Private Placement of Securities (Learning No. 10)

Learning no.  10 Month: Nov, 2020	MIBS Learning Centre: www.mithunbshenoy.blogspot.com
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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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ACCEPTANCE OF DEPOSITS BY CORPORATES – A REVIEW (PART - B) (Learning No. 9)

 

 

Learning no.  9 Month: Nov, 2020	MIBS Learning Centre: www.mithunbshenoy.blogspot.com
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ACCEPTANCE OF DEPOSITS BY CORPORATES – A REVIEW (PART - B)

This write up is the continuation of learning no. 8. Those who have not read the previous write up, please go through it first.

 

Sl. No.	Particulars	Sec 73(2) Company	Sec 76 eligible Company
1	TENURE OF DEPOSIT     (Rule 3 of Deposit Rules)	accept or renew any deposit which is repayable on demand or upon receiving a notice within a period of less than 6 months or more than 36 months from the date of acceptance or renewal of such deposit. For the purpose of meeting any of its short-term requirements of funds, accept or renew such deposits for repayment earlier than 6 months from the date of deposit or renewal, as the case may be, subject to the condition that- (a)   such deposits shall not exceed 10% of the aggregate of the paid-up share capital, free Reserves and securities premium account of the company, and (b)   such deposits are repayable not earlier than 3 months from the date of such deposits or renewal thereof.
2	JOINT NAME (Rule 3 of Deposit Rules)	joint names not exceeding three.
3	MAXIMUM DEPOSIT AMOUNT   (Rule 3 of Deposit Rules)	shall accept or renew any deposit from its members, shall not exceed 35% of the aggregate of the Paid-up share capital, free Reserves and securities premium account of the company. Specified IFSC Public company and a private company may accept from its members’ monies not exceeding 100% of aggregate of the paid up share capital, free reserves and securities premium account and such company shall file the details of monies so accepted to the Registrar in Form DPT-3. Also maximum limit in respect of deposits to be accepted from members shall not apply to following classes of private companies, namely: - (i)     a private company which is a start-up, for 10 years from the date of its incorporation; (ii)    a private company which fulfils all of the following conditions, namely: - (a)   which is not an associate or a subsidiary company of any other company; (b)   the borrowings of such a company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or Rs. 50 crores, whichever is less; and (c)   such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under section 73: Provided also that all the companies accepting deposits shall file the details of monies so accepted to the Registrar in Form DPT-3.	No eligible company shall accept or renew-   o any deposit from its members exceeds 10% of the aggregate of the Paid-up share capital, free Reserves and securities premium account of the company;   o any other deposit exceeds 25% of aggregate of the paid-up share capital, free Reserves and securities premium account of the company.     No Government company eligible to accept deposits under Sec 76 shall accept or renew any deposit exceeds 35% of the aggregate of its Paid-up share capital, free Reserves and securities premium account of the company.
4	Rate of interest (Rule 3 of Deposit Rules)	at a rate not exceeding the maximum rate of interest or brokerage prescribed by the RBI for acceptance of deposits by NBFCs.
5	Credit Rating (Rule 3 of Deposit Rules)	Nil		Once in a year. Credit Rating for deposits accepted by it and a copy of the rating shall be sent to the RoC along with the Return of Deposits in Form DPT-3.
6	Circular inviting deposit   (Rule 4 of Deposit Rules)	Form DPT-1   Certificate of the statutory auditor of the company shall be attached in Form DPT-1.   Such circular shall be uploaded in the website of the Company.   Circular must be issued on the authority and in the name of the Board of directors of the company.   Circular (or circular in form of ADD) shall not be issued on behalf of a company unless, not less than 30 days before the date of such issue, there has been delivered to the RoC for registration a copy thereof signed by a majority of the directors of the company as constituted at the time the Board approved the circular duly authorized by them in writing.   A circular (or circular in form of ADD) issued shall be valid until the expiry of 6 months from the date of closure of the FY in which it is issued or until the date on which the financial statement is laid before the company in AGM or, where the AGM for any year has not been held, the latest day on which that meeting should have been held in accordance with the Act, whichever is earlier, and a fresh circular shall be issued, in each succeeding financial year, for inviting deposits during that financial year.
7	Advertisement (Rule 4 of Deposit Rules)	Optional		Mandatory. To be published in English language in an English newspaper having country wide circulation and in vernacular language in a vernacular newspaper having wide circulation in the State in which the registered office of the company is situated.
8.	Creation of Security (Rule 6 of Deposit Rules)	shall create a charge on its assets, as appearing in the balance sheet under Schedule III, excluding intangible assets for the due repayment of the amount of deposit and interest thereon. Such security (not being pledge), either on movable or immovable property, shall be created in favour of a trustee for the deposit holders.
9	Appointment of Trustee for Depositors (including duties, meeting of trustees etc..)   (Rule 7 & 8 of Deposit Rules)	Every company shall appoint deposit trustees for creating security for its deposits, which shall be mentioned on the circular to be issued.   A written consent shall be obtained from the trustee for depositors before their appointment.   A deposit trust deed shall be executed in Form DPT-2 at least 7 days before issue of the circular.   Deposit trustees cannot be removed after issue of circular / advertisement and before the expiry of his term except with unanimous consent of all directors present at the meeting of the Board, which shall include an independent director, if any.   Disqualification of Trustee: follow Rule 7 of Deposit rules.   Duties of Trustee: follow Rule 8 of Deposit rules
10	Meeting of Depositors (Rule 9 of Deposit Rules)	The trustee for depositors shall call a meeting of all the depositors on-   (a)   requisition in writing signed by at least 1/ 10th of the depositors in value for the time being outstanding;   (b)   the happening of any event, which constitutes a default or which, in the opinion of the trustee for depositors, affects the interest of the depositors.
10	Form of Application for Deposits (Rule 10 of Deposit Rules)	company shall not accept, or renew any deposit unless an application (No format mentioned. Company can decide.) is submitted by the intending depositor for the acceptance of such deposit.   Such application shall contain a declaration by the intending depositor to the effect that the deposit is not being made out of any money borrowed by him from any other person.
11	Power to nominate (Rule 11 of Deposit rules)	Every depositor may, at any time, nominate any person to whom his deposits shall vest in the event of his death.
12	Furnish the Deposit Receipts to Depositors (Rule 12 of Deposit Rules)	Every company shall, on the acceptance or renewal of a deposit, furnish to the depositor, receipt for the amount received, within a period of 21 days from the date of receipt of money/ renewal.
13	Maintenance of Liquid Assets and Creation of Deposit Repayment Reserve Account.   (Rule 13 of Deposit Rules)	Every company shall on or before the April 30, of each year, deposit the sum at 20% of deposit amount maturing during FY, with any scheduled bank and the amount so deposited shall not be utilized for any purpose other than for the repayment of deposits:
14	Register of Deposit     (Rule 14 of Deposit Rules)	Companies accepting deposits shall maintain a register of deposits, entering particulars of each depositor, as provided in the Rules, within 7 days of issue of the deposit receipt.   Entries made shall be authenticated by a director / company secretary / any officer authorized by the Board.
15	Return of Deposit   (Rule 16 of Deposit Rules)	Every company to which these rules apply, shall on or before the 30th day of June, of every year, file with the Registrar, a return in Form DPT-3 and furnish the information contained therein as on the 31st day of March of that year duly audited by the auditor of the company.   It is hereby clarified that Form DPT-3 shall be used for filing return of deposit or particulars of transaction not considered as deposit or both by every company other than Government company.
16	Disclosure in Financial Statement   (Rule 16A of Deposit Rules)	o Every company, other than a private company, shall disclose in its financial statement, by way of notes, about the money received from the director.   o Every private company shall disclose in its financial statement, by way of notes, about the money received from the directors, or relatives of directors.
17	Premature repayment of Deposit   (Rule 15 of Deposit Rules)	Where a company makes a repayment of deposits, on the request of the depositor, after the expiry of a period of six months from the date of such deposit but before the expiry of the period for which such deposit was accepted, the rate of interest payable on such deposit shall be reduced by one per cent. from the rate which the company would have paid had the deposit been accepted for the period for which such deposit had actually run.
18	Penal rate of Interest   (Rule 17 of Deposit Rules)	18% p.a. for overdue period.

PENALTY FOR CONTRAVENTION

As per the section 76A, where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under section 73 or section 76 or rules made thereunder or such further time as may be allowed by the Tribunal under section 73,—

On the Company	In addition to the payment of the amount of deposit or part thereof and the interest due, a fine of minimum Rs. 1 crore or twice the amount of deposit so accepted, whichever is lower, which may extend to Rs. 10 crore; and
On the officers of the Company	Who is in default: imprisonment up to 7 years and with a fine of not less than Rs. 25 lakhs which may extend to Rs. 2 crore.

 Provided that if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under section 447.

As per the Rule 21, If any company referred to in sub-section (2) of section 73 or any eligible company inviting deposits or any other person contravenes any provision of these rules for which no punishment is provided in the Act, the company and every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first day during which the contravention continues.

PROCEDURE OF ACCEPTANCE OF DEPOSITS FROM MEMBERS

1.  1. The companies intending to invite deposits from its members shall convene a Board meeting to consider and approve the business to propose and accept deposits from members and decide the day, date, time and place of the general meeting.

2.    2. Issue notice of general meeting to the members of the company. 

3.    3. Hold the general meeting and pass resolution for acceptance of deposits.

4.   4.Comply with the Rules prescribed in consultation with RBI and terms and conditions mutually agreed by the company and deposit holders either for acceptance or for repayment of deposits.

5.  5. *Issue circular to the members of the company including therein a statement showing the financial position of the company, the total number of depositors and the amount due towards depositors in respect of any previous deposits and such other particulars as may be prescribed. These details indicate the soundness of the company or a warning about risks involved. The circular shall be published at least once in English language in a leading English newspaper and in vernacular language in a vernacular newspaper having wide circulation in the State in which the registered office of the company is situated. 

6.  6. *File the copy of aforesaid circular in the Form DPT-1 along with such statement with the Registrar within thirty days before the date of issue of circular. 

7.   7. In case, a company does not secure the deposits or secures such deposit partially, then, the deposits shall be termed as “unsecured deposits” and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

8.    8. *A company inviting secured deposits shall provide for security by way of a charge on its assets for the due repayment of the amount of deposit and interest thereon. The company shall submit Form CHG-1 with Registrar for assets other than intangible assets and of the amount of deposit and interest thereon. Secured deposits including interest thereon can in no case exceed the market value of the charged assets assessed by the registered valuer. 

9.  9. *After the expiry of 30 days of filing Form DPT-1, the circular in Form DPT-1 along with application form is sent to all members by registered post with acknowledgement due/speed post/electronic mail.

10 10. Collect duly signed application form along with money from the members. 

1111. Issue receipts of deposits within 21 days of the receipts of money/ realization of cheque. 

1212. Maintain register of deposits at its registered office which shall contain the details as prescribed under rule 14 Companies (Acceptance of Deposits) Rules, 2014 from the date of such acceptance. 

1313. Pay interest as per the rate proposed on agreed terms. 

1414. *Deposit such sum which shall not be less than 15 % of the amount of its deposits maturing during the financial year and the financial year next following and keeping it in a separate bank account called deposit repayment reserve account. 

15 15. Submit return of deposits in Form DPT-3 on or before 30^th June each year for information as on 31st March of respective year. 

* Exempted for certain private companies which have mentioned above.

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