See.42 Offer or invitation for subscription of securities on private placement 981 the 6. Voting r —(1) A holder of depository receipts may become a member of the company and shall be entitled to vote as such only on conversion of th lepository receipts into underlying shares after following the procedure provided in the Scheme and the provisions of this Act ___ 2) Until the conversion of depository receipts, the overseas depository shall be entitled to vote on behalf of the holders of depository receipts in accordance with the Provisions of the agreement entered into between the depository, holders of depository receipts and the company in this regard. 7. Proceeds of issue —The proceeds of issues of depository receipts shall either be remitted to a bank account in India or deposited in an Indian bank operating abroad or any foreign bank (which is a Scheduled Bank under the Reserve Bank of India Act, 1934) having operations in India with an agreement that the foreign bank having operations in India shall take responsibility for furnishing all the information which may be required and in the event of a sponsored issue of Depository Receipts, the proceeds of the sale shall be credited to the respective bank account of the shareholders. 8. Depository receipts prior to commencement—(1) A company which has issued depository receipts prior to commencement of these rules shall comply with the requirements under this rule within six months of such commencement. (2) Any issue of depository receipts after six months of commencement of these rules shall be in accordance with the requirements of these rules. 9. Non applicability of certain provisions of the Act—(1) The provisions of the Act and any rules issued thereunder insofar as they relate to public issue of shares or debentures shall not apply to issue of depository receipts abroad. +) The offer document, by whatever name called and if prepared for the issue of depository receipts, shall not be treated as a prospectus or an offer document within the meaning of this Act and all the provisions as applicable to prospectus or an offer document shall not apply to a depository receipts offer document. (3) Notwithstanding anything contained under section 88 of the Act, until the redemption of depository receipts, the name of the overseas depository bank shall be entered in the Register of Members of the company." PART IL.—Private placement 42. Offer or invitation for subscription of securities on private placement—(1) Without prejudice to the provisions of section 26, a company may, subject to the provisions of this section, make private placement through issue of a private placement offer letter. (2) Subject to sub-section (1), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, [excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as pet provisions of clause (b) of sub-section (1) of section 62}, in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.os Company Law Chapter 11 Explanation I—If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter. Explanation II.—For the Purposes of this section, the expression— () “qualified institutional buyer" buyer as defined in the Securit (Issue of Capital and Disclosure as amended from time to time, means the qualified institutional ‘ies and Exchange Board of India Requirements) Regulations, 2009 (ii) "private placement" means 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. (3) No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company. (4) Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (1S of 1992) shall be required to be complied with. (5) 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. (6) 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:42 Offer or invi See.42 Offer or im for subscription of securities on private placement 983 ne Provided that i ceive’ i iene veonies received on application under this section shall et i 4 Separate bank account in a scheduled bank and shall not be utilised for any purpose other than— : (a) for adjustment agains allotment of securities; or (b) for the repayment of moni mj a of monies where the ci is a he 2 company is unable to allot (7) All offers covered under this section shall be made only to such en pice names are recorded by the company prior to the invitation 0 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. (8) No company offering securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer. (9) Whenever a company makes any allotment of securities under this section, it shall file with the Registrar a return of allotment in such manner as may be prescribed, including the complete list of all security-holders, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed. (10) Ifa 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. Corresponding provision in Companies Act, 1956 67. Construction of references to offering shares or debentures to the public, ete.—(1) Any reference in this Act or in the articles of a company to offering shares or debentures to the public shall, subject to any provision to the contrary contained in this Act and subject also to the provisions of sub-sections (3) and (4), be construed as including a reference to offering them to any section of the public, whether selected as members or debenture holders of the company concemed or as clients of the person issuing the prospectus or in any era i icles of a company to invitations to this Act or in the articles o the ote! Yerba fr shares or debentures shall, subject as aforesaid, be construed as including a reference to invitations to subscribe for them extended to any section of the public, whether selected as members or debenture holders of the company concerned or as clients of the person issuing the prospectus or in any other manner.984 Company Law Chapter 111 [~~ (3) No offer or invitation shall be treated as made to the public by virtue of | sub-section (1) or sub-section (2), as the case may be, if the offer or invitation can properly be regarded, in all the circumstances— (a) as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons | other than those receiving the offer or invitation; or | (b) otherwise as being a domestic concern of the persons making and | receiving the offer or invitation: | [Provided that nothing contained in this sub-section shall apply in a case | where the offer or invitation to subscribe for shares or debentures is made to fifty persons or more: Provided further that nothing contained in the first proviso shall apply to the non-banking financial companies or public financial institutions specified in section 4A of the Companies Act, 1956 (1 of 1956) ] *{(3A) Notwithstanding anything contained in sub-section (3), the Securities and Exchange Board of India shall, in consultation with the Reserve Bank of India, by notification in the Official Gazette, specify the guidelines in respect of offer or invitation made to the public by a public financial institution specified under section 4A or non-banking financial companies referred to in clause (f) of ‘section 45-1 of the Reserve Bank of India Act, 1934 (2 of 1934).] (4) Without prejudice to the generality of sub-section (3), a provision in a company’s articles prohibiting invitations to the public to subscribe for shares or debentures shall not be taken as prohibiting the making to members or debenture holders of an invitation which can properly be regarded in the manner set forth in that sub-section. (6) The provisions of this Act relating to private companies shall be construed in accordance with the provisions contained in sub-sections (1) to (4). Synopsis Legislative history ‘Commentary 1, Simplified version of the section 985 2. Meaning of ‘private placement 986 2.1 General meaning 986 2.2. Statutory definition 993 3. Offer to more than 200 persons 993 3.1 How an offer to 200 or fewer people should be made 996 3.2. Does “private & confidential” string help? 996 4. Exempted offers 997 5. Other obligations concerning private placement offer 997 6. Provision in articles 998 7. Exemptions for Nidhis 998 8. Requirements under Rules 998 1. Inserted by the Companies (Amendment) Act, 2000, w: 2 Inserted by the Companies (Amendment) Act, 2000, w. 13-12-2000. 13-12-2000.See.42_ Offer or invitation for subscription of securities on private I ISLATIVE HISTORY, This corresponds to section 67 of the Ce from 1-4-2014 vide Notification No. St COMME of the section (1) The provisions of this section do not have section 26. Any company may, b securities by a private placement ‘Placement 985 ‘ompanies Act, 1956. It has been made 10 902(E), dated 26-3-2014, ‘ARY plified vers adverse effect on the provisions of 'y complying with the provisions of this section, offer its offer by an offer letter. Explanation Ii) defines "private placement" to subscribe securities 10 a select group of persons public offer) by an offer letter and in compliane¢ section, as “any offer of securities or invitation s by a company (other than by way of with the conditions specified in this (2) A private placement offer can be made to a maximum of 50 persons (or any higher number prescribed by the government}, excluding qualified institutional buyers {as defined in Explanation 11()] and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (B) of sub-section (1) of section 62, in any one financial year. Every private placement offer must comply with the prescribed conditions, form and manner, Ifany company makes an offer for subscripting for its securities, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, itis treated as a public offer and therefore the provisions of Part I of Chapter IIT must be complied with, (3) If a company makes a private placement offer, it cannot make another private placement offer unless securities offered by the immediately preceding private placement offer have been allotted unless that has been withdrawn or abandoned. (4) A private placement offer not in compliance with the provisions of this section is treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 must be complied with (5) Money payable in respect of the securities subscribed for pursuant to a private placement offer must be received by the company by cheque or demand draft or other banking channels and not in cash, (6) Securities subscribed for pursuant to a private placement offer must be allotted within 60 days from the date of receipt of the application for subscription. The company is liable to repay that money with interest at the rate of 12% per annum from the expiry of the sixtieth day. ‘The money received on applications for subscription must be kept in a separate bank account in a scheduled bank and it must be used only— (a) for adjustment against allotment money payable; or (®) for the repayment in the event the company is unable to allot securities. 1 Rule 14(2)(b) of Chapter III of the Rules states that offer on invitation under section 42 shall not be made to more than 200 persons in the aggregate in one financial year.986 Company Law Chapter III (7) Every private placement offer must be made by name to specific persons (prospective subscribers). The company must keep a record of such offers in prescribed manner. The company must file details of the offer within 30 days of circulation of the relevant private placement offer letter, (8) The company making a private placement offer must not release any public advertisement or make use of any media, marketing or distribution channels or agents for dissemination of information about the offer. (9) The company must file a return of allotment in respect of securities allotted Pursuant to a private placement offer in the prescribed form. (10) A contravention of any provision of this section will render the company, its Promoters and directors liable to punishment of fine up to the amount involved in the offer or & Two crores, whichever is higher. The company is also liable to refund all the monies to the subscribers within 30 days of the order imposing the fine. 2. Meaning of ‘private placement 2.1 General meaning. This section defines the expression "private placement" as tion to subscribe securities toa select group of persons by ¥ of public offer) through issue ofa private placement offer a company (other than by wa letter and which satisfies the conditions specified in this section.” The words ‘offer’ and “invitation” have been used respectively to refer to the act of offering securities of company for subscription and the act of inviting people to subscribe to the securities of a company. The word "subscription" means taking o agreeing to take shares for cash. It imports that the person agreeing to take the shares puts himself under a liability to pay the nominal amount thereof in cash.! As noted before, there is a difference between ‘creation’, issue’ and ‘allotment’ of shares. A share in a company comes into existence on the evolution of a process which begins with the creation ofa share and ends with its allotment. The intermediary step is that of issue’ of the shares.? The word ‘issue’ is invariably used as a synonym of ‘offer’. A company may offer its securities by private placement which is not a public offer or a rights offer. This section contains provisions concerning offering securities by a private placement offer. The Oxford Business English Dictionary defines it th directly to investors rather th Business English Dictionai when shares are sold to the public on the stock market’. The Longman defines it as the act of selling shares etc to a group of ring them openly on a financial market. Section 67 of the 1956 Act laid down the criterion for construction of references to offering shares or debentures to the public, etc. In other words, this section provides an aid to determine as to when an offer or invitation for subscribing for securities can be said to be one to the public and when it is not. An offer which is not a private placement offer would be deemed to be a public offer. Broadly, an offer to subscribe to shares or debentures to the public at large or to any section of the public would be treated as a Public offer if itis intended to invite anybody or it is made in such a way that anybody 1 Government Stock and other Securities Investment Co. Ltd. v Christopher (1956) 1 All ER 490, 2 Sree Gopal Jalan v Calcutta Stock Exchange Association Limited (1963) 33 Comp Cas 862: AIR 1964 SC 250.Sec. 42 Offer or invitation fo it rrivate pl ita ion for subscription of securitie Pp Tt ivate pla ce a to invest can do so or, ifhe does o . to him. Thus, the offer j < ml ‘ ; , 18 not restricted o1 ‘domestic affair’; on the contrary, it tums ea Not s is x 80 wish, he can renounce the offer made 'y to specific persons; it does not remain a to be a ‘public affair Sub-seetions (1) a ections (1) and (2) of section 6 ¢ i vi public offer or public invitation pe 1956 Act laid down a test to determine what is pevate placement Wii at ub tin (3) laid down a test to determine or debentures 16 the pebic™ n (1) deals with the case of “offering shares Petlic ts swans ee (2) deals with the case of “invitations to the sail ia do gas ean a tures”, What section 67 of the 1956 Act really Renal eead a aan (3) as to when an offer or invitation shall be Sai Ri i aa thereby let a company determine whether what it is ‘was reached that the offer did an fal On eet Se ee ari el a fall under sub-section. (3), it was axiomatic that it fel unde, iat, aoe ( ral 12 This a sought to be done by a statutory fiction by faa ef d ion (3), namely “No offer or invitation shall be treat the public by virtue of sub-section (1) or sub- section (2).” anny According to sub-section (3) of section 67 of the 1 1956 Act, after declaring that even 7 offer made to any section of the public, whether selected as members or debenture jolders, shall be treated as a public offer or public invitation. This section provided in its sub-section (3), that no offer or invitation shall be treated as made to the public ifthe offer or invitation can properly be regarded, in all the circumstances — (a) as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation, or (b)_ otherwise as being a domestic concern of the person making and receiving the offer or invitation. 1) of section 67 of the 1956 Act was limited by offer or invitation for subscription to shares or sspontares would not be deemed to be a public offeror invitation, if satisfies the ems aid down therein. These tests Inid down in section 67 of the 1956 Act sub-section(3) were: the offer or invitation can properly be regarded, in all cireumsiinces (@) as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation; or (b) otherwise as being a domestic concern of the person making and receiving the offer or invitation. In one case! it was argued that an offer of shares to. any Pi . ount to an invitation to: the public to subscribe for the company is tantam‘ aa ae he eammmons ofa private company had offered ne shares © Poca other than the shareholders who had declined the offer. Rejecting that argument bid regard to the provision in sectit f the 1956 Act, the court held that such an of cannot esd to be an offer made tothe public. The cont refered tthe provision in lau @ ow tection (3), according ro which an ove" 1 beng casted ements ini inthe shares fea ton sa publi of, ard i persons other than those rece Thus, the wide scope of sub-section ( its sub-section (3) according to which an erson other than the existing 1 Rattan Singh v Managing, ‘pirector, Moga Transport Co Led (1959) 29 Comp CaS 165 (Punj): fattan AIR 1959 Punj 196.988 Company Law Chapter IIT “The word "calculated" suggests design, forethought, or intention to accomplish a purpose. "Calculated" primarily means to compute mathematically, but when applied to a human action it is used in the sense of, to intend, to design, to plan, oF to adapt, to achieve a purpose. ... offer to one's kith and kin cannot be considered to be an invitation to public. An offer to buy shares made to an individual as such is not ‘thin the prohibition of the word "public" as used in s. 67 of the 1956 Act of the Act, Where a company offers shares to selective persons, it cannot be said to be extending an invitation to by shares to the "public". In all cases the determination of the question of an offer being made to the public, depends upon the facts and language of the notice on the particular circumstances of each case. If the attitude as has been adopted by the petitioners in this case, can be deemed to be permissive in Jaw, then it will be virtually impossible for a company to increase its capital where the existing shareholders are unwilling to purchase shares, or debentures of the company, even if the total number of its members is much below 50."The provisions of section 67 of the 1956 Act, which are pari materia with those of section 55 of the English Companies Act, 1948, do recognise the concept of ‘private placement’ of shares without making any public offer or public invitation for subscribing to the shares issued. In the first instance, it should be clearly understood that nowhere in the Companies Act the phrase ‘private placement’ is to be found. In a loose sense, this phrase denotes the practice of offering shares privately or to a section of the public, either by the company itself or by the promoters or directors of the company. In other words, broadly speaking, an issue of shares without offering them to the public may be said to be an issue made by private placement, the main feature being that no prospectus is issued for offering the shares to the public or inviting the public for subscribing to the shares so offered, This mode of issuing shares is not prohibited under the Act, even in the case of public companies provided, of course, it does not contain the elements of public offer or public invitation to subscribe to the shares issued. In fact, there is no compulsion for offering shares to the public by prospectus when a company intends to raise share capital, This concept is wholly dear to the issue of shares by a private company which is prohibited from making any invitation to the public to subscribe for any shares in, or debentures of, the company; but the said concept is not wholly alien to a public company which is not so prohibited. While recommending the insertion of a new section corresponding to section 55 of the English Act (which was subsequently enacted as section 67 of the 1956 Act), the Company Law Committee (1952) observed as follows: "One of the methods by which savings are attracted from the public is through "placings" by a broker's or issuing office or investing syndicates. While it will be hard to provide statutorily that every placing must be deemed to be an offer for sale, such placings as are to all intents and purposes "offers to the public” should be brought indisputably within the provisions of the Act ... The object of this section is to cover such placings". [See pages 298, 299 of the Company Law Committee's Report). Commenting on the concept of "placings", Palmer says: "Whether the procedure of placings requires a prospectus in the legal sense cannot be answered generally. The definition of an offer of shares or debentures to the public in section 55(1) of the 1948 Act is sufficiently wide to include this Procedure the sub-section refers expressly to “any section of the public, whether selected ... - as clients of the person issuing the prospectus or in any other manner".See. 42 Offer or invitation for subscription of securities on private placement 989, The answer depends on the facts surrounding the ph small closely restricted circle and no prospectus is require allottees who by way of a attention of their clients 1s; if the placings are to a of select investors, they will fall within section 55(2) rattan Singh v Managing Director. foga Transport Co. Lid. 1959) 29 Comp Cas 165 (Pun) Yanaging Director, Mog sport Co. Lid. (1959) jingh v Man AIR 1959 Punj 196. it les, 2014 us and Allotment of Securities) Rules, ir shall not be made to more than 200 persons | ously defective and it should be ion (2) is obviously defective at i ita ‘iends'to provide is that intends 10 Prove ihe inCompany Law ‘Chapter It 994 one year, The phrase ‘not exceeding fifty’ means fifly or fewer number of people and if it does so, that would amount to ‘public offer’ and, consequently, the tose is what Explanation I below sub- requirements relating to public offer would apply. This section (2) secks to provide. ction (2) uses the word ‘offer’, it is apparent that what is prohibited a issue’, As sub offering securities to more than fifly people. The Companies Act uses the terms ‘offer’ and ‘allotment’ in different sections in relation to shares in or debentures or other securities of a company. The word ‘offer’ used in the context of formation of a binding contract of taking shares has a different connotation than the word ‘offer’ in the expression “offering shares or debentures to the public” also in the definition of the term ‘prospectus’ in section 2(70) of the Companies Act according to which prospectus means yy document... “inviting offers’ from the public for subseription or purchase of any Securities of, a body corporate. In this definition in the expression ‘inviting offers’ the word ‘offer’ has been used in the first sense, that is used in the context of formation of a binding contract of taking shares. In the ordinary sense, to ‘offer’ means to present for acceptance or rejection, The expression ‘offering shares or debentures’ means presenting by a company shares or debentures for subscription by making it known to the person(s) to whom they are offered that he’they may apply for and subscribe to them and thereby become a shareholder or debenture holder of the company. However, under the law of contract offering shares or debentures for subscription is merely an invitation for getting offers for subscription for shares made by prospectus or any other document or even orally. Thus the word ‘offer” is used in two senses and in which sense it has been used in a particular provision will depend upon the context of the provision. In one sense ‘offer’ means offering by a company its shares or debentures to people for subscription or inviting people to subscribe to the shares or debentures offered by the company. In the other sense, offer means an application made by a subscriber in response to the company offer or invitation, Thus, there must be an offer or invitation made by the company to more than fifty Persons {not more than two hundred as per rule 14(2)(b)]. This provision requires Satisfaction of two conditions: first, there must be an offer or invitation for subscribing for securities of the company; second, the offer or invitation must be to fifty or more Persons. So, unless there i an offer or invitation to fifty or more persons [not more than ‘wo hundred as per rule 14(2)(b)}, the section cannot apply. It is implied that some act is done by @ company which purports to be an offer or invitation to subscribe for shares Unless there is such a positive act, the section cannot apply. The function of an offer is to seck applications for shares by a prospectus or some other document published by the company. By an offer, the company puts forward for sale the securities to either the public at large or to specified persons. This is usually done by a document which may be cither a that offer and letter of allotment is the communicat culminates into a binding contract, —_—_ 1 See National Westminster Bank ple v Inland Inland Revenue Commissioner (1994)3 Al Re a ccerimissioners and Barclays Bank ple v ER 1; (1994) 2 BCLC 239 (HL),Sec.42_ Offer or invitation for subscription of securities on private placement 995 Ifa company docs not make an offer to more than 200 persons at a time or by a single offer or several offers in one financial year, the prohibition stipulated in sub- section (2) cannot apply. To reiterate, there is no restriction on the number of members @ public company can have and the number stipulated under this section cannot be read as restricting the number of members or the maximum number of members. A private placement offer by a private company should be such that it does not exceed the number of members i.e.200.Sub-section (2) of this section uses both the words ‘offer’ and ‘invitation’, It is well settled that the contract to purchase shares or debentures is concluded by allotment of shares issued under the prospectus.' To constitute a binding contract to take shares in a company when such contract is based upon application and allotment, it is necessary that there should be an application by the intending shareholder, an allotment by the directors of the company of the shares applied for, and a communication by the directors to the applicant of the act of such allotment having been made? Thus, in terms of the law of contract, an application by any person for a share or debenture is an ‘offer’ and allotment by the company is ‘acceptance’ and the contract becomes binding when the acceptance is communicated by the company to the allottee. It has been held that an application for shares is an offer and like any other offer must not only be accepted, but the acceptance must be communicated to the person making the offer; hence a mere entry of a sharcholder's name in the company's register is insufficient to establish that an allotment of shares has in fact been made.* The words used in sub-section (2) are “the offer of securities or invitation to subscribe (for) securities”. Thus, there must be an offer or invitation made by the company. This provision requires satisfaction of two conditions to attract it: first, there ‘must be an offer or invitation for subscribing for securities of the company; second, the offer or invitation must be to more fifty persons in one financial year. So, unless there is ‘an offer or invitation to more than fifly persons, the prohibition cannot apply. It is implied that some act is done by a company which purports to be an offer or invitation to subscribe for shares. Unless there is such a positive act, the section cannot apply. The function of an offer is to seek applications for shares by a prospectus or some other document published by the company.* ‘The words in sub-section (2) are clear and unambiguous in their meaning and ought to be interpreted according to their plain literal meaning in the context of issue of shares of a company; otherwise, it would be doing violence to plain language to construe the provision as covering a case in which there has been no offer or invitation or it is not made to fifly or more persons. One of the principal rules of statutory interpretation is ‘the literal rule’, or ‘the golden rule’, according to which words that are reasonably capable of only one meaning rust be given that meaning whatever may be the result. It is only when the words of a 1 Larsen & Toubro Ltd. v Haresh Jagtiani AIR 1991 SC 1420: (1991) 2 Comp LJ 1 (SC): AIR 1991 SCW 1119. 2 Re Scottish Petroleum Co. (1883) 23 Ch D 413. 3 Bellary Electric Supply Co v Kanniram AIR 1933 Mad 320: 64 MLI 130; Re Universal Banking Corpn (1867 of the 1956 Act) 3 Ch App 40; Re Rolling Stock Co of Ireland (1866) 1 Ch $67 of the 1956 Act. 4. See National Westminster Bank ple v Inland Revenue Commissioners and Barclays Bank ple v Inland Revenue Commissioners (1994) 3 All ER 1; (1994) 2 BCLC 239 (HL).996 Company Law apter IIT statute are unelear or ambiguous that other aids to interpretation are to be resorted to. Long ago, an English Judge had said: “If the words of the statute are in themselves, precise and unambiguous, then no more can be necessary than to expound those words in their natural and ordinary sense, The words themselves do alone in such cases best declare the intent of the lawgiver. Ifthe words used are capable of one construction only then it would not be open to the Courts to adopt any other hypothetical construction on the ground that such construction is more consistent with the alleged object and policy of the Act." 3.1 How an offer to 200 or fewer people should be made.—Sub-scction (7) lays down that 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. As per Rule 14(2)(a) of Companies (Prospectus & Allotment of Securities) Rules, 2014 the restriction as the number of 200 applies to each offer or invitation 3.2 Does “private & confidential” string help?.—The OFCDs issue in Sahara was ‘attempted to be saved from the attack that it was a public offer, by attaching a string of “private and confidential and not for circulation” in the information memorandum (IM), obviously trying to bring it within the ambit of clause (a) or (6) of section 67 of the 1956 Act. With this end in view, the IM said: “This issue is purely on the private placement basis and the company does not intend to get these OFCD's listed on any of the Stock Exchanges in India or Abroad. This Memorandum for Private Placement is neither a Prospectus nor a Statement in Lieu of prospectus. It does not constitute an offer for an invitation to subscribe to OFCD''s issued by Sahara India Real Estate Corporation Limited.” That, however, could not save the offer from being treated as a public offer, for, as the Supreme Court pointed out, the intentions and actions did not match and it could not shake off the shackles of section 67 of the 1956 Act. On this point, an old English decision, which was not referred to in Sahara case, is worth taking note of! In February 1910, a prospectus was issued on behalf of a company headed "for private circulation only", but also containing a statement that it had been filed with the Registrar of Joint Stock Companies. It was stated that this prospectus was distributed by the promoter only to shareholders in certain gas companies in which he was interested, and not more than 3000 copies were sent out. The court held that the prospectus did offer shares to the public within the meaning of section 285 of the Companies (Consolidation) Act 1908, by which ‘prospectus’ was defined as any Prospectus, notice, circular, advertisement, or other invitation offering to the public for subscription or purchase any shares or debentures of a company, and none the less because copies were sent only to shareholders in gas companies who were the most likely subscribers. The act of filing of the prospectus was later stated to be a ‘mistake, Notably, in Sahara too the IM was filed with the Registrar of Companies, purportedly (but wrongly) under section 60B of the 1956 Act. i ~ 1 South of England Natural Gas and Petroleum Co Lid (1911) 1 Ch $73,Sec.42 Offer or invitation for subscription of securities on private placement 997 On the contrary, where the company had printed a prospectus with a remark “strictly private and con} idential: not for publication", and the directors of the company sent copies of it to their friends, it was held that it was not an offer to the public.! ‘The word “calculated” presumably means “likely” rather than intended”? 4, Exempted offers Sub-section (2) exempts from the restriction on an offer for subscribing for securities being made to not more than fifiy (or such higher number as may be prescribed — Two hundred as per rule 14(2)(b) of Companies (Prospectus and Allotment of Securities) Rules, 2014), persons to be treated as a private placement offer, two cases, namely— © Offer to qualified institutional buyers (as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009); and © Offer to employees of the company under a scheme of employees’ stock option as per provisions of clause (6) of sub-section (1) of section 62. Section 62, which contains provision regarding further issue of capital, provides in clause (b) of sub-section (1), that a company may offer its securities to its employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed. In such a case, the provisions of sub-section (1) of section 62 are not applicable. Accordingly, in effect, an offer by a company to its employees under an employees” stock option scheme may be made to any number of employees, provided the offer has been approved by a special resolution. 5. Other 0 Sub-section (3) prohibits a fresh offer or invitation by private placement unless the securities offered by private placement earlier have been allotted or the earlier offer or invitation has been withdrawn or abandoned by the company. jons concerning private placement offer ‘Sub-section (5) requires all monies payable towards subscription for securities under this section be paid by cheque or demand draft or other banking channels but not by cash. Sub-section (6) requires the securities subscribed for pursuant to a private placement offer to be allotted within 60 days from the date of receipt of the application money for the securities subscribed for; but if the company cannot allot the securities within 60 days, it must refund the application money to the subscribers 15 fifteen days from the date of completion of the 60 day period and if the company fails to refund the application money within the 15 day period, it is liable to refund the money with interest at the rate of 12% per annum from the expiry of the sixtieth day, The monies received on applications under this section must be kept in a separate bank account in a scheduled bank and must not be used for any purpose other than for— (a) adjustment against allotment of securities; or (b) repayment of monies where the company is unable to allot securities. EEE 1 Sherwell v Combined Incandescent Mantles (1907) 23 TLR 482 2 Gower's Principles of Modern Company Law, 4th edn, p 351.998 Company Law Chapter ty 6. Provision in articles As Iaid down in section 2(68)ii). a private company is prohibited from making any invitation to the public to subscribe for any securities. However, what is prohibited ig “any invitation to the public”. Whether or not an invitation is an invitation to the publi¢ Will be determined in the light of the provisions of section42of the Act. Section 2(68)i) does not prohibit a mere invitation to subscribe to securities, but it prohibits an “invitation to the public", Sub-section (2) of section 42 of the Act makes it clear that invitation to subscribe for Securities shall be treated as invitation to the public if itis not made in the manner set forth in sub-section (2) of this section. As such, where a private company makes an invitation for subscribing to its securities, it will not be treated as an invitation to the Public so long as the invitation in question satisfies the test laid down in sub-section (2), Where the articles of association of a private company authorised the directors to offer and issue further shares to the existing sharcholders in the same proportion in which they held the shares, the articles cannot be read to mean thatthe directors are prohibited from offering and issuing further shares to outsiders if the existing shareholders decline the offer. The article is permissive and not prohibitive. In such a ease the subsequent offer by the directors of the new shares to persons other than the shareholders whe had declined the offer, cannot be said to be an offer made to the "public". The offer of the new issue by the managing director to his kith and kin is not an invitation to the publie for subscription.! 7. Exemptions for Nidhis? The Central Government has, in exercise of the powers under section 462, granted exemption to Nidhis. Accordingly, sub-section (2) and Explanation 1, sub-section (3), sub-section (5) and sub-section (7) shall not apply to Nidhis, 8. Requirements under Rules Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 lays down the following further requirement in connection with issue of securities by private placement: “14, Private Placement.—(1)(a) For the purposes of sub-section (1) of section 42, @ company may make an offeror invitation to subscribe to securities through issue ofa private placement offer letter in Form PAS-4, (0) A private placement offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, ether in writing or in electronic mode, within thirty days of recording the names of such persons in accordance with sub-section (7) of section 42: Provided that no person other than the person so addressed in the application form shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid, ; 1 Rattan Singh v Managing Director, Moga Transport Co. Ltd. (supra). “A 2 Notification No. GSR 465(E), dated 5-6-2015. aSee.42_ Offer or invitation for subscription of securiti (2) A company shall not make a (a) () © @) son private placement 999 securities unless: private placement of the proposed offer of securities or invi previously approved by the sharcholders of the company, by a Sp Resolution, for each of the Offers or Invitations ion to subscribe securities has been i Provided that in the explanatory statement annexed to the notice for the general meeting the basis or justification for the price (including premium, ifany) at which the offer or invitation is being made shall be disclosed: Provided further that in case of offer or invitation for non- convertible debentures, it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitation for such debentures during the year. \[Provided also that in case of an offer or invitation for non-convertible debentures referred to in the second proviso, made within a period of six months from the date of commencement of these rules, the special resolution referred to in the second proviso may be passed within the said period of six months from the date of commencement of these rules.) such offer or invitation shall be made to not more than two hundred persons in the aggregate in a financial year: Provided that any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62 shall not be considered while calculating the limit of two hundred persons. Explanation.—For the purposes of this sub-rule, it is hereby clarified that— (i) the restrictions under sub-clause (b) would be reckoned individually for ‘each kind of security that is equity share, preference share or debenture; (id) the requirement of provisions of sub-section (3) of section 42 shall apply in respect of offer or invitation of each kind of security and no offer or invitation of another kind of security shall be made unless allotments with respect to offer or invitation made earlier in respect of any other kind of security is completed; the value of such offer or invitation per person shall be with an investment size of not less than twenty thousand rupees of face value of the securities; the payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the Bank account from where such payments for subscriptions have been received: Provided that monies payable on subscription to securities to be held by joint holders shall be paid from the bank account of the person whose name ‘appears first in the application. Inserted by the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2014, weeef. 30-6-2014. 1Company Law Chapter 11) = plete record of private placement offers in (3) The company shall maintain a com Form PAS-5: Provided that a copy of such record along with the private placement offer letter rovided that a copy of S ith the Registrar wit ided in Companie P ail he filed with the Registrar with fee as provided in C d Rea omnes te foe) Rules, 2014 and where the company is listed, wih ieee ities and Exchange Board within a period of thirty days of circulation ofthe private placement offer letter. . i i i arified that the date of Janation—For the purpose of this rule, it is hereby clarified that the dat private plecment ofr ltr sal be deemed tobe the date of circulation of privat placement offer letter. (4) A retum of allotment of securities under section 42 shall be filed with the Registrar within thiny days of allotment in Form PAS-3 and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list ofall security holders containing — (i) the full name, address, Permanent Account Number and E- mail ID of such security holder, (ii) the class of security held; (iii) the date of allotment of security; (iv) the number of securities held, not | value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash. (5) The provisions of clauses (6) and (c) of sub-rule (2) shall not be applicable to— (a) non-banking financial companies which are registered with the Reserve Bank of India under Reserve Bank of India Act, 1934; and (b) housing finance companies witich are registered with the National Housing Bank under National Housing Bank Act, 1987, if they are complying with regulations made by Reserve Bank of India or National Housing Bank in respect of offer or invitation to be issued on private placement basis: Provided that such companies shall comply with sub-clauses (b) and (c) of sub-rule (2) in case the Reserve Bank of India or the National Housing Bank have not specified similar regulations.” FORM No. PAS-4 Private Placement Offer Letter (Pursuant to section 42 and rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014) ‘The Private Placement Offer Letter shall contain the following: 1, GENERAL INFORMATION (a) Name, address, website and other contact details of the company indicating both registered office and corporate office; Orage (®) Date of incorporation of the company;See. 42. Offer or invitation for subscription of securities on private placement 1001 (c) Business carried on by the company and its subsidiaries with the details of branches or units, ifany; (d)_ Brief particulars of the management of the company; (c) Names, addresses, DIN and occupations of the directors; () Management's perception of risk factors; (g) Details of default, if any, including therein the amount involved, duration of default and present status, in repayment of — (statutory dues; (ii) debentures and interest thereon; (iii) deposits and interest thereon; (iv) loan from any bank or financial institution and interest thereon. (i) Names, designation, address and phone number, email ID of the nodal/ compliance officer of the company, if any, for the private placement offer process. 2. PARTICULARS OF THE OFFER (a) Date of passing of board resolution; (b) Date of passing of resolution in the general meeting, authorizing the offer of securities; (©) Kinds of securities offered (ie. whether share or debenture) and class of security; (@) price at which the security is being offered including the premium, if any, alongwith justification of the price; (e) name and address of the valuer who performed valuation of the security offered; () Amount which the company intends to raise by way of securities; (g) Terms of raising of securities: Duration, ifapplicable, Rate of dividend or rate of interest, mode of payment and repaymei (i) Proposed time schedule for which the offer letter is valid; (i) Purposes and objects of the offer; contribution being made by the promoters or directors either as part ofthe offer or separately in furtherance of such objects; (&) Principle terms of assets charged as security, if applicable. 3, DISCLOSURES WITH REGARD TO INTEREST OF DIRECTORS, LITIGATION ETC (i Any financial or other material interest of the directors, promoters or key ‘managerial personnel in the offer and the effect of such interest in so far as itis different from the interests of other persons. (ii) Details of any litigation or legal action pending or taken by any Ministry or Department of the Government or a statutory authority against any promoter of the offeree company during the last three years immediately preceding the year1002 Company Law Chapter 1 of the circulation ofthe offer letter and any direction issued by such Ministry or Department or statutory authority upon conclusion of such litigation or legal action shall be disclosed (iii) Remuneration of directors (during the current year and last three financial years); (iv) Related party transactions entered during the last three financial years immediately preceding the year of circulation of offer letter including with regard to loans made or, guarantees given or securities provided (¥) Summary of reservations or qualifications or adverse remarks of auditors in the last five financial years immediately preceding the year of circulation of offer letter and of their impact on the financial statements and financial position of the company and the corrective steps taken and proposed to be taken by the company for each of the said reservations or qualifications or adverse remark (vi) Details of any inquiry, inspections or investigations initiated or conducted under the Companies Act or any previous company law in the last three years immediately preceding the year of circulation of offer letter in the case of company and all of its subsidiaries. Also if there were any prosecutions filed (whether pending or not) fines imposed, compounding of offences in the last three years immediately preceding the year of the offer letter and if so, section- wise details thereof for the company and all of its subsidiaries (vii) Details of acts of material frauds committed against the company in the last three years, if any, and if'so, the action taken by the company 4. FINANCIAL POSITION OF THE COMPANY (@) The capital structure of the company in the following manner’ in a tabular form— ( (q@) the authorised, issued, subscribed and paid up capital (number of securities, description and aggregate nominal value); (0) size of the present offer; (c)_ paid up capital (A) after the offer; (B) after conversion of convertible instruments (if applicable) (4) share premium account (before and after the offer) i) the details of the existing share capital ofthe issuer company in a tabular form, indicating therein with regard to each allotment, the date of allotment, the number of shares allotted, the face value of the shares alloted, the price and the form of consideration Provided that the isuet company shall also disclose the number and price at ich each ofthe allotments were made in the last one year preceding the date of the offer letter separately indicating the allotments made for Considerations other than cash and the details of the consideration in each (6) Profits of the company, before and after making provision for tax, for the three financial years immediately Preceding the date of circulation of offer letter;Sec. 42 Offer or invitation for subscription of securities on private placement 1003 (©) Dividends declared by the company in respect ofthe said thre financial years interest coverage ratio for last three years (Cash profit after tax plus interest paid/interest paid) @ ay summary of the financial position of the company as in the three audited lance sheets immediately preceding the date of circulation of offer letter; (€)_ Audited Cash Flow Statement for the three years immediately preceding the date of circulation of offer letter; (A) Any change in accounting policies during the last three years the profits and the reserves of the company. 5, A DECLARATION BY THE DIRECTORS THAT- (a) the company has complied with the provisions of the thereunder; (b) the compliance with the Act and the rules does not imply that payment of dividend or interest or repayment of debentures, if applicable, is guaranteed by the Central Government; (©) the monies received under the offer shall be used only for the purposes and objects indicated in the Offer letter. | am authorized by the Board of Directors of the Company vide resolution number “ . dated “an t0 sign this form and declare that all the equirements of Companies Act, 2013 and the rules made thereunder in respect of the subject matter of this form and matters incidental thereto have been complied with. Whatever is stated in this form and in the attachments thereto is true, correct and complete and no information material to the subject matter of this form has been suppressed or concealed and is as per the original records maintained by the promoters apeeribing to the Memorandum of Association and Articles of Association It is further declared and verified that all the required attachments have been completely, correctly and legibly attached to this form. and their effect on ‘Act and the rules made Date: Signed Place: Attachments:~ Copy of board resolution Copy of shareholders resolution Copy of, Optional attachments, ifanyCompany Law Chapter II Form PAS-5 ivate placement offer to be kept by the company 1004 Record of a [Section 42(7) and Rule 14(3) of Companies (Prospectus and Allotment of Securities) Rules, 2014] Name of the Company: Registered office of the Company: CIN: DETAILS OF PRIVATE PLACEMENT OFFER: Date when approval of the relevant authority (board or the shareholders, as the case may be) obtained for the current Private Placement Offer Letter: Amount of the offer: Date of circulation of private placement offer letter: Following details (in a tabulate statement) of the persons to whom private placement offer letter has been circulated:-— (i) Name (ii) Father’s name (iii) Complete Address including FlavHouse Number, Street, Locality, Pin Code (iv) Phone number, if any (v) email ID, if any (vi) Initial of the Officer of the company designated to keep the Record