Offer of invitation for subscription of securities on private placement :
Section 42 of the Act describes the process of offer or invitation for subscription of securities on private placement and conditions to prevent public issues in the shield of private placement.
According to section 42 of the Companies Act, 2013, a company may make an offer or invitation of securities by way of private placement. The term “private placement” means 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 by fufilment of the conditions specified in this section.
This section lays the conditions through which invitation can be made. The law contained in the provision is as follows:
(1) Issue of private placement offer letter: Without effecting to the provisions of section 26, a company may make private placement through issue of a private placement offer letter.
(2) Offer/ invitation to number of persons: The offer of securities or invitation to subscribe securities, shall be made maximum to 50 persons or such higher number as may be prescribed, in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.
As per the Rule 14 sub-rule (2) of the Companies (prospectus and Allotment of securities) Rules, 2014,limit on membership i.e., the higher number, have been prescribed. According to it, offer of securities or invitation to subscribe securities shall be made to not more than two hundred persons in the aggregate in a financial year.
However this does not include- 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)].
(3) Offer/ invitation made to more than the prescribed number of persons: A company, listed/unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions related to public offer of this Chapter (whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India).
(4) No issue of fresh offer/ invitation: No fresh offer or invitation shall be made, unless-
• the allotments with respect to any offer or invitation made earlier have been completed, or
• that offer or invitation has been withdrawn, or
• abandoned by the company.
(5) Offer / invitation treated as public offer: Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with.
(6) Payment of amount: All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash.
(7) Time for allotment of securities: A company making an offer or invitation under this section shall allot its securities within 60 days from the date of receipt of the application money for such securities.
(8) Default in allotment of securities: Where the company is not able to allot the securities within stated period, it shall repay the application money to the subscribers within 15 days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest @ of 12 % per annum from the expiry of the sixtieth day:
(9) Separate Bank Account: Monies received on application shall be kept in a separate bank account in a scheduled bank and shall be utilised only for the following purpose-
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities.
(10) Offers made to the persons whose name is recorded: Offers shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and that such persons shall receive the offer by name, and that a complete record of such offers shall be kept by the company and complete information about such offer shall be filed with the Registrar within a period of thirty days of circulation of relevant private placement offer letter.
(11) No publicity required: Company offering securities under this section shall not publish any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.
(12) Filing with the registrar: Whenever a company makes any allotment of securities, it shall file with the Registrar a return of allotment, including the complete list of all security-holders, with their full names, addresses, number of securities allotted and such other relevant information.
(13) In contravention of the section: If a company makes an offer or accepts monies in contravention of this section-
| Persons liable | Penalty |
| Company | • May extend to the amount involved in the offer or invitation, or |
| Promoters | • Two crore rupees- whichever is higher, and |
| Directors | • Company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty. |
The Companies (Prospectus and Allotment of Securities) Rules, 2014, provides certain limitations on the companies with respect to making of a private placement.
Limitations on making a private placement by company: A company shall not make a private placement of its securities, unless-
(a) Previous approval of shareholder: The proposed offer of securities or invitation to subscribe securities has been previously approved by the shareholders of the company, by a Special Resolution, for each of the Offers or Invitations.
Provided that in the explanatory statement annexed to the notice for the general meeting the basis or justification for the price (including premium, if any) at which the offer or invitation is being made shall be disclosed.
Whereas in case of offer or invitation for non- convertible debentures it shall be sufficient it the company passes previous special resolution only once in a year for all the offers or invitation for such debentures during the year.
As per the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2014, dated 30th June 2014 further a new proviso has been added.According to which also that in case of an offer or invitation for non-convertible debentures referred to in the second proviso, made within a period of six months from the date of commencement of these rules, the special resolution referred to in the second proviso may be passed within the said period of six months from the date of commencement of these rules.”
(b) Offer/ invitation to the number of persons: such offer or invitation shall be made to not more than two hundred persons in the aggregate in a financial year.
Provided that any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62shall not be considered while calculating the limit of two hundred persons;
(c) Dependence on the value of offer/invitation: The value of such offer or invitation per person shall be with an investment size of not less than twenty thousand rupees of face value of the securities;
(d) Company to maintain record of bank account: The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the bank account from where such payments for subscription have been received.