INTRODUTION

Any“business needs funds in order to make it successful or at least run that business. Initially,
the money comes from the subscription of the members but as the company grows, it definitely
needs more funds. The company then raises funds by various methods. One of the most preferred
methods to raise funds is that of private placement. The Companies Act, 1956 and the SEBI
(Securities and Exchange Board of India) guidelines and regulations governed the law relating to
private placement, but the loopholes present in those laws were extensively misused by the
companies and their promoters to indulge in malpractices, thereby compromising the interests of
the shareholders.”

The“Companies Act, 2013 made significant changes in the law relating to private placement and
made it water-tight to avoid any leakage and prevent the malpractices taking place in companies.
With this new law, the procedure for private placement has become more structured, transparent
and time-oriented as compared to the law under the 1956 Act.”

Explanation II (ii) of Section 42,“unlike the law under the 1956 Act, defines “Private
Placement”. According to it, 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 the issue of a private placement offer letter and which satisfies the conditions
specified in this section.”

BACKGROUND

The lacuna “in the provisions of Companies Act, 1956 related to private placement can be very
well seen 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 Rs. 19,400
crore, raised from over two crore investors. When SEBI came to know about the large scale
collection of money from the public by the Sahara Group of Companies through the issuance of
the OFCDs, it issued a show cause notice to SIRECL and SHICL stating that this issuance of
OFCDs was a public issue and thus liable to be listed under Section 73 of the Companies Act,
1956. The Sahara Group of Companies put forth the contention that the funds were raised
through private placement of the OFCDs, which were outside the definition of “securities”
mentioned that the SEBI” regulations. They also contended that since they were unlisted
companies, the issue of such debentures was outside the scope of SEBI. SEBI, however
contended that this method of raising capital adopted by the Sahara Group “violated various
regulations and since the offer was made to more that 50 persons at a time, it becomes a public
issue by virtue of first proviso to section 67(3) of the Companies Act, 1956. The Hon’ble
Supreme Court also held that following situations, is generally regarded, as not an offer made to
public:”

 Offer of securities made less than 50 persons;

 Offer made only to the existing shareholders to the company (right issue);
 Offer made to a particular addressee and be accepted only persons to whom it is addressed;
 Offer and invitation being made and it is the domestic concern of those making and
receiving the offer.

While “Shahara was a high- profile case, there were various other companies that used the
lacunae of the provisions of the law relating to private placement and indulged in various
malpractices. Companies took advantage of the overlapping powers of Ministry of Corporate
Affairs (MCA) and SEBI in order to make multiple private placements. The new provisions of
the Companies Act, 2013 has now made the law tighter and more secured and prevents the scope
of any malpractices by the companies. The 2013 Act mandates, under Section 42(4), a company
to comply with the provisions laid down under Securities and Exchange Board of India and
Securities Control Regulation Act (SCRA).”

THE 2013 ACT AS AN ATTEMPT TO CURB MALPRACTICES

The provisions of the 2013 Act has helped to curb malpractices that had increased in the
corporate world. The provisions are listed as below:

 Use of the term ‘securities’ instead of ‘shares’: “Use of term shares in the Act of 1956
restricted the regulations of issuance of various other instruments by companies to raise
funds. Companies manipulated this loophole by using other terminology or nomenclature for
instruments used to raise funds, thereby easily escaping the regulatory oversights.”
Having understood the practices, the government decided to cover issue of all types of
securities in the Companies Act and thus, minimizes the chance of manipulation.
 Restriction on number of persons to whom a private placement offer can be made in a
financial year: The“number of persons to whom invitation or offer of private placement can
be made shall not be more than 200 in an aggregate for a financial year and not more than 4
such offers shall be made in a financial year as per rule 14(2)(b) of the Companies
(Prospectus and Allotment of Securities) Rules, 2014.”
 Use of banking channels for private placements: According“to Section 42(5) of the
Companies Act, 2013. Since the subscription money will have to be made through demand
draft or cheque or other normal banking channels, opportunities to launder money will go
down.”
 Requirement to complete allotment within 60 days: It“has been specified u/s 42(6) of the
Companies Act 2013 that allotment under Private Placement should be made within 60 days
of receiving the application money. This proposal will curb a common practice under which
companies would accept funds as application money without adequately complying with
regulations for accepting deposits.”
 It has been specifically provided in Rule 14(2)(b) of the Companies (Prospectus and
Allotment of Securities) Rules, 2014“that where the private placement does not comply with
the provisions of the Act, it shall be treated as a public offer and that all provisions of the
Securities Contract Regulation Act, 1956 and the Securities and Exchange Board of India
Act, 1992 would comply.”

How is Private Placement different from a public offer?

While“in case of private placement there is a cap of 50 persons to whom the offer for securities
can be made, there is no such limit in case of a public offer. If a company makes an offer, or
enters into an agreement to allot securities to more than 50 persons, it shall be deemed to be an
offer to the public and thus shall be governed by the provisions of Part I of the Chapter III of
Companies Act, 2013 in contrary to the provisions laid down by Part II of Chapter III of the
Act.”

CONDITIONS FOR PRIVATE PLACEMENT

The law for the private placement “of securities is codified under Section 42 and 62 of the
Companies Act, 2013 and the Companies (Prospectus and Allotment of Securities) Rules, 2014.
However, Rule 13 of the Companies (Shares Capital and Debentures Rules), 2014 lays down
certain mandatory secretarial compliances in case of various modes of issue of shares under
Section 62.”

 A“Private Placement offer cannot be made to more than 200 people in aggregate in a
financial year excluding “qualified institutional buyers” and employees of the company
being offered securities under a scheme of Employee’s stock option asper provisions of
Section 62(1)(b) of the Act of 2013.”
 If a“company, listed or unlisted, makes an offer to allot or invite subscription, or allots, or
enters in to an agreement to allot, securities to more than 200 people, whether the payment
for the securities has been received or not or whether the company intends to list its
securities or not on any recognized stock exchange outside India, the same shall be deemed
to be an offer to the public and shall accordingly be governed by the provisions of Part I of
Chapter III of Companies Act, 2013.”
 No fresh “offer or invitation under this section 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.1
 Any allottee “under a private placement offer/invitation shall not transfer his/her securities
to more than 20 persons during a quarter and a company shall not register any transfer which
is not in conformity with this requirement.”
 The “number of such offers or invitations shall not exceed 4 in a financial year and not more
than once in a calendar quarter with a minimum gap of 60 days between any 2 such offers or
invitations.”
 The value of such offer or invitation shall be with an investment size of not less than 20,000
Rupees of the face value of the securities.2
 No “Company offering securities under this section shall release any public advertisements
or utilize any media, marketing or distribution channel or agents to inform the public at large
about such an offer.3”

1
Section 42(3), Companies Act, 2013
2
Rule 14(2)(b) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
3
Section 42(8) of the Companies Act, 2013
  Any“offer or invitation not in compliance with the provisions of Section 42 shall be treated
as a public offer and all provisions of this act, and the Securities Contract (Regulation) Act,
1956 and the Securities Exchange Board of India, 1992 shall be required to be compiled
with.”
 The payment for the subscription should be made through cheque or demand draft or other
bank channels but not cash.4
 A“Company making an offer or invitation under Section 42(8) shall allot its securities
within 60 days from the Date of the Receipt of the Application money for such securities
and if the company is not able to allot the securities within that period, it shall repay the
application money to the subscribers within 15 days from the Date of Completion of 60 days
and if the company fails to repay that money with interest at the rate of 12% p.a from the
expiry of the 16th day.”
 All offers covered under Section 42(7)“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 in such a manner as may be prescribed.”
 Complete “information about the offer made shall be filled with the registrar within a period
of 30 days of circulation of relevant placement offer letter.”
 Whenever a “company makes any allotment of securities under section 42(9) of the Act,
2013, it shall file with the registrar a return of allotment in such manner as may be
prescribed, including the complete list of all security-holders, with their full names,
addresses, number of securities allotted and such other relevant information as may be
prescribed.”

PROCEDURE FOR PRIVATE PLACEMENT OF SECURITIES

 The“person(s) to whom private placement offer/invitation shall be made has to be identified

first. All others shall m]be made only to such persons whose names are recorded by the
company prior to the invitation to subscribe, and that such person shall receive the offer by
name.”

4
Section 42(6), Companies Act, 2013
  A“private placement offer letter needs to be prepared according to form Form No. PAS 4. 5 It
shall be accompanied by an application form addressed specifically to the person to whom
the offer is made and shall be sent to him by name.”
 The proposed offer “of securities or invitation to subscribe securities needs to be approved
by the shareholders of the company, by way of a special resolution for each of the offers/
invitations.6”
 Th offer letter and the application form “addressed specifically to the allottee shall be sent to
him, either in writing or in electronic mode, within 30 days of recording the names of such
persons as specified above. 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.7”
 The “company has to maintain a complete record of private placement offers and
acceptances of such offer in Form No. PAS 5.8”
 A copy of the“record maintained by the company along with the private placement offer
letter in Form No. PAS 4 has to be filed with the Registrar with fee and with SEBI, where
the company is listed, within a period of 30 days of circulation of the private placement offer
letter.”
 All monies payable towards subscription of securities“under this section has to be paid
through cheque or demand draft or other banking channels but not by cash. Further, the
payment to be made on subscription of securities shall be made from the bank account of the
person subscribing of such securities. In case of joint holders, it shall be paid from the bank
account of the person whose name appears first in the application.”
 Monies received on application under this section shall be kept in a separate bank account in
a scheduled bank and shall not be utilized for any purpose other than-
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the companies are unable to allot securities.9

5
Rule 14(1)(a) of the Companies (Prospectus and Allotment of Securities) Rules, 2014

6
Rule 14(2)(a) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
7
Rule 14(1)(b) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
8
Rule 14(3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
9
Section 42(6) of the Companies Act, 2013
  A company “making an offer or invitation under section 42 shall allot its securities within
sixty days from the date of receipt of the application money for such securities and if the
company is not able to allot the securities within that period, it shall repay the application
money to the subscribers within fifteen days from the date of completion of sixty days and if
the company” fails to repay that money with interest at the rate to twelve per cent per annum
from the expiry of the sixtieth day.
 A return “of allotment of securities under section 42 shall be filed with the Registrar in Form
No. PAS 3 with necessary fees along with a company list of all security” holders containing-
(a) full name. address, PAN and e-mail id of such security holders;
(b) class of security held;
(c) date of becoming security holder;
(d) number of securities held; nominal value and amount paid on such securities; and particulars
of consideration received.10
 Share certificates has to be issued and minutes books and registers has to kept updated at all
times.

CONCLUSION

It can be“concluded that many steps have been taken by the government to protect the honest
investors from the malpractices of the companies. The primary advantage of the private
placement is that it bypasses the stringent regulatory requirements of a public offering. Another
advantage of private placement is the reduced time and reduced cost of issuance. Issuance of
securities publicly can be time consuming and may require certain expenses.”

Also, because “private placements are negotiated privately between investors and the issuing
company, they can be tailored to meet the financing needs of the company and the investing
needs of investors.”

There are also some disadvantages of using private placements as a method of raising funds for
the Companies. “For example, there will be the need to place the bonds or share at a substantial
discount to compensate investors for their greater risk and longer- term returns.”

10
Rule 14(4) of the Companies (Prospectus and Allotment of Securities) Rules, 2014
Even though “private placement has certain advantages and disadvantages, this method of raising
funds is the most preferred and commonly used method by the companies because it gives more
flexibility and gets capital much faster than searching for venture capitalists, or waiting for
shares to sell on the public market.”

REFERENCES

1. Agarwal, V. (2018). Private Placement of Securities under companies Act, 2013. Retrieved
5 September 2020, from https://taxguru.in/company-law/private-placement-securities-under-
companies-act-2013.html
2. Companies (Prospectus and Allotment of Securities) Rules, 2014
3. Companies (Shares Capital and Debentures Rules), 2014
4. Company Law Bare Act, 2013
5. Kumar, A., & Samant, N. (2018). Recent Amendments to the Private Placement Guidelines
– Revamp or Cosmetic?. Retrieved 7 September 2020, from
https://corporate.cyrilamarchandblogs.com/2018/09/recent-amendments-private-placement-
guidelines-revamp-cosmetic/
6. Malhan, Y. (2020). Private Placement under Companies Act, 2013. Retrieved 6 September
2020, from https://www.mondaq.com/india/securities/305626/private-placement-under-
companies-act-2013
7. Pawa, P. (2016). Concept of Private Placement under Companies Act, 2013. Retrieved 6
September 2020, from http://corporatelawreporter.com/2016/01/18/the-concept-of-private-
placement-under-the-companies-act-2013/#_ftn2
8. Private Placement under Companies Act, 2013. (2017). Retrieved 7 September 2020, from
https://www.caclubindia.com/articles/private-placement-under-companies-act-2013-
29787.asp