MAHARASHTRA NATIONAL LAW UNIVERSITY, MUMBAI

COMPANY LAW

FINAL DRAFT

TOPIC: PRIVATE PLACEMENTS IN INDIA

Submitted To: Prof.Anand Shrivas Enrolment No.:2017043 Submitted By: Sakshi Salunke

INTRODUCTION

The law for private placement of securities is codified under sections 42 and 62 of the 2013
Act and the Companies (Prospectus and Allotment of Securities) Rules, 2014 ("Rules").
Essentially, section 42 and the Rules contain the complete code for private placement.
However, rule 13 of the Companies (Shares Capital and Debentures Rules), 2014 prescribes
certain mandatory secretarial compliances in case of various modes of issue of shares under
section 62 (which, in addition to ESOPs and rights issue by unlisted companies, include private
placements too). Therefore, a company making private placements must comply with section
62 of the 2013 Act too.1

➢ What Is a Private Placement? & Understanding Private Placement

A private placement is a sale of stock shares or bonds to pre-selected investors and institutions
rather than on the open market. It is an alternative to an initial public offering (IPO) for a
company seeking to raise capital for expansion. he offers of securities or invitation to subscribe
securities, shall be made to not more than 200 persons in the aggregate in a financial year
(excluding qualified institutional buyers and employees of the company being offered
securities under ESOP). This restriction would be reckoned individually for each kind of
security that is equity share, preference share or debenture. Investors invited to participate in
private placement programs include wealthy individual investors, banks and other financial

1
http://docs.manupatra.in/newsline/articles/Upload/754A95A7-8144-48CE-903B-80C8F93287D1.pdf
institutions, mutual funds, insurance companies, and pension funds. One advantage of a private
placement is its relatively few regulatory requirements.2 There are minimal regulatory
requirements and standards for a private placement even though, like an IPO, it involves the
sale of securities. The sale does not even have to be registered with the U.S. Securities and
Exchange Commission (SEC).3 The company is not required to provide a prospectus to
potential investors and detailed financial information may not be disclosed. The sale of stock
on the public exchanges is regulated by the Securities Act of 1933, which was enacted after the
market crash of 1929 to ensure that investors receive sufficient disclosure when they purchase
securities. Regulation D of that act provides a registration exemption for private placement
offerings. The same regulation allows an issuer to sell securities to a pre-selected group of
investors that meet specified requirements. Instead of a prospectus, private placements are sold
using a private placement memorandum (PPM) and cannot be broadly marketed to the general
public. It specifies that only accredited investors may participate. These may include
individuals or entities such as venture capital firms that qualify under the SEC’s terms.4

KEY FEATURES OF PRIVATE PLACEMENTS

1. Offer Procedure: Before initiating private placement, a company must ensure that it’s
articles of association authorize increase of share capital by private placement. If that’s
not the case, the first step will be to amend the articles which will involve approvals
both at the Board and shareholder levels. If the articles authorize, the company should
get the shares valued and take up in their board meeting. Once the board decides to go
ahead with private placement, it must put forth the proposal of increasing the capital
through private placement before the shareholders. The shareholders must approve the
proposal through a special resolution before a company can proceed with private
placement. Section 42 and the Rules provide that a company proposing to make a
private placement cannot propagate the same through advertisements. It mandates
companies to issue an offer letter which spells out the terms of offer of securities. Such
terms should typically mention the nature of securities on offer, timelines for

2
https://www.sebi.gov.in/sebi_data/commondocs/su
3
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Private_equity_investments_in_India_-
_a_legal_and_structural_overview.pdf
“AMENDMENTS IN PRIVATE PLACEMENT PROVISIONS AND THEIR IMPLICATIONS.” M&A
Critique, January 4, 2019. https://mnacritique.mergersindia.com/private-placement-companies-act-
amendements/.
4
http://psalegal.com/wp-content/uploads/2017/01/ENewslineJanuary2015.pdf
 acceptance of the offer, mode of accepting or rejecting the offer etc. Company can make
offers only to such persons whose names are identified prior to the invitation to
subscribe. The law makes no distinction between an Indian citizen and a foreign
shareholder i.e. to say, private placement can be made to any person except for qualified
institutional buyers and ESOP holders. Normally, a company would prefer approaching
its existing shareholders over any other person. If they do not accept the offer or if the
company is not able to raise the required amount of capital from existing shareholders,
then it may consider approaching its key managerial personnel, kith and kin of the
directors etc.5 Basically, the underlying element of the provision is that private
placements cannot be made to persons who are not even remotely acquainted with the
company.
2. Size of Offer: Further, unlike a public offer where shares are offered to public at large,
a private placement can be made to a maximum of 200 people (and not more than 50
people per offer) in a financial year. This number excludes qualified institutional buyers
such as banks, financial institutions etc. and employees of the company to whom shares
are allotted under ESOPs. A classic case of menace under this provision is the Sahara
scam. In the case of Sahara scam, two unlisted companies, Sahara Real Estate
Corporation Ltd. and Sahara Housing Investment Corporation Limited in the garb of
private placement, issued optionally fully convertible debentures and raised
approximately 3,243 million USD from the public. The two companies made private
placements in multiples of 49 (in-line with the 1956 Act) and in essence made a public
issue through private placement! The Sahara lawyers contended that there is no
prescribed limit for number of persons to who private placement offers can be made.
They also argued that they complied with the 1956 Act as the company had made offer
to only close friends and relatives of the promoters and directors. Moreover, as unlisted
companies they were not required to issue prospectus and make disclosures. The
Supreme Court looked into the spirit of section 67 of the 1956 Act and interpreted it to
hold that although the intention of the companies was to make the issue of debentures

5
private placement. Accessed April 9, 2020. https://indiankanoon.org/search/?formInput=private placement.
“The Concept of Private Placement under The Companies Act, 2013.” Corporate Law Reporter, January 18,
2016. http://corporatelawreporter.com/2016/01/18/the-concept-of-private-placement-under-the-companies-act-
2013/.
 look like a private placement, it ceases to be so when the securities are offered to more
than 50 persons and, hence, qualifies to be a public offer.

Special Resolution for Private Placement

The offer should be previously approved by the shareholders of the company, by a Special
Resolution, for each of the offers or invitations. In case of offer or invitation for non-convertible
debentures, it shall be sufficient if the company passes the Board Resolution each time if such
issue is within the borrowing limit specified under Section 180(1)(c) of the Companies Act.
However, borrowing limits are to be approved by the shareholders of the issuer company first.
A company shall issue private placement offer cum application letter only after the relevant
special resolution or Board resolution has been filed in the ROC.

➢ Advantages and Disadvantages of Private Placement

Private placements have become a common way for start-ups to raise financing, particularly
those in the internet and financial technology sectors. They allow these companies to grow and
develop while avoiding the full glare of public scrutiny that accompanies an IPO. Buyers of
private placements demand higher returns than they can get on the open markets. As an
example, Lightspeed Systems, an Austin-based company that creates content-control and
monitoring software for K-12 educational institutions, raised an undisclosed amount of money
in a private placement Series D financing round in March 2019. The funds were to be used for
business development.6

➢ A Speedier Process & A More Demanding Buyer

Above all, a young company can remain a private entity, avoiding the many regulations and
annual disclosure requirements that follow an IPO. The light regulation of private placements
allows the company to avoid the time and expense of registering with the SEC. That means the
process of underwriting is faster, and the company gets its funding sooner. If the issuer is selling
a bond, it also avoids the time and expense of obtaining a credit rating from a bond agency. A
private placement allows the issuer to sell a more complex security to accredited investors who
understand the potential risks and rewards. The buyer of a private placement bond issue expects
a higher rate of interest than can be earned on a publicly traded security. Because of the
additional risk of not obtaining a credit rating, a private placement buyer may not buy a bond

6
Ibid
unless it is secured by specific collateral. A private placement stock investor may also demand
a higher percentage of ownership in the business or a fixed dividend payment per share of
stock. 7

THE 2013 ACT: AN ATTEMPT TO CURB MALPRACTICES

The provisions of the 2013 Act has helped to curb malpractices that had surged in the corporate
world:

➢ Use of the term ‘securities’ instead of shares.

➢ Restriction on number of persons to whom a private placement offer can be made in a
financial year.
➢ Use of banking channels for private placement.
➢ Requirement to complete allotment within 60 days.

PROCEDURAL ASPECT OF PRIVATE PLACEMENT

❖ Hold Board Meeting

• To grant in-principle approval for issue of securities on private placement basis.
• To identify persons to whom securities be allotted.
• To approve draft private placement, offer letter and record of private placement.
• To open separate bank account for receiving money.
• To approve notice of GM for approval of members.

2) Confirm whether Letters from all proposed allottees giving consent to subscribe the issue
are received or not.

3) Prepare the List of allottees along with all the required details as per the format prescribed
under the Form PAS-5.

4) Hold General Meeting and pass special resolution along with resolutions to approve the offer
letter and authorize an officer of the company to give effect to the Private Placement.

7
Ibid
http://www.navneetaroracs.com/wp-content/uploads/2014/04/An-Analysis-on-Law-Related-to-Private-
Placement.pdf
“AMENDMENTS IN PRIVATE PLACEMENT PROVISIONS AND THEIR IMPLICATIONS.” M&A
Critique, January 4, 2019. https://mnacritique.mergersindia.com/private-placement-companies-act-
amendements/.
5) File MGT-14 along with special resolution and explanatory statement.

6) Dispatch private placement offer letter along with application form to the proposed allottees.

7) Receive application money against issue of securities in bank account opened in scheduled
bank.

8) Hold Board Meeting for Allotment of Securities and allot securities within 60 days of
receiving application money.

9) File Form PAS-3 within 15 days of the allotment of securities along with Special Resolution
and List of allottees.

10) Issue corresponding Share Certificates; make respective entries in Register of Members
along with confirming the Distinctive numbers and Certificate Numbers of the Shares allotted.8

CONCLUSION

From companies' standpoint, there are enough reasons why private placements are preferred
over a rights or a bonus issue. In the latter, a company can issue only "shares," whereas in a
private placement, it can issue "securities" i.e. shares, debentures and even hybrid instruments
like compulsorily convertible debentures. Further, they can issue shares to persons other than
shareholders too. The provisions under the new law are pro-investor. Fixed timelines for share
allotment and levy of interest on late refund of subscription money with interest are some good
steps towards safeguarding investors' interests. Companies cannot now promise share
allotment, collect money from interested investors and then delay allotment and issue of share
certificates. In order to ensure that private placements stay private, the 2013 Act clearly
prohibits advertisements. As a result, unlike the practices under the 1956 Act, companies
cannot now utilize media, marketing channels, services of agents and brokers or other
distribution channels to make a private placement. The mandate for maintaining separate bank
accounts has introduced transparency and accountability. Further, with high quantum of

8
https://www.researchgate.net/publication/312499172_CHOICE_OF_PRIVATE_PLACEMENT_AS_AN_INS
TRUMENT_FOR_RAISING_201_DEBT_RESOURCES_EVIDENCE_FROM_INDIAN_FIRMS_Choice_of_
Private_Placement_as_an_Instrument_for_Raising_Debt_Resources_Evidence_from_Indian_Firm
“The Concept of Private Placement under The Companies Act, 2013.” Corporate Law Reporter, January 18,
2016. http://corporatelawreporter.com/2016/01/18/the-concept-of-private-placement-under-the-companies-act-
2013/.
penalty for violation of section 42 and detailed provisions, let's hope for no instance of
misinterpretation by the companies.9

BIBLIOGRAPHY

1. https://www.researchgate.net/publication/312499172_CHOICE_OF_PRIVATE_PLA
CEMENT_AS_AN_INSTRUMENT_FOR_RAISING_201_DEBT_RESOURCES_E
VIDENCE_FROM_INDIAN_FIRMS_Choice_of_Private_Placement_as_an_Instrum
ent_for_Raising_Debt_Resources_Evidence_from_Indian_Firm
2. “The Concept of Private Placement under The Companies Act, 2013.” Corporate Law
Reporter, January 18, 2016. http://corporatelawreporter.com/2016/01/18/the-concept-
of-private-placement-under-the-companies-act-2013/.
3. “Private Placement of Securities in India Under Companies Act, 2013.” Legal Service
India - Law, Lawyers and Legal Resources. Accessed April 9, 2020.
http://www.legalserviceindia.com/legal/article-1604-private-placement-of-securities-
in-india-under-companies-act-2013-.html.
4. Ministry of Corporate Affairs - Government of India. Accessed April 9, 2020.
http://mca.gov.in/SearchableActs/Section42.htm.
5. Kumar, Abhinav, and Neha Samant. “Recent Amendments to the Private Placement
Guidelines – Revamp or Cosmetic?” India Corporate Law, September 19, 2018.
https://corporate.cyrilamarchandblogs.com/2018/09/recent-amendments-private-
placement-guidelines-revamp-cosmetic/.
6. “AMENDMENTS IN PRIVATE PLACEMENT PROVISIONS AND THEIR
IMPLICATIONS.” M&A Critique, January 4, 2019.
https://mnacritique.mergersindia.com/private-placement-companies-act-
amendements/.

9
Malhan, Yogesh. “Private Placement Under Companies Act, 2013 - Corporate/Commercial Law - India.”
Articles on USA including Law, Accountancy, Management Consultancy Issues. Singh & Associates, April 9,
2014. https://mondaq.com/india/CorporateCommercial-Law/305626/Private-Placement-Under-Companies-Act-
2013.