COMPLETE AND CRITICAL ANALYSIS OF PRIVATE PLACEMENT

COMPLETE AND CRITICAL ANALYSIS OF PRIVATE PLACEMENT

        Private placement is always being one of the hot topic among students and corporate professionals. A Private Placement can be explained as a means of raising capital by the companies without going for public issues. However, The Private placement has defined in explanation II of sub-section (3) of section 42 of companies Act 2013 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

                 

                  Before analyzing the provisions of private placement in detail, the Securities Exchange Board of India v. Sahara India Real Estate Ltd. is regarded as one of the landmark case with reference to the power and jurisdiction of SEBI in the case of corporate fundraising especially in private placement. SIRECL and SHICL (both unlisted public companies), in March 2008 and September 2009, respectively, in their general meeting resolved through a special resolution to raise funds Around 23 million people, mostly from villages and small towns subscribed to this scheme and invested about 24,000 crores rupees through unsecured optionally fully convertible debentures ("OFCDs") by way of private placement to friends, associates, group companies, workers/employees and other individuals associated/affiliated or connected in any manner with Sahara group of companies ("Sahara Group").The Hon'ble supreme court of India reject the theory of Sahara group that is private placement and ordered to refund to SEBI that they had raised along with an interest and also to furnish details, along with the application forms, etc., of the subscribers from whom the Appellants had raised the monies.

               The Sahara Judgement has also reaffirmed the fact that a public issue would mandatorily entail an application for listing on a stock exchange. With this clarity, the market players may now be able to manage their fundraising affairs with more certainty. Thus, we may get to see stricter enforcement of these laws now. Having said that, to discover such instances, unless an investor complains or a public filing is made, would still be a challenge.

              The Report of the Company Law Committee (CLC) issued in February 2016 recommended changes to private placement norms to simplify the processes, avoid duplication of disclosures, lessen regulatory interference and ensure greater self-regulation. This led to an amendment of Section 42 of the Act. Although the procedural requirements have been simplified, disclosure requirements have been enhanced significantly, but the penalty for violation of norms of private placement have been significantly reduced.

            On 7 August 2018, the Central Government has issued a notification bringing into force the provisions of Section 10 of the Companies (Amendment) Act, 2017 amending Section 42 of the Companies Act, 2013 (Act) relating to private placement norms for issue of securities. Further, consequential amendments required to Rule 14 Companies (Prospectus and Allotment of Securities) Rules, 2014, as amended (PAS Rules) pursuant to Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 have also been notified.

Section 42 of Companies Act 2013( Offer or Invitation for Subscription of securities on Private Placement )

(1)  A company may, subject to the provisions of this section, make a private placement of securities.

(2)  A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as "identified persons"), whose number shall not exceed fifty or such higher number as may be prescribed (200) [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as prescribed in RULE 14 of Companies (Prospectus and Allotment of securities ) Rules 2014.

NOTE- Persons whose names are recorded by the company prior to the invitation to subscribe shall only be given an offer referred as "identified persons"

NOTE- It is here clarified that restrictions of 200 would be reckoned individually for each kind of securities that is equity share ,preference share or debentures.

NOTE- Prior to the amendment, NCDs could be issued on a private placement basis provided a shareholders' resolution was passed once a year for all NCD issuances in that year. This requirement was in addition to the already existing borrowing limits approved by the shareholders of the company under Section 180(1) (c) of the Act. Now, the PAS Rules permit issue of NCDs pursuant to a board resolution so long as it is within limits for raising debt as approved by the company under Section 180(1) (c) of the Act (exceeding paid-up share capital and free reserves). The requirement of shareholders' resolution under Section 42 of the Act is only applicable in case the issuance exceeds the limits approved under Section 180(1) (c) of the Act. Accordingly, the requirement of one omnibus shareholders' resolution in addition to the borrowing limits resolution under Section 180 for NCD issuances in a calendar year has been dropped so long as Section 180 has been complied with.

NOTE-The restriction of making a minimum offer of securities whose aggregate face value was at least ₹20,000 , to each person, has been dispensed with

NOTE-The explanatory statement (issued along with the notice for shareholders’ approval) now requires additional disclosures including the type and price of securities being offered, objects of the offer, promoter interest, etc.

(3) A company making private placement shall issue private placement offer and application in form PAS-4 and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in PAS-5.

NOTE- Offer Letter in Form PAS-4 and record of persons to whom the Offer Letter is issued in Form PAS-5 are required to be maintained by the Company and are no longer required to be filed with the ROC. The requirement of filing of the Offer Letter with the SEBI by listed issuers has also been dispensed with.

Provided that the private placement offer and application shall not carry any right of renunciation.

NOTE-The Offer Letter shall be issued to specific persons and they shall not have the right to renounce their right to subscribe in favour of other person.

(4)  Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash.

NOTE-The mode of payment shall be either by cheque or demand draft/ other banking channels. But it can not be made by cash.

Provided that a company shall not utilize monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub-section (8).

NOTE- The law now mandates that the company must not utilize the monies raised through private placement, even after allotment, until the return of allotment of securities in Form PAS-3 has been filed with the ROC. This delays the use of funds raised by the company, as filings typically take place a few days after allotment. The timeline for filing Form PAS-3 has been reduced from 30 days to 15 days, from the date of allotment, and a penalty of ₹1,000 for each day of default has been introduced.

(5) 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.

Provided that, subject to the maximum number of identified persons under sub-section (2), a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.

NOTE-No invitation of security will be made until and unless allotments that were made earlier will be completed. There is no provision for the gap between the two offers in the Amendments in Privately Shares Placement so far but a company can get into the new offer as soon as it is done with the previous one.

(6) A company making an offer or invitation under this section 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 15 days from the expiry 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 at the rate of 12% per annum from the expiry of the sixtieth day:

Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.

NOTE-A separate bank account would be opened for keeping the money received from placing shares which will be used only for repayment.

 (7) No company issuing securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue.

(8) A company making any allotment of securities under this section shall file with the Registrar a return of allotment in PAS-3 within 15 days from the date of the allotment in such manner as may be prescribed, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed

(9) If a company defaults in filing the return of allotment within the period prescribed under sub-section (8), the company, its promoters and directors shall be liable to a penalty for each default of 1000 for each day during which such default continues but not exceeding INR 2500000.

(10) Subject to sub-section (11), if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing the penalty. 

NOTE- Further, for a non-compliance of the private placement provisions, now the penalty is capped at the amount raised through the private placement process or INR 20,000,000 (Rupees Twenty million), whichever is lower. Earlier, the penalty imposed was capped at higher of the two amounts.

(11) Notwithstanding anything contained in sub-section (9) and sub-section (10), any private placement issue not made in compliance of the provisions of sub-section (2) shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be applicable.

AUTHOR'S SPECIAL NOTE FOR PROMOTERS/ DIRECTORS -

Companies should be careful and not interpret that section 42 shall not apply to private placement of debentures. Otherwise, the company, its promoters and directors shall expose themselves to huge amount of penalty as specified in sub-section (10) of section 42 of companies Act 2013.

Prior to the amendment, NCDs could be issued on a private placement basis provided a shareholders' resolution was passed once a year for all NCD issuances in that year. This requirement was in addition to the already existing borrowing limits approved by the shareholders of the company under Section 180(1) (c) of the Act. Now, the PAS Rules permit issue of NCDs pursuant to a board resolution so long as it is within limits for raising debt as approved by the company under Section 180(1) (c) of the Act (exceeding paid-up share capital and free reserves). The requirement of shareholders' resolution under Section 42 of the Act is only applicable in case the issuance exceeds the limits approved under Section 180(1) (c) of the Act. Accordingly, the requirement of one omnibus shareholders' resolution in addition to the borrowing limits resolution under Section 180 for NCD issuances in a calendar year has been dropped so long as Section 180 has been complied with.

Discussion in Company Law Report (CLC) Report of February 2016 on the issue of debentures by private placement – The committee recommends that since Non-Convertible Debentures are pure borrowings and do not form part of equity capital, the proviso to Rule 14(2)(a) may be amended to prescribe that the relevant board resolution under Section 179(3)(c) would be adequate in case the offer under Section 42 is for debentures up to the borrowing limits permissible for Board under section 180(1)(c) of the Act. This would also align the requirements with that of section 180(1)(c). It was, however, felt that the said Board resolution should clearly mention (in the body of the resolution) that the offer of debentures being approved by Board is through private placement under Section 42 and certain other minimum details as may be prescribed in the rules be provided in the Board resolution. Private companies (who have been given exemption from Section 117(3)(g) through section 462 notification) should either be required to file board resolutions under Section 179(3)(c) or pass a special resolution.” 

As stated above, the intent was only to exempt the requirement of seeking shareholder’s sanction if the company had already obtained approval of shareholders under section 180 (1) (c). Apart from this, compliance of entire section is required to be ensured.

ABOUT THE AUTHOR 

SANDEEP SINGH CHAUHAN

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