereafter.

·     the price of the shares or other securities to be issued on a preferential basis, either for cash or for consideration other than cash, shall be determined on the basis of valuation report of a registered valuer;


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