Private Placement | Company Law - CLAT PG PDF Download

Private Placement of Shares

Private placement, as per Explanation I to Section 42(3), refers to the offer or invitation to subscribe for or issue securities to a select group of individuals by a company, excluding public offers. This process is conducted through a private placement offer-cum-application, adhering to the specified conditions.

Private Placement Offer-cum-Application

• According to Section 42(1), a company is permitted to make a private placement of securities, subject to the provisions of this section.
• Section 42(3) states that a company engaging in private placement must issue a private placement offer and application in a prescribed form and manner to identified persons.
• The names and addresses of these identified persons must be recorded by the company in a prescribed manner.
• It is important to note that the private placement offer and application do not carry any right of renunciation.

Maximum Number of Persons for Private Placement Offers

According to Section 42(2) of the Companies Act, a private placement can only be made to a specific group of individuals identified by the Board of Directors. This group, referred to as "identified persons," must not exceed fifty individuals, or a higher number as prescribed by regulations. It's important to note that this count excludes offers made to qualified institutional buyers and employees participating in an employee stock option scheme.

Definition of Qualified Institutional Buyer

• A qualified institutional buyer(QIB) is defined according to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
• When calculating the number of identified persons for a private placement, offers made to QIBs and employees under an employee stock option scheme are not included.

Consequences of Exceeding the Prescribed Number

• If a company, whether listed or unlisted, makes an offer to allot or invite subscription for securities to more than the prescribed number of persons, it will be considered a public offer.
• This applies regardless of whether payment for the securities has been received or whether the company intends to list its securities on a recognized stock exchange in India or abroad.

Applying for Private Placement

As per Section 42(4) of the Companies Act:

• Every identified person interested in subscribing to the private placement offer must submit their application along with the subscription money.
• Payments should be made through cheque,demand draft, or other banking channels, and not in cash.
• A company cannot utilize the funds raised through private placement until the allotment is made and the return of allotment is filed with the Registrar of Companies.

Fresh Offers and Allotments

• A company cannot make a new offer or invitation for private placement until the allotments for any previous offer or invitation have been completed, or the earlier offer has been withdrawn or abandoned.
• However, a company is allowed to make multiple issues of securities to the same class of identified persons at different times, as long as it adheres to the maximum number of identified persons.