Private Placement of Shares
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Private Placement of Shares

In today’s world, mostly all the corporates irrespective of size, require capital to expand, diversify and grow their business. Every year many companies come into existence which tries to bring new product & Services in the market. All the companies require funds for expansion and to meet their working capital requirements. These funds can be arranged in many ways, like issuing shares, debentures, or Loans. The company raises funds by comparing the various routes and their routes and choosing the best routes.

Private placement of securities is how the corporates can raise funds in a compliant manner. The private placement (or non-public offering) refers to a round of financing where securities are sold instead through a private offering, usually to a small group of investors. This group of investors includes friends, family, accredited investors, and institutional investors. Private placement of securities is covered by Section 42 of the Companies Act, 2013, and the companies (prospectus and allotment of securities) Rules, 2014. A private placement is an offer or invitation by a company (other than by way of a public offer) to subscribe to or issue securities to a select group of investors through a private placement offer-cumulation form.

Procedure of private placement

  1. Calling for a board meeting to offer securities on a private placement basis.
  2. Passing board resolution for issue of shares under private placement to specified persons and calling for a general meeting for members’ approval.
  3. Filing MGT-14 Board resolution for issue of share under private placement.
  4. Issuing notice for calling of a general meeting.
  5. Passing a special resolution in the shareholder’s meeting for issue and allotment of shares under the private placement.
  6. The offer cum application letters in form PAS-4 should be sent to identified persons within 30 days after the names are recorded. Offer and application letters can be sent electronically (by email) or by post.
  7. Separate bank accounts must be opened to receive the amount for the shares within the offer period as specified in the offer cum application letter.
  8. The company shall allot shares to the applicants who have subscribed through the application letter and deposited the subscription amount within the offer period.
  9. After the offer period expires, call a board meeting and pass a resolution for allotment of shares to the entitled subscribers.
  10. The company shall allot shares to the applicants who have subscribed through the application letter and deposited the subscription amount within the offer period.
  11. Company should allot shares within 60 days of receipt of the amount.
  12. The company shall allot shares to the applicants who have subscribed through an application letter and deposited the subscription amount within the offer period.
  13. Company can utilize the amount received for the purpose specified only after the return of allotment PAS-3 is filled with ROC.
  14. Company should maintain the record of private placement in FORM-PAS-5.
  15. Company has to update the register of members after the allotment of shares.

Whom can we make an offer of private placement?
Private placement offers are made to prospective investors or anyone who intends to invest a specific amount of money in the company against the issue of securities. Under the private placement, a company’s securities may not be offered to more than 200 persons in a fiscal year. In the event that a company, listed or unlisted, makes an offer to allot or invites subscriptions or allots or enters into an agreement to assign securities to more than the prescribed number of persons, it shall be considered an offer to the public. Qualified Institutional Buyers (QIBs) as defined in the Securities and exchange board of India (issue of capital and disclosure requirements) regulations, 2009, and employees of the company being offered securities under a scheme of employees stock option may be excluded from the calculation of 200 persons.No advertisements, media marketing or distribution channels, or agents to be used by the company to inform the public about such an issue.

Why prefer private placement instead of other routes of raising funds?
One significant advantage of the private placement is that the issuer isn’t subject to the SEC’s strict regulations for a typical public offering. With a private placement, the issuing company is not required to disclose and report the same information as a public offering. In addition, privately placed bonds do not require credit ratings. Private placement also saves time & Cost. Publicly issued bonds incur significant underwriter fees, whereas privately issued bonds can be more cost-effective. Private placements can be tailored to meet the financial needs of both the issuer and investors.

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