India: Safer And Transparent Private Placements In India!

Last Updated: 20 October 2014
Article by Hemant Goyal and Sandhya Aggarwal


The term "Private Placement" of securities has been defined distinctively for the very first time in Indian legal and corporate history by the new Companies Act of 2013. The earlier Indian Companies Act of 1956 dealt scarcely with the practices of this under its Sections 67(3) and 73(1), and was concerned mainly with shares and debentures, and the public limited companies. However, SEBI (Issue of Capital and Disclosure Requirements) Regulations of 2009 did stipulate the term Preferential Allotment, which is the private placement of shares or of convertible securities by a listed company to a select group of investors, who are not its existing shareholders. The new Companies Act of 2013 not only defined and described fully the private placements of securities, but also laid down certain intelligent provisions for the private placements by both the private and public companies. Moreover, the new provisions for private placements have widened the scope through replacing the term 'Shares' by the wording 'Securities', and thus cover a rather broad range of money and capital market instruments, such as equity shares, bonds, debentures, preference shares, convertible instruments, and other marketable securities.


The Private Placement (non-public offering) of securities is a popular way of raising capital by small businesses or corporations, through making offer for subscribing to their securities by some select investors forming a small number. The funds thus raised through making private placements of securities, can then be used for expansion or growth of their businesses. Such private placements are opposite to the public offerings, in which securities are made available for sale to the public at large on the open market. Generally, the customers of privately places securities are banks, insurance companies, mutual funds, pension funds, etc. And the types of securities offered and sold are equity shares, bonds, debentures, preference shares, convertible instruments, redeemable instruments, and other marketable securities. The private placements are commonly regarded as being quite cost-effective and time-saving [because of requiring no brokers or underwriters] for small corporations for raising funds, without going public and making initial public offerings [IPOs]. Again, these private placements could be the only source of gathering capital by start-up firms or for risky business ventures. Moreover, private placements enable the issuer corporations to hand-pick well-experienced and sophisticated investors possessing compatible goals and interests. However, there are also some disadvantages associated with private placements of securities, such as scarcity of and difficulty in finding suitable and congenial investors; low buying prices of privately placed securities as compared to the market value of those; offering companies may need to relinquish more equity to compensate the risks and illiquid positions of the prospective investors.


Private Placements of Securities by Indian companies are to be governed and regulated by the provisions, regulations, and compliances given in the Chapter III, Part II of the new Indian Companies Act of 2013. The Section 42 of this magnificent CA-2013 defines the private placement as being an offer of securities or an invitation to subscribe for securities made ever by a company to a chosen group of persons or investors, in a way other than the way of public offer, and through issue of proper private placement offer letter, and satisfying all other conditions and provisions given in the paragraphs below.

Some of the most significant and key provisions provided in the Indian Companies Act of 2013, for making private placement of securities in India, are the following. Here, it must be noted that the following provisions and guidelines are applicable, when the offer for subscribing to securities is being made to a person or investor who is currently not an equity shareholder in the issuer company. In case, when the offer is to be made to persons/investors who are already the equity holders of the issuer company, then another set of provisions and guidelines are applicable.

  • At present, the provisions and instructions given in the Section 42 of the Companies Act of 2013 [CA-2013] regarding the private placements of securities, are common for all classes of companies, be it private limited companies, public limited companies, or the listed companies on stock exchanges. In addition to these provisions of Section 42, provisions given in the Rule-14 under the Companies (Prospectus and Allotment of Securities) Rules of 2014, are also applicable. Again, besides the SEBI Act of 1992, the Securities Contract Regulation Act of 1956 [SCRA], and the SEBI (Issue of Capital and Disclosure Requirements) Regulations of 2009, the Securities and Exchange Board of India [SEBI] has the power to prescribe additional provisions, processes, or disclosure requirements for making private placements of securities.
  • Though these provisions, requirements, and procedural compliances are common to all above-mentioned classes of securities, there exist some additional requirements and compliances in the cases of the equity shares or the securities convertible into equity shares on preferential basis. These specific requirements and compliances are presented in the Section 62 of the CA-2013, read with the Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.
  • The proposed offer of securities or invitation to subscribe securities to a select group of persons/investors by a company, must be duly and previously approved by its shareholders, by way of a special resolution, for each of the offers/invitations. The offer prices and justifications for these, must be disclosed to the shareholders of the issuer company.
  • An offer or invitation for private placement shall be made to not more than two hundred persons/investors in the aggregate in any financial year, individually for each type of securities. This limit of 200, does not include the Qualified Institutional Buyers [QIBs] and employees of the issuer company, who are receiving securities under ESOP. These provisions are in compliance to the Section 62(1)(b) of the CA-2013, and the PAS Rule 14(2).
  • An offer of securities or invitation to subscribe for securities shall be made through issue of a Private Placement Offer Letter [PPOL] in Form PAS-4. The PPOL shall be accompanied by an application form serially numbered and addressed specifically to the person/investor to whom the offer is being made, and must be sent to him either in writing or in electronic mode, within thirty days of recording names of such persons, in accordance with Section 42(7) of the CA-2013.
  • In the cases a company makes offers for non-convertible debentures, it must pass a special resolution, at least once in a year, in respect of all such offers during the entire year.
  • According to the Rule 14(2) of the Companies (Prospectus and Allotment of Securities) Rules of 2014 [PAS Rules 2014], the value of the offer or invitation per person/investor shall not be less than INR-20,000/- of the Face Value of the securities. The payment for subscription shall be made through the bank account of the concerned person/investor; no cash transaction being permitted.
  • Again, the application money shall be kept in a separate bank account by the company, which shall be utilized only for the purpose of adjustment against allotment of securities, or for repayment of the money, in case the company fails to allot securities.
  • The complete and flawless record of private placement offers and acceptances shall be well-maintained by the issuer company in Form PAS-5. A copy of such record, along with the private placement offer letter in Form PAS-4, shall be filed with the concerned Registrar of Companies [RoC], together with the prescribed fee given in the Companies (Registration Offices and Fees) Rules of 2014; and with the SEBI if the company is a listed one; within a period of thirty days from the date of circulation of the private placement offer letter [same as the date of issue of the offer letter].
  • Any advertisement or any other media-related activities, intended to inform the public at large about the placement offer, is strictly prohibited.
  • The (punctual) allotment of securities must be completed within a period of 60 days, counted from the date of receipt of the application money. Somehow, if the company is not able to complete allotment within this period, then it shall refund the money well within 15 days of the expiry of 60-day period; or else, the company shall repay the received money along with the interest @12% per annum, reckoned from the sixtieth day.
  • No any fresh offer of securities or invitation for subscribing to securities shall be raised unless all allotments related with previous offers have been completed.
  • A return of allotment of securities shall be filed by the company with the Registrar within thirty days from the completion of the allotments, in Form PAS-3, along with the requisite fee as provided in the Companies (Registration Offices and Fees) Rules of 2014, and including the complete list of all security holders, and their details [email IDs, addresses, date of allotment, etc.].
  • The provisions related to a maximum of 200 persons and the minimal investment size of not less than twenty thousand rupees, shall not be applicable to –
  1. Non-banking Financial Companies [NBFCs], which are registered with RBI, under the RBI Act of 1934.
  2. Housing Finance Companies, which are registered with the National Housing Board [NHB], under the NHB Act of 1987.

However, if RBI or NHB has no specific provisions regarding the private placements of securities, then these companies also need to follow these provisions and processes for private placements.


The Section 42(10) of the Companies Act of 2013 contains harsh and fast provisions for preventing breach of the above-mentioned provisions and statutory compliances regarding the private placements of securities, and also for apt punishment to the culprits. The company, or its directors or promoters at fault, shall be liable for an onerous monetary penalty which extends to the amount involved in the offer of private placement, or INR-2 Crore, whichever is higher. Prompt refund of the money involved in such private placements to the subscribers is also mandated, within thirty days counted from the date of the order imposing penalty.


Thus, the Indian Companies Act of 2013 has made significant changes in the provisions related with the private placements of securities, and promises better protection of the legitimate rights of the shareholders, greater corporate accountability and transparency, and brighter future of the investors/shareholders/companies engaged in diverse economic sectors. Elegant and admirable provisions have been made for curbing malpractices in connection with private placements of securities, including rigorous penal provisions under its Section 42(10). However, as the private companies and small companies are now required to follow the same strenuous and strict provisions for carrying out private placements, these are naturally subject to heavier compliance burden and lesser operational flexibility, than those offered by the earlier Companies Act of 1956.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Sandhya Aggarwal
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