The Mess of Private Placement and Preferential Allotment

Origin of power to Issue Securities

Sec 23 of Companies Act, 2013 (hereinafter referred as “the act”) proffer the ways to the companies for issuing the securities, which clearly envisages the route which may be invoked by the companies to come up with the issue of securities. However, the section has been articulated in two parts: firstly, dealing with Public company and second with Private company, though the distinction between the two is the facility of PUBLIC ISSUE OF SECURITIES which has been desisted from the private companies.

Private Placement & Preferential Offer

Section 42 read along with Rule 14 of The Companies (Prospectus and Allotment of Securities) Rule, 2014 comprises the provision pertaining to Private Placement and in contrast, Preferential Allotment is dealt under Sec 62(1)(c) along with Rule 13 of The Companies (Share Capital and Debentures) Rule, 2014.

As per sec 62(1)(c), The company may offer further shares to any person, if it is authorized by Special Resolution, whether or not those persons include the person referred in sec 62(1)(a) or (b). This means that a company may issue share to any person(s) in any manner other than stated in sec 62(1)(a). It may be said that, instead of being offered to the existing members on pro-rata basis, can be offered –

        a.      To persons other than the members of the company; or
b.       To the existing members of the company and also to persons other than the existing members; or
c.        To the existing members of the company in a proportion other than pro-rata, that is, other than in proportion to the capital paid-up on the shares held by them.

To authorize the company to offer shares on no-right basis, the required Special Resolution shall be passed by the company which may be passed either at an Annual/Extra-ordinary General meeting or by Postal Ballot.

A Private placement issue of shares requires compliance with sec 42 besides sec 62(1)(c) of the act.

The act itself defines the same as an explanation I to sec 42(3) “means any offer or invitation to subscribe or issue of securities to a SELECT GROUP OF PERSONS by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in this section.”

In contrast the term Preferential offer has been defined by the act as an explanation to the Rule 13(1) of The Companies(Share Capital and Debenture) Rules, 2014 “means an issue of shares or other securities, by a company to any SELECT PERSON OR GROUP OF PERSONS on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities”

Sec 2(81) of the act, adopts the definition of ‘securities’ as given in sec 2(h) of Securities Contracts (Regulation) Act. 1956. Going by that definition sec 42 is applicable to a private placement offer or invitation of every kind of securities, such as shares (Equity as well as Preference shares), debentures, bonds etc.

Conceptually, shares issued to any one or more persons other than by way of public or right offer, is a Private Placement offer. But the statutory definition in sec 42 makes this section applicable to an offer or an invitation for subscribing for any securities. However, in order to attract the provision of sec 42 the Offer or invitation must be made to “a select group of persons”. Hence an offer or invitation must be made to a group of persons; there must be two or more persons to whom an offer or invitation is to be made, and an offer or invitation made to a single person (or a single entity) cannot attract this section. As the ordinary meaning of the word ‘group’ is a number of people or things located, gathered, or classed together; a number of individuals assembled together or having some unifying relations.

STATUTORY FRAMEWORK

Private Placement

To invoke the route of Sec 42 every company, shall pass Special Resolution however, in case of non-convertible debentures to be issued which is within the limit of sec 180(1)(c), Board resolution is enough and where the said limit exceeds a previous Special Resolution passed shall be sufficient for all the offer or invitation of the said debenture, may make a Private Placement of securities, which shall be made to such number person not exceeding 50 or a higher number as may be prescribed, in a Financial Year. The word ‘shall’ in this provision (i.e. sec 42(2)) must be interpreted as ‘may’, Accordingly what it intents is that in any one Financial year (April – March) a company may make a Private placement issue by offering securities to maximum of 50 persons. From the limit of those 50 persons Employees of the company being offered securities u/s 62(1)(b) and Qualified Institutional Buyer SHALL BE EXCLUDED. Under Rule 14(2) of The Companies (Prospectus and Allotment of Securities) Rule, 2014, the limit of 50 stands increased to 200 for each kind of securities. If the company allots the securities in contravention of sec 42(2) (i.e. limit of 200 person) then the said offer SHALL BE DEEMED TO BE A PUBLIC OFFER and the provisions of Securities Exchange Board of India Act, 1992 and Securities Contract (Regulation) Act, 1956 shall apply accordingly.

The provision pertaining to the limit of identified person in a financial year shall not be applied to the Non-Banking Financial companies and Housing finance company registered with their respective regulators, only when they are in compliance with the similar regulation laid by their respective regulators (i.e. Reserve Bank of India and National Housing Bank).

A company shall not make a fresh private placement under this section unless the allotment with respect to the previous private placement has been completed or the offer or invitation has been withdrawn or abandoned by the company. However, a new exception has been inserted by Companies (Amendment) Act, 2017 allowing the companies to make more than one issue of securities to the identified persons subject to the limit of 200 identified person. In other words, if a company at a time offer securities to 100 persons under this section and wish to come up with another offer during the currency of previous offer it may now offer the securities to other identified persons not exceeding 100 and there is NO NEED to withdraw or abandon the previous offer or to wait till the allotment.

The company shall issue private placement offer cum application which shall be in form PAS 4, to be sent, either in writing or by electronic mode, within 30 days of recording to the name of such persons by the company, no person other than the persons who has been identified by the company shall apply for the securities.

The aforementioned PAS 4 shall be issued only after the Board or Special Resolution as the case may be has been filed to the ROC in form MGT 14 (usually MGT 14 is to be filed within 30 days of passing of the resolution as required u/s 117(1) read with sec 117(3)(g) and sec 179(3)(c))

The company shall receive the money either by cheque or demand draft or by other banking channels but NOT by CASH, in case of joint holders the money shall be received by the first person in order. The amount received SHALL NOT be used by the company until the allotment is made and Return of the allotment is filed to ROC within 15 days of allotment in form PAS 3 (the base section of PAS 3 is sec 39(4) read with rule 12 of The Companies (Prospectus and Allotment of Securities) Rule, 2014) USUALLY the form PAS 3 is to be filed within 30 days of allotment however, sec 42(8) makes the time limit more stringent and reduced to 15 days only, starting from the date of allotment. And in case of non-filing of PAS 3 within the said time limit of 15 days, then the Company, its Directors and Promoters shall be liable for penalty of Rs 1,000 for each default and for each day subject to maximum of RS 25 Lakh. hhh

The amount received shall be kept in a separate bank account  which shall be used only for the given two purposes:

a.       Adjustment against allotment of securities; or

b.      Refund of the amount on failure of allotment of securities.

Consequence of Non-allotment and Non-repayment of amount

The allotment of securities shall be made within 60 days from the date of receipt of application money, failure of which will lead to the refund of the money received within next 15 days, in case the company fails to refund the aforesaid amount within the said time limit the company would be liable to REPAY the said amount along with the INTEREST OF 12% p.a starting from the expiry of 60 days. In case the company fails to allot the securities within the said time and to refund the said amount within the said time, then the company shall also comply with the provisions of Deposits, and the amount so received shall be DEEMED TO BE DEPOSITS. See rule 2(1)(C)(vii) of The Companies (Acceptance of Deposits) Rule, 2014

Any acceptance of money in contravention of this section will cause, the company, its directors and promoters liable to the penalty which may extend to, lower of, the amount raised through the private placement or Rs 2 Crore. In addition, the company shall repay the amount to the subscribers along with the interest of 12% p.a within 30 days of such order imposing the penalty.

Preferential Allotment

The act has laid down the simplified provision for Preferential allotment which requires the company to Pass Special Resolution and the Articles of Association (AOA) must authorize the same. The sec 62(1)(c) covers in its ambit the issue of ‘shares and other securities’ which specifically envisage an explicit definition under the act as an explanation ii of Rule 13 of The Companies (Share Capital and Debenture) Rules, 2014 as “means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date”. 

further, in case of an unlisted company the price of share to be issued shall not be less than the price determined by the registered valuer and in case of Listed company it shall be in consonance with the regulation made by SEBI.

The allotment under sec 62(1)(c) shall be made within 12 months from the date of passing Special Resolution and in case of non-allotment within those 12 months, the company has to pass another Special Resolution. In other words, the validity of Special Resolution is only 12 Months.

The price of the share to be converted with other securities shall be determined either:

• at the time of allotment of securities based on the registered valuer report at that time; 

• at the time not earlier than 30 days of conversion of securities based on the registered valuer report which shall not be earlier than 60 days of the date when the holder of securities becomes eligible to apply for shares

The non-cash consideration shall be valued by the registered valuer in case the preferential offer of shares is on consideration other than cash and shall be carried to the balance sheet if it takes form of depreciable or amortizable assets OTHERWISE shall be expensed as per the accounting standards.

CONCLUSION- Every preferential allotment is private placement but every private placement is not preferential allotment

ABOUT THE AUTHOR

Abhishek Jha: B.com Honours Graduate from Delhi University, Pursuing Company Secretaryship, All India Company Law Quiz Winner and Scored Rank 19 in The Companies Act Challenge (held online)

Read the other article of the author on another platform on The Companies (Amendment) Act 2017 (click here).

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