Private Placement Norms

• May, 2023 News (Report from Hindustan Times):

• The Adani group is considering a plan to raise as much as $2.5 billion by selling shares
in four group companies, three months after it was forced to withdraw a follow-on
public offer by flagship Adani Enterprises to raise the same amount.
• Of the four companies, three — Adani Enterprises Ltd, Adani Green Energy Ltd and
Adani Transmission Ltd — have already announced plans to raise an unspecified
amount through private placements. Adani Ports and Special Economic Zone Ltd will
reportedly soon announce a plan to hold a board meeting for finalizing the private
placement deal.
• “To start with, the group will raise about $1 billion through the issuance of fresh equity
in a private placement of shares,” as per the report gathered in Stock market circle.
• The boards of Adani Enterprises, Adani Green Energy and Adani Transmission may
meet as soon as possible “to take an enabling resolution” to raise a total of around
$2.5 billion in FY24.
 Private Placement Norms
• As per the stock market reports, Adani Enterprises, the boards of
Adani Green Energy and Adani Transmission may meet at
Ahmedabad to consider and approve the proposal of raising funds
by issuing equity shares through a private placement such as
qualified institutional placement (QIP), preferential allotment or a
combination of methods. However, Adani Ports is yet to make an
announcement in this regard.
• “The group plans to raise $1 billion via share sales in Adani
Transmission, Adani Green and Adani Enterprises and Adani Ports.
The proceeds from this $1 billion will be primarily used to partly
fund the group’s $3.8 billion capex planned for FY24. The balance
capex will be funded through the issuance of fresh bonds,” said a
stock market expert.
 Private Placement Norms
• “The companies are taking the enabling resolution from their boards
for the equity fundraising now because once demands or offers start
coming from potential investors (at the right price), the companies
should be able to raise the amounts immediately,” – report gathered
from stock market.
• A board resolution and shareholder approval are mandatory for QIPs
as per norms.
• “If the board resolutions are not taken in advance, it often
unnecessarily delays the fundraising process by over 30 days which,
in turn, may again expose the stocks to unwanted market volatility,”
the person added while explaining the rationale behind the timing
of the board meetings, even as the stocks of Adani Group firms are
still recouping their losses.
 Private Placement Norms
• The Adani Group, following a 24 January, 2023 report by US-based short-
seller Hindenburg Research, lost over $140 billion in market value and
was forced to call off its flagship Adani Enterprises’ fundraising on 1
February, 2023.
• According to the people cited above, the group is now planning to raise
most of the $2.5 billion via QIPs, issuing new shares to large offshore
funds, including asset managers, private equity funds and sovereign
wealth funds.
• Boards of three Adani group companies have planned their meetings just
a day after the scheduled Supreme Court hearing on the ongoing Adani-
Hindenburg case on 12 May, 2023.
• On 2 March, 2023 the apex court asked the markets regulator to probe
Hindenburg’s allegations of stock “price manipulation” by the Adani
group and lapses in regulatory disclosures within two months.
 Private Placement Norms
• To be sure, Adani group stocks have steadily
recovered over the past few weeks, indicating a
waning effect of the Hindenburg report.
• After falling 70% from ₹3,442 on 24 January, 2023
(the day of the Hindenburg report) to its 52-week
low at ₹1,017.45 on 3 February, 2023 shares of Adani
Enterprises have gained over 95% to ₹1,984.65 now
on the back of the group’s move to prepay a series of
loans and a $1.87 billion investment by GQG
Partners.
 Private Placement Norms
• Section 42 of the Companies Act, 2013 (‘Act’) provides that a
company can make a private placement to a select group of persons.
Private placement by companies means offering its securities or
inviting to subscribe its securities for a select group of persons other
than by way of a public issue, through a private placement offer
letter.
• Private placement of securities can be made only to select persons
or identified persons (as identified by the board of the company).
• A company making a private placement cannot offer its securities
through any public advertisements or utilize any marketing, media,
or distribution agents or channels to inform the public about such
an offer. If the offer is advertised or marketed, it will be considered a
public offer and not a private placement by the company.
 Private Placement Norms
• Private Placement Offer Letter:
• Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
(‘Rules’) provides the regulations relating to the private placement by
companies. The Rules state that the company should offer or invite to subscribe
its securities through a private placement offer letter in Form PAS-4.
• All private placement offers should be made only to those persons whose
names are recorded by the company before sending the invitation to subscribe.
• The persons whose names are recorded will receive the offer, and the company
should maintain a complete record of the offers in Form PAS-5.
• A company should send a private placement offer letter accompanied by an
application form serially numbered and addressed either in writing or
electronic mode, specifically to the person to whom such an offer is made.
• The company should send the private placement offer letter to the specific
person within thirty days of recording the person’s name.
 Private Placement Norms
• The person to whom the private placement offer letter is addressed in the application
form should accept the offer. The company should file the complete information of
the offer with the Registrar of Companies (‘ROC’) within thirty days of circulating the
private placement offer letter.
• Special Resolution for Making Private Placement
• The company can make a private placement of its securities after approval of
shareholders of the company for the proposed offer or invitation to subscribe to
securities by passing a Special Resolution for every offer or invitation, which is
amended subsequently.
• Maximum Limit of Private Placement
• The select persons to whom the company can make a private placement should not
exceed fifty persons or such a higher number prescribed by the Rules in a financial
year. The limit of fifty persons excludes the qualified institutional buyers and
employees of the company who are offered securities in the financial year under a
scheme of employees stock option as per Section 62 of the Act.
 Private Placement Norms
• The Rules state that the offer or invitation of private placement should not
be more than two hundred persons in the aggregate financial year. The limit
of two hundred persons will exclude the qualified institutional buyers and
employees of the company offered securities in the financial year under a
scheme of employees stock option as per Section 62 of the Act.
• The value of the private placement offer or invitation for each person
should be of an investment size of Rs.20,000 of the face value of the
securities. However, the limit of the maximum number of select persons
and value of private placement does not apply to the following:
• Non-banking financial companies registered under the Reserve Bank of
India Act, 1934.
• Housing finance companies registered with the National Housing Bank
under National Housing Bank Act, 1987.
 Private Placement Norms
• Mode of Payment of Private Placement:
• Every identified person wanting to subscribe to the private
placement issue should apply through the private placement
application given to such a person by the company along with
the subscription money paid by demand draft or cheque or
other banking channel and not by cash.
• The subscribers should make the securities subscription
payment from their bank account to the securities.
• The company must keep a record of bank accounts from
where they receive the subscription payments.
 Private Placement Norms
• Allotment of Private Placement:
• A company making an invitation or offer of private placement should allot its
securities within sixty days from the receipt of the application monies for the
securities. The company should repay the application money to the subscribers
within fifteen days from the completion date of sixty days if the company is unable
to allot securities within sixty days.
• When the company fails to repay the application money within fifteen days after
completion of sixty days, it is liable to repay the subscription money with an
interest rate of 12% per annum from the expiry of the sixtieth day.
• The company must keep the application money in a separate bank account in a
scheduled bank and should not utilize it for any purpose other than the following:
• For adjustment against allotment of securities.
• For repaying application monies where the company is unable to allot
securities.
 Private Placement Norms
• Record of Private Placement Offers:
• The company should maintain a complete record of private
placement offers in Form PAS-5. The copy of the record of offers
and the private placement offer letter in Form PAS-4 should be
filed with the ROC with the fees as provided in the Companies
(Registration Offices and Fees) Rules, 2014 within thirty days of
the circulation of the private placement offer letter.
• When the company is a listed company, it should file the record of
private placement offers along with the private placement offer
letter with the Securities and Exchange Board within thirty days of
circulating the private placement offer letter.
 Private Placement Norms
• Return of Allotment of Private Placement:
• The company must file the return of allotment of securities with the ROC, after allotting
the securities, within thirty days of allotment in Form PAS-3 and the fees as provided in
the Companies (Registration Offices and Fees) Rules, 2014 having the following
information:
• Complete list of all security holders.
• Full name, address, PAN, and E-mail of such security holders.
• Class of security held.
• Date of allotment of security.
• Number of securities held, the amount paid and nominal value on such securities.
• Particulars of the consideration received if the securities were issued for consideration
other than cash.
• The Form PAS-3 filed by the company, other than One Person Company and small
company, should be pre-certified by a practicing CMA (Certified Management
Accountant), CA (Chartered Accountant) or CS (Company Secretary).
 Private Placement Norms
• Penalty for Non-Compliance of Private Placement
• A company, its directors and promoters will be liable for a penalty if
the company accepts monies or makes an offer in contravention of the
Act and Rules. The penalty may extend to the amount involved in the
invitation or offer or Rs.2 crore, whichever is higher. The company
should also refund all monies to the subscribers within thirty days of
the order imposing the penalty.
• What kinds of securities are covered under private placement?
• The following securities can be issued under private placement:
• Equity shares
• Preference shares
• Debentures
 Private Placement Norms
• Which documents are required for the issue of securities through private
placement?
• The following documents are required to issue securities through private placement:
• Valuation report
• Private placement offer cum application letter
• Certified copy of board resolution approving the private placement offer.
• Notice of general meeting along with the explanatory statement of special
resolution.
• Records of private placement offers in form PAS-5.
• Application form along with subscription money from all the proposed investors.
• List of allottees containing full name, address, PAN and e-mail ID, class of
security, date of allotment and number of securities held, nominal value and
amount paid on such securities.
 Private Placement Norms
• Can private placement be made to existing shareholders?
• The Companies Act, 2013 does not specifically mention the offer of securities to
existing shareholders. In most cases, promoters and directors are also the
shareholders of the company to whom private placement is applicable. Further, an
offer of securities to the existing shareholders is an offer to a select group of persons
and not open to the public. Thus, shares can be issued to existing shareholders
under the private placement.
• Is the limit of 200 persons considered for the issue of each kind of security or
jointly for all securities?
• The restriction of 200 persons applies individually for each kind of security, i.e.
equity share, preference share or debenture. Thus, 200 person limit is considered for
the issue of each kind of security and not jointly. For example, the offer of equity
shares to 200 persons and debentures to 200 persons in the same financial year is
valid.
 Private Placement Norms
• As cited already, Private placement of securities -- a
relatively faster way to raise funds -- are governed by both
the Companies Act and the Sebi regulations.
• In the Companies Act, 2013, issuance of securities to up to
50 persons or entities would be considered as private
placement while in the case of exceeding that limit, firms
would be required to make a public offer.
• As per Sebi rules, a private placement is an issue of shares
or of convertible securities by a company to a select group
of persons, which is neither a rights issue nor a public issue.
 Private Placement Norms
• Instances of entities misusing the private placement route to garner funds have
come to light of SEBI.
• Sahara India Real Estate Corp Ltd (SIRECL) and Sahara Housing Investment Corp
Ltd (SHICL) -- which together raised more than Rs 24,000 crore through private
issue of securities -- were found to have violated various provisions of the
Companies Act and the Sebi Act.
• The two companies have been asked by the Supreme Court to refund the
money to investors.
• In view of this, Sebi has brought out various new measures for issuance and
listing of non-convertible redeemable preference shares.
• Besides, the regulator has also come out with working on re-defining a host of
terms and instruments in this regard, such as Non-Convertible Redeemable
Preference Shares, Perpetual Non-Cumulative Preference Shares, Innovative
Perpetual Debt Instruments.
 Private Placement Norms
• October, 2020 News:
• In a significant relief for companies going in for private placement of
securities, the Corporate Affairs Ministry (MCA) has now said that
companies need not pass special resolution with approval of
shareholders every time it issues securities to qualified institutional
buyers (QIBs).
• It would be sufficient if a company passes a special resolution only
once in a year for all the allotments to such buyers (QIB) during the
year, MCA has said.
• This relaxation for private placement to QIBs comes on top of a similar
one provided two years back to companies issuing non-convertible
debentures (NCDs) (above a threshold and within borrowing limits)
through private placement route, corporate observers said.
 Private Placement Norms
• The current company law specifies three main modes of
raising funds for companies:
• Public issue,
• Rights issue and
• Private placement.
• For private companies, only two modes:
• Rights issue and
• Private placement, are available.
• Private placements are generally the most utilized route by
private companies, although compliance requirements are
tough.
 Private Placement Norms
• Experts’ take
• Partner, Khaitan & Co, a law firm, said this latest MCA move is an
excellent step to ensure fund-raising happens at short notice. “Given the
current scenario in the economy, companies will move to raise funds, and
therefore, one resolution a year should work and at an opportune time it
can be realized on and funds be raised. For listed companies, qualified
institutional placements (QIPs) will now become easier and less timeline-
driven,”
• An independent markets commentator, said that the idea of special
resolution is to bring any extraordinary or critical matter to the notice of
the shareholder. Allowing for companies to pass special resolution in a
yearly once mode for allotment of securities to QIBs is a good idea to
save time and resources, if the companies can list out the detailed
conditions in which such allotment would happen, he said.
 Private Placement Norms
• Partner, L&L Partners, said this MCA relaxation, which is
akin to the one presently provided for issuance of NCDs,
would further facilitate in meeting immediate funding
requirements of the issuer companies via QIB issuance,
given that now the companies wouldn’t have to approach
the shareholders repeatedly for such issuance.
• Partner, MV Kini & Co, said that a company need not get a
special resolution passed repeatedly in case of offer or
invitation of any securities to QIBs. Once the special
resolution has been passed by the shareholders, it is valid
for one year and the same is sufficient if the company
passes a Board resolution only, he added.