Imagine Rajesh & Co. Pvt. Ltd. needs ₹5 crore quickly but doesn't want the hassle of a public issue — no SEBI prospectus, no newspaper ads, no waiting months. The solution? Private Placement under Section 42. It lets a company raise money by offering securities to a handpicked group of investors, quietly and quickly, without going to the general public.
Here's the core rule: a company can make a private placement only to identified persons — people specifically chosen by the Board. The magic number is not more than 50 persons in a financial year (this limit excludes Qualified Institutional Buyers (QIBs) — think mutual funds, FIIs — and employees getting shares under an ESOP scheme). The company must issue a Private Placement Offer-cum-Application form to these identified persons, and this form cannot carry any right of renunciation (meaning the offeree cannot transfer their right to apply to someone else). Payment must be made only through cheque, demand draft, or banking channels — never cash. A company also cannot make a fresh offer until the previous round of allotment is fully completed (or withdrawn). Once applications and money come in, the company must allot securities within 60 days. If it fails to allot in time, it must repay the money within 15 days after that 60-day window closes. Critically, the company cannot use the money raised until allotment is done and the return of allotment is filed with the Registrar. The big red-flag rule — if a company offers to more than the prescribed number of persons, the entire issue is treated as a public offer, triggering all the heavy compliance requirements of a prospectus-based issue. This is asked frequently as a 4-mark question in the form: "State the conditions for a valid private placement" or "What happens if a company offers shares to 60 persons?"
📊 Worked example
Example 1: Checking validity of a private placement
Sunrise Tech Pvt. Ltd. wants to raise funds. In FY 2024–25, it made a private placement offer to the following:
- 30 high-net-worth individuals (HNIs)
- 15 Qualified Institutional Buyers (QIBs)
- 10 employees under an ESOP scheme
Question: Is this a valid private placement under Section 42?
Working:
- The 50-person limit applies to identified persons excluding QIBs and ESOP employees.
- Count of persons subject to the 50-person cap = 30 HNIs only.
- QIBs (15) + ESOP employees (10) are excluded from the count.
- 30 ≤ 50 ✓
Answer: Yes, this is a valid private placement. The 15 QIBs and 10 ESOP employees are excluded from the 50-person limit, so only 30 persons count against the cap.
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Example 2: Allotment deadline and refund
Ms. Iyer applied for shares in Bluestar Infra Ltd.'s private placement on 1st January 2025, sending a demand draft of ₹10,00,000.
The company did not allot shares by the deadline.
Question: By when must Bluestar allot shares, and if it fails, by when must it refund Ms. Iyer?
Working:
- Allotment deadline = 60 days from receipt of application money
- 60 days from 1st January 2025 = 1st March 2025 (allotment must happen by this date)
- If not allotted by 1st March 2025 → refund window opens
- Refund deadline = 15 days after expiry of 60-day period = 16th March 2025
Answer: Bluestar must allot by 1st March 2025. If it fails, it must refund ₹10,00,000 to Ms. Iyer by 16th March 2025.
⚠️ Common exam mistakes
- Students forget the exclusions from the 50-person limit. Don't count QIBs and ESOP employees toward the cap — the limit of 50 applies only to other identified persons. Always segregate the categories before checking compliance.
- Confusing the 60-day and 15-day timelines. Students mix these up and say "refund within 60 days." Remember: allot within 60 days of receiving money; if you can't, refund within 15 days after the 60-day period expires — not within 15 days of the application.
- Missing the "no fresh offer until allotment is complete" rule. A company cannot launch Round 2 of private placement while Round 1 is still pending. Students often overlook this sequential requirement in scenario-based questions.
- Saying cash payments are allowed. They are not. Payment must be through cheque, demand draft, or other banking channels. Cash payments = non-compliant private placement — this is a favourite 1-mark MCQ trap.
- Ignoring the "deemed public offer" consequence. If a company offers to more than 50 persons (ignoring QIB/ESOP exclusions), students often just say "it's invalid." The correct answer is stronger: the entire issue is deemed a public offer, attracting full prospectus and SEBI compliance — a much heavier penalty.
📖 Bare Act text — Section 42, Companies Act 2013
(click to expand)
(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 [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 may be prescribed.(3) A company making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed:Provided that the private placement offer and application shall not carry any right of renunciation.Explanation I.—"private placement" 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.Explanation II.—"qualified institutional buyer" means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended from time to time, made under the Securities and Exchange Board of India Act, 1992, (15 of 1992).Explanation III.—If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter.(4) Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person alongwith subscription money paid either by cheque or demand draft or other banking channel and not by cash:Provided that a company shall not utilise 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).(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.(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 fifteen days from the expiry of sixty days and if the company fails to repay the application money within the [text cut off]
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