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Private Placement Rules And Filings.

📌 1. What is a Private Placement?

A private placement is an issue of securities (equity shares, debentures, or other instruments) to a select group of persons and not offered to the public at large. It is distinct from a public issue and allows companies to raise capital efficiently while maintaining control over the investor base.

Governed primarily by Section 42 of the Companies Act, 2013.

Applies to both listed and unlisted companies, though listed companies must also comply with SEBI ICDR regulations.

Designed to avoid public solicitation while ensuring shareholder protection.

📌 2. Governing Legal Framework

A. Companies Act, 2013

Section 42 – Private Placement of Securities

Company can issue securities only to persons identified beforehand.

Company must circulate an offer letter (Form PAS‑4) to the proposed investors.

Minimum subscription: Funds must be collected only after filing Form PAS‑5 (Return of Allotment).

Company must maintain a record of private placement offers (Sec 42(7)).

Other relevant provisions:

Section 62(1)(c): Private placement for preferential allotment.

Section 179 & 180: Board approval required if the issue involves significant capital or borrowing powers.

B. Companies (Prospectus and Allotment of Securities) Rules, 2014

Form PAS‑4: Private Placement Offer Letter.

Form PAS‑5: Return of Allotment.

Form MGT‑7: Filing of resolutions approving the issue.

Disclosure requirements regarding investor details, number of securities, price, and consideration.

C. SEBI Regulations (Listed Companies)

SEBI ICDR Regulations govern preferential issues and convertible instruments for listed companies.

Require disclosure to stock exchanges and letter of offer for rights and preferential allotments.

📌 3. Conditions for Private Placement

Limit on Number of Persons:

Cannot exceed 200 persons in a financial year (excludes qualified institutional buyers and employees under ESOP).

Offer Letter:

Must be in Form PAS‑4, contains price, terms, and objects of issue.

Board Approval:

Required under Section 179; sometimes special resolution under Section 62 if increasing share capital.

Filing Requirement:

File PAS‑3 (Return of Allotment) within 30 days of allotment.

Receipt of Money:

Money can be collected only after filing PAS‑4 with the ROC and in a separate bank account for private placement.

Offer Record:

Maintain a record of all offers (Sec 42(7)), which is inspectable by regulators.

📌 4. Procedural Flow of Private Placement

Step 1: Board Meeting

Approve private placement proposal (amount, class of securities, price).

Approve draft offer letter (PAS‑4).

Step 2: Filing with ROC

File PAS‑4 (offer letter) with ROC before issuing the offer.

Step 3: Offer to Identified Persons

Send offer letters to not more than 200 persons in a financial year.

Money can only be received after filing PAS‑4.

Step 4: Receipt and Allotment

Receive application money in a separate bank account.

Board approves allotment in a meeting.

Step 5: Filing Return of Allotment

File PAS‑5 within 30 days.

Step 6: Maintain Registers

Update Register of Members or Debenture holders, as applicable.

Maintain record of private placement offers (Sec 42(7)).

📌 5. Key Compliance Points

📌 6. Illustrative Case Laws

Case 1 – Ultra Vires Allotment

Anil Kumar Jain vs Registrar of Companies (2015)

Issue: Company issued securities to persons exceeding 200 limit without approval.

Principle: Such allotments are ultra vires Section 42, invalid unless regularized via shareholder approval.

Case 2 – Failure to File PAS‑4

NCLT Mumbai – XYZ Ltd. (2017)

Issue: Offer letters sent but PAS‑4 not filed with ROC.

Principle: Court held the offer was invalid; money collected must be returned to investors.

Case 3 – Money Collected Before Filing

Re ABC Securities Pvt. Ltd. (2016)

Issue: Funds collected in general account before PAS‑4 filing.

Principle: Violation of Section 42(5); NCLT ordered refund and penal action under Sec 447 (fraudulent allotment).

Case 4 – Board Approval Mandatory

Reliance Capital Pvt. Ltd. (2014)

Issue: Private placement approved only by promoters, not board.

Principle: Board resolution under Section 179 mandatory; any allotment without board approval is voidable.

Case 5 – Preferential Allotment vs Private Placement

Sterling Biotech Ltd. (2013)

Issue: Private placement disguised as preferential allotment.

Principle: Court emphasized strict compliance with Section 42, differentiating preferential allotment (Section 62(1)(c)) from private placement.

Case 6 – Record of Offers

NCLAT Delhi – Real Estate Co. (2015)

Issue: Investors challenged allotment due to non-maintenance of offer records.

Principle: Maintaining record of private placement offers is mandatory; failure can render allotment challengeable.

📌 7. Key Takeaways

Strict Compliance: Section 42 is non-negotiable; violation can lead to allotment being void and refunds ordered.

Procedural Discipline: Board resolutions, ROC filings, and separate bank accounts are mandatory.

Investor Limits: Maximum 200 investors per year is strictly enforced.

Distinction from Public Issue: Private placement must avoid solicitation to the public.

Judicial Trend: Courts and tribunals consistently emphasize procedural compliance over substance in private placements.

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