Provisions, Procedure For Allotment Of Securities By Way Of Private Placement

Unlike the Companies Act, 1956, the Companies Act, 2013, stipulates stringent provisions for allotment of securities. These provisions have also been made applicable to Private Companies. 

The provisions of Section 42 and rules made thereunder are to be complied in case of allotment of Securities by Private placement and the provisions of Section 62 and rules made thereunder are to be complied in case of further issue of Securities on Preferential basis.

The scope of Section 42 is vast, thereby any allotment even under Section 62, requires the compliance of provisions under Section 42. 

The procedure and compliances required for issue of shares by way of Private Placement is as below: 

1. Identifying a party who is interested in investing in the Company.
2. Convening of Board Meeting to consider issue of security to such party, approval of draft letter of offer, and fixing of time, place and venue for convening Extra-ordinary General Meeting [EGM] for obtaining the approval of the members by way of special resolution for the proposed issue to proposed party.

[Filing of Form MGT-14 with ROC, for the decision of the Board to issue shares [Filing pursuant to Sec. 179 (3) (c)].

3. Sending of Notices to all the Shareholders for EGM. The Explanatory Statement/Statement of Material Facts, of the EGM, shall contain the following details: 

• the type of security issued; 

• Price at which the Security is being offered including the premium, if any, along with justification of the price; 

• Name and address of the valuer who performed valuation of the security offered; 

• Amount which the company intends to raise by way of this issue; 

• Proposed time schedule for which the officer letter is valid; 

• Purposes and objects of the offer; 

• Contribution being made by the Promoters or Directors either as part of the offer or separately in furtherance of such objects;

4. Convening of EGM and passing of resolutions. Filing of Form MGT-14 with ROC, along with the extract of the resolution passed, within 30 days, [Filing pursuant to Sec. 117 (3) (a)].

 

5. Convene Board Meeting, for authorising a Director to send letter of offer, along with serially number application to the identified party, along with other documents. 

The company shall maintain a complete record of private placement offers in Form PAS-5, and file the same along with the offer letter within 30 days of circulation of private placement offer letter. 

[Filing pursuant to Sec. 42(7) and proviso to sub-rule 3 of Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014].

“Circulation” here means, the date of the Private Placement offer letter.

Offer or invitation shall be made to not more than 200 persons in the aggregate in a financial year.

6. Receipt of monies from the concerned person within the times prescribed in the offer letter, allotment of securities, filing of return on allotment, and issue of Certificates.

Here it is to be noted that: 

• the value of such offer or invitation per person shall be with a minimum investment size of 20,000/- of face value of the securities;
• 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.

The monies received on application under shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than:

• for adjustment against allotment of securities; or
• for the repayment of monies where the company is unable to allot securities.
• Allotment of shares under the offer shall be made within 60 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 subscriber within 15 days from the date of completion of 60 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
• a., from the expiry of the 60^th day.
• Up on allotment of shares, a return on allotment is required to be filed with the ROC within 30 days in Form PAS-3, along with the following details/information [Filing pursuant to Sec. 42(9) and Rule 14 (4) of the Companies (Prospectus and Allotment of Securities) Rules, 2014]. 

(i) the full name, address, Permanent Account Number and E-mail ID of such security holder; (ii) the class of security held; 

(iii) the date of allotment of security ;

• the number of securities held, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash.
• Certificates are to be issued within 2 months from the date of allotment in case of Shares. 

[Pursuant to Section 56 (4) (b) in Form SH-1, pursuant to Rule-5 of the Companies (Share Capital and Debentures) Rules, 2014], and Within 6 months from the date of allotment in case of in case of Debentures, pursuant to Section 56 (4) (d). 

In case of issue of debentures, the Company also needs to comply with the provisions contained in Section 71 read with Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014. 

Other aspects: 

The Company shall not issue any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer. 

Penalties: 

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 involved in the offer or invitation; or
• 2 Crores, whichever is higher; 

and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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