Indian Companies Act 2013 Issuance of Private

Placements by a Company
Course : Legal Aspects of Business
Group No. 5
Praveen Kumar Mishra
Prashant Kumar Pattniak
Bharat Bhushan
Sonalika Prasad
Viresh Agarwal
Sanjay Kumar
Bhaskar Kumar
Companies Act
Most important piece of legislation that empowers the Central Government to regulate the
formation, financing, functioning and winding up of companies.

Company means a company formed and registered under the act or an existing company i.e.
a company formed or registered under any of the previous company laws. (Companies act
1956)

The companies act is administered by the Central Government through the Ministry of
Corporate Affairs and the Offices of Registrar of Companies, office Liquidators, Public
Trustees, Company Law Board, Director of Inspection, etc.

4 amendments since 1956 and a new company act in 1956.

Companies Act
1956
Companies
(Amendment)
Act, 2000
Companies
(Amendment)
Act, 2002
Companies
(Amendment)
Act, 2006
Companies Act
2013
Companies Act 2013
First major revision after Companies Act 1956.

Divided into 29 chapters containing 470 clauses as against 658 Sections in the Companies Act
1956 and has 7 schedules.

Act 2013 has replaced the Companies Act 1956 (partially) after receiving assent from President
of India on 29
th
August 2013.

Came into force on 12
th
September 2013.

Changes such as maximum number of members in private companies (200 in place of 50), a
new term of one person company etc.

Significant change in the provisions relating to private placement of securities, an important
route for raising the funds by the companies.


Source : Wikipedia
Private Placement
Private Placement (or non-public offering) is a funding round of securities which are sold not
through a public offering, but rather through a private offering, mostly to a small number of
chosen investors. Wikipedia

The sale of securities to a relatively small number of select investors as a way of raising
capital. Investors involved in private placements are usually large banks, mutual funds,
insurance companies and pension funds. Private placement is the opposite of a public issue, in
which securities are made available for sale on the open market. Investopedia

Because the securities sold in a private placement are not registered, they cannot be re-sold into the
public market until a registration statement (Form S-1, SB-2, or S-3)has been filed and declared
effective.

To compensate for the inability to sell the securities immediately, private placement securities are
often issued at a discount or are structured to provide the investors certain protections against
decreases in the common stock price.

This is a means to restrict the investors that can get involved in a company so that they can maintain
some level of control over the company.

Source : Wikipedia
Companies Act 1956 - Private
Placement
No specific provisions on private placement exists in the Act of 1956.

Unlisted companies were required to follow unlisted public companies (preferential allotment) rules,
2003 while making private placement and listed companies were required to follow the guidelines or
regulation of SEBI.

Though Section 67(3) of the Companies Act, 1956 restricted the number of persons whom the shares
could be allotted under single offer or invitation (limited to 49 persons at a time).

These loopholes had been misused by many companies and their promoters to indulge in
malpractices,

The companies compromised the interest of the stakeholders.

Recent example is Sahara Group (used as a case study in this presentation).

Source : Wikipedia
Companies Act 2013 Closing the
Loopholes
Chapter III, Part II of the Act, 2013 deals exclusively with private placements.

Section 42 of the Act, 2013 defines 'private placement.

In consonance with the interpretation of the Supreme Court it can be defined as "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 and which satisfies the conditions
specified in this section including the condition that he offer or invitation is made to not more than 50
or such higher number of persons as may be prescribed (excluding QIB's and employees offered
securities under ESOP) in a financial year".

The provisions for private placement applies to the issue of "securities" and not "shares". Thus the
new provisions have widened the scope and cover a whole host of instruments such as shares,
bonds, debentures and other marketable securities etc.

The Act, 2013 under section 42(4) mandates a company to comply with the provisions of SEBI Act &
SCRA, if any offer or invitation is not in compliance with the provisions of the section and such offer
or invitation shall be treated as a public offer.
Source : Wikipedia
Companies Act 2013 Private
Placement Salient Features
An offer can be made under a Private Placement Offer Letter to not more than 200 people. Not just
the limitation of allotment to 200 people but even an invitation to subscribe cannot be made to more
than 200 people.

The price of the security has to be justified and the inference is that, it requires a valuation report by
a Registered Value assessor (can be a company secretary, chartered accountant or a cost accountant)

All monies payable towards subscription of securities under this section shall be paid through cheque
or demand draft or other banking channels but not by cash.

A company making an offer or invitation under this section shall allot its securities within sixty days
from the date of receipt of the application money for such securities and if the company is not able
to allot the securities within that period, 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 twelve per cent. per annum from the expiry of the sixtieth day.
Source : Wikipedia
Companies Act 2013 Private
Placement Salient Features
(contd )
Provided that monies received on application under this section shall be kept in a separate bank
account in a scheduled bank and shall not be utilised for any purpose other than

for adjustment against allotment of securities; or
for the repayment of monies where the company is unable to allot securities.

All offers covered under this section shall be made only to such persons whose names are recorded
by the company prior to the invitation to subscribe, and that such persons shall receive the offer by
name, and that a complete record of such offers shall be kept by the company in such manner as
may be prescribed and complete information about such offer shall be filed with the Registrar within
a period of thirty days of circulation of relevant private placement offer letter.

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.
Source : Wikipedia
Case Study Sahara Group
SAHARA INDIA PARIWAR a privately held conglomerate headquartered in Lucknow , India.

Founder by Mr. Subrata Roy in 1978 at Gorakhpur

Business interests in finance, infrastructure & housing, media & entertainment, consumer
merchandise retail venture, manufacturing & information technology.

Was the main sponsor of the India national cricket team.

Company owns a 42.5% stake in Formula 1 Team

Sponsors India national field hockey team.

Market capitalization of US $ 26 billion as of March 2011.
Source : Wikipedia
Case Study Sahara Group
Defaulter

(Contd)
Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation
Limited (SHIC) issued Optionally Fully Convertible Debentures (OFCDS) through subscriptions from
investors with effect from 25th April 2008 up to 13th April 2011.

Raised around Rs.20,000 crores from investors.

The purpose of issue was to carry out infrastructural activities namely, constructing the bridges,
modernizing or setting up of airports, rail system or any other projects which may be allotted to the
company.

The amount was collected from the about 30 million investors in the guise of a PRIVATE
PLACEMENT.

Sahara Prime City Limited intended to raise funds through listing of its shares filed prospectus to
SEBI.
Source : Wikipedia
Case Study Sahara Group and
Supreme Court

The Supreme Court directs Sahara group's real estate company to return with a 15-percent interest
the Rs.17,000 crore ($3.5 billion) it had mopped up as debentures from investors in August 2012.

Sahara misses the repayment deadline set up by SC. The company fails to deposit the second
installment amount with market regulator. It was required to submit INR 10,000 crore by January first
week. The Supreme Court also dismissed the Sahara group's plea for a review of its verdict directing
two Sahara firms to refund around INR 24,000 crore to their investors with 15 per cent interest.
Complained alleged Sahara Group to not comply with relevant regulation in January 2013.

The Supreme Court Wednesday issued a non-bailable warrant against Sahara group chief Subrata
Roy for failing to appear before it in person as directed at the court's last hearing. Roy was also given
till March 4 to comply with the court's order in February 2014.

Sahara India chief Subrata Roy surrenders before the police, a day after they failed to trace him to
execute a Supreme Court warrant for his arrest.
Source : Wikipedia
Case Study Sahara Group and
Supreme Court Observations

Whether the power to investigation and adjudication lies with SEBI in this matter as per Sec 11, 11A,
11B of SEBI Act and or Ministry of Corporate Affairs (MCA) under Sec 55A of the Companies Act.

Whether the hybrid OFCDs fall within the definition of "Securities" within the meaning of Companies
Act, SEBI Act and SCRA so as to vest SEBI with the jurisdiction to investigate and adjudicate.

Whether the issue of OFCDs to millions of persons is a Private Placement and not covered by SEBI
Regulations and various provisions of Companies Act.

Whether listing provisions under sec 73 is mandatory for all public issues or depends on Intention of
the Company.

Whether the Public unlisted companies (Preferential Allotment) Rules, 2003 will apply in this case.
Source : Wikipedia