The Companies Act, 2013 ('Act, 2013') which received the assent of the President on 29 August, 2013 has made significant changes in the provisions relating to private placement of securities, which was an important route for raising the funds by the companies. The Draft Rules under the Act, 2013 ('Draft Rules') have also been released by the Central Government for public comments. In order to ensure greater control and compliance over the private companies, the Act, 2013 has withdrawn most of the exemptions as available under the Companies Act, 1956 ('Act, 1956'). The Act, 1956 did not define the term 'private placement' rather certain offers of shares or debentures/invitation to subscribe for shares or debentures to any section of the public were not regarded as public issues under section 67(3) the Act, 1956 i.e where shares or debentures are available for subscription or purchase only to those receiving the offer/invitation and offer/invitation is a domestic concern of the issuer and those receiving the offer/invitation, were termed as private placement. However, as per the proviso to section 67(3) of the Act, 1956, when a company made an offer or invitation to subscribe for shares or debentures to 50 or more persons, such offers was treated as made to public. Under the Act, 1956 the conditions relating to private placement were applicable only to public companies. on the contrary Act, 2013 provides various conditions for private placement of shares and debentures which apply to both private companies and public companies.


The conditions imposed in relation to private placements by companies seem to have been issued after the ruling of the Hon"ble Supreme Court of India in the case of Sahara Group wherein the companies Sahara India Real Estate Corporation Limited ('SIRECL') and Sahara Housing Investment Corporation Limited ('SHICL') issued unsecured optionally fully-convertible debentures ("OFCDs") amounting to about Rs 24,000 crores to more than 2 crore investors. When Securities Exchange Board of India ('SEBI'), had came to know of the large scale collection of money from the public by Sahara through issuance of OFCDs, it issued a show cause notice to SIRECL and SHICL inter alia stating that the issuance of OFCD's are public issue and therefore liable to be listed u/s 73 of Act, 1956 and also directed to refund the money solicited and mobilized through the prospectus issued with respect to the OFCDs, since they had violated various other clauses of the SEBI (Disclosure and Investor Protection) Guidelines, 2000 and also various provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

It was urged by the Sahara Group that OFCDs were issued in the nature of "hybrid instruments" as defined u/s 2(19A) the Act, 1956 and SEBI did not have jurisdiction to administer those securities since Hybrid securities were not included in the definition of 'securities' under the Securities and Exchange Board of India Act, 1992 ("SEBI Act"), or the Securities Contract Regulation Act, 1956 ("SCRA"), but would be governed by the Central Government under section 55A(c) of the Act, 1956. The Supreme Court held that OFCDs issued by Sahara Group were public issue of debentures, hence securities and once the number 49 is crossed, the proviso to Section 67(3) becomes effective and it is an issue to the public, which attracts Section 73(1) of Act, 1956 and application for listing becomes mandatory which falls under the administration of SEBI u/s 55A(1) (b) of the Act, 1956. The Court upheld the proceedings of the SEBI and Sahara Group was ordered to refund the amount to investors along with interest.


Chapter III, Part II of the Act, 2013 deals exclusively with private placements. Section 42 of the Act, 2013 defines 'private placement' which can be said in consonance with the interpretation of the Supreme Court as "any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section including the condition that he offer or invitation is made to not more than 50 or such higher number of persons as may be prescribed (excluding QIB's and employees offered securities under ESOP) in a financial year".

It is also to be noted that the provisions for private placement applies to the issue of "securities" and not "shares". Thus the new provisions have widened the scope and cover a whole host of instruments such as shares, bonds, debentures and other marketable securities etc. The Act, 2013 under section 42(4) mandates a company to comply with the provisions of SEBI Act & SCRA, if any offer or invitation is not in compliance with the provisions of the section and such offer or invitation shall be treated as a public offer.

The section stipulates that all monies payable towards subscription of securities by private placement shall be paid through cheque or demand draft or other banking channels but not by cash and also all the securities under private placement are to be allotted within a period of 60 days from the receipt of application money. If the company is not able to allot the securities within the specified period, the application money is to be refunded within a period of 15 days from completion of 60 days time. The money raised by the issue of offer or invitation shall be in a separate bank account and cannot be used until allotted. Every company making any allotment under the said section shall submit with the Registrar the particulars of every private offer within 30 days of circulation of offer letter.


Chapter III, Part II of the Draft Rules deals with private placements by the companies. As per rule 3.12(2)(b) of the Draft Rules, an offer or invitation for private placement shall be made to not more than two hundred persons in the aggregate in a financial year, excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of section 62(1)(b) of the Act, 2013. The Draft Rules also prescribe certain other conditions which are as follows:

I. A private placement offer letter shall be accompanied by an application form addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the names of such persons in accordance with section 42(7) of the Act, 2013. 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 so received shall be treated as invalid.

II. The proposed offer of securities or invitation to subscribe securities must be approved by the shareholders of the company, by way of a special resolution, for each of the offers/ invitations.

III. The offer or invitation shall be made to not more than two hundred persons in the aggregate in a financial year, excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of subsection (1) of section 62 of the Act, 2013.

IV. The number of such offers or invitations shall not exceed four in a financial year and not more than once in a calendar quarter with a minimum gap of sixty days between any two such offers or invitations.

V. The value of such offer or invitation shall be with an investment size of not less than fifty thousand rupees per person.

VI. The payment to be made on subscription of securities shall be made from the bank account of the person subscribing to such securities. However, 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.


According to Section 42(10) of the Act, 2013, if a company makes an offer or accepts monies in contravention of the section 42 of the Act, 2013, 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. The company is also required to refund all monies to subscribers within a period of thirty days of the order imposing the penalty.


Since the requirements for raising the funds by way of private placement have been made more stringent, it will significantly increase the compliance burden on private companies looking to raise funds through private placement. It is also to be noted that as no specific exemption has been provided for private companies or small companies, it will lead to reduce flexibility available to private companies and the companies operated by closely held people for the raising funds. However, the better governance of all companies is expected which will lead to the transparency in the affairs of the Company and accountability of the directors.

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