A company is required to raise funds for setting up projects, new ventures, expansion of business or for meeting the working capital requirements. In order to meet these requirement, a company has various options to raise funds depending upon the financial condition of the company after taking into consideration its internal financial dynamics. The funds can be raised either by way of taking a loan from a Bank/ Financial Institutions/ Non-Banking Financial Institutions, or by way of issue of debentures or bonds or by way of further issue of share capital. It depends upon the company to choose the medium of raising funds for its business. In this article, I have detailed about raising funds by way of issue of share capital through private placement.
What is a Private Placement?
Private Placement means offer of securities to pre-selected group of people, in other words identified persons, through issue of private placement offer letter. Private Placements are different from public issue since in public issue, the shares are sold in the open market to anyone willing to buy them whereas in private placements, the shares are sold to specific investors. It is a cost effective way to raise your capital without going to the public.
Who can issue securities under Private Placement?
A public company and a private company can make a private placement. An offer to subscribe to the securities shall not exceed 200 (two hundred) persons in the aggregate, in a financial year. However, Qualified Institutional Buyers or Employees Stock Option holders shall not be considered while calculating the limit of two hundred persons.
Points to be kept in mind:
1. the restriction of two hundred persons shall be reckoned individually for each kind security i.e, 200 persons for equity share, 200 persons for preference shares or 200 persons for debentures.
2. The provision is not applicable to NBFCs registered with Reserve Bank of India (RBI) and Housing Finance Companies registered with National Housing Bank (NHB), if they are complying with the regulations for private placement laid down by RBI and NHB. If no regulations are mentioned in this regard, then the requirement for 200 persons shall be applicable to them also.
3. If the offer is made to more than 200 persons than it is deemed public offer and all the requisite compliances under Companies Act, 2013, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India, 1992 shall be complied with.
What is the time limit for making the allotment?
A company shall make an offer in Form PAS-4 within 30 days of recording the name of such identified persons. Once the application money is received, the company shall allot the securities within 60 days from the receipt of the application money. Further, a return of allotment shall be filed with the Registrar of Companies (RoC) in e-Form PAS-3 within 15 days from the date of allotment of the securities.
Points to be kept in mind-
1. The application money received shall not be used, until the securities against such application money received has been allotted and the return for the same has been filed with the RoC.
2. The application money shall be kept in a separate bank account.
3. No advertisement shall be made in any media, marketing, distribution channels or agents to inform the public at large about the issue of offer.
4. Where the company is unable to allot the securities within the time limit, it shall repay the application money within 15 days from the expiry of 60 days along with an interest of 12% per annum which is to be calculated from the 61st day.
5. The right of renunciation is not available. The offer can be either accepted or rejected.
6. No fresh offer shall be made unless the allotment made earlier is completed, withdrawn or abandoned by the company.
7. The application money shall be paid either by cheque or demand draft or any other banking channel. The remittance cannot be done in cash.
8. A complete record of the private placement offers shall be maintained in Form PAS-5 by the company.
9. No specific minimum offer period is provided for private placement. However, the maximum offer period can be taken as 365 days.
How shall the price of the securities be determined?
The price at which the securities is to be issued shall be determined on the basis of valuation report issued by the registered valuer.
What the steps to be followed for Private Placement?
The steps are as follows:
What are the penalties for non-compliance?
1. If the company fails to file the return of allotment within 15 days with the RoC, then the company, its promoters and directors shall be liable with the penalty of Rs 1,000 for each day of default until such default continues, upto the maximum of Rs. 25 Lakhs.
2. If the company makes an offer or accept the application money in contravention of provisions of private placement, then the penalty amount shall be lower of-
a. The amount raised through private placement; or
b. Rs. 2 Crores
In addition to the above mentioned penalty, the company will have to refund the application money received with an interest of 12% to the subscribers within 30 days of the order imposing such penalty.
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