# Section 42 - Private Placement of Securities

## Meaning

Private Placement (PP) means any offer or invitation to subscribe to securities made to a select group of persons by a company (other than by way of public offer) through a Private Placement Offer cum Application Letter (PAS-4).

## Key Features

### 1. Identified Persons

Offer can be made only to identified persons.
Identification of persons is done by the Board of Directors (BOD).

### 2. Maximum Number of Offerees

Limit: Not more than 200 persons in a financial year, in aggregate per kind of security (equity, preference, debenture - each counted separately).
Excludes:
Qualified Institutional Buyers (QIBs)
Employees offered securities under ESOP scheme.

### 3. Special Resolution Required

A Special Resolution (SR) at the General Meeting is required for each kind of security before issuing the PP Offer Letter.

Exception: For Non-Convertible Debentures (NCDs), only a Board Resolution is needed if the issue is within the limit prescribed under Section 180(1)(c).

### 4. Particulars in Explanatory Statement to SR Notice

The Explanatory Statement annexed to the notice of GM must contain:

Particulars of the offer (kind of security, no. of securities, price)
Date of passing of Board Resolution
Kinds of securities offered
Price and its basis of justification
Name, address, and value of securities to be subscribed
Material terms of raising securities
Amount to be raised

## Procedure

1. Issue PAS-4 (Private Placement Offer cum Application Letter) to identified persons.

2. The letter shall be serially numbered and specifically addressed to the person to whom offer is made.

3. No right of renunciation - the offer is personal; offeree cannot renounce in favour of another person.

4. If offered to more than the prescribed limit → deemed public offer; Part I of Chapter III shall apply.

## Mode of Payment

Payment through:

Cheque
Demand Draft
Other banking channels (NOT cash)

Application money must be kept in a separate bank account with a scheduled bank.

## Use of Application Money

Application money can be used only for:

Adjustment against allotment, OR
Refund if no allotment is made.

## Time Limits

Event	Time Limit
Allotment	Within 60 days from receipt of application money
Refund (if unable to allot)	Within 15 days thereafter (i.e., from expiry of 60 days)
Interest if refund delayed	12% p.a. from the 60th day
Filing return of allotment (PAS-3)	Within 15 days from allotment

## Minimum Investment Size

Minimum offer/investment per person = ₹20,000 of face value of securities.

## Restrictions

### Prohibition on Fresh Offer

A company cannot make a fresh offer of any kind of securities unless:

Allotment of the previous PP offer is completed, OR
The previous offer is withdrawn or abandoned.

### No Advertisement / Public Solicitation

A company making PP shall not release any public advertisement or utilise any media/marketing/distribution channels to inform the public at large about such issue.

## Records (Form PAS-5)

The company shall maintain complete records of PP offers in Form PAS-5.

## Filing Requirements

PAS-3 (Return of Allotment) - within 15 days of allotment.
Company can utilise the money raised only after filing PAS-3.

## Special Restriction on Offerees

Private Placement Offer shall NOT be made to any body corporate which is incorporated outside India in any country sharing a land border with India, unless prior Government approval is obtained and attached with the offer letter.

Worked example

### Example 1

Example 1 - 200 person limit: During FY 2025-26, Alpha Ltd offered equity shares to 150 persons and preference shares to 180 persons under private placement. Is there any violation of Section 42?

Solution: The 200-person limit applies separately to each kind of security. Equity (150) and Preference (180) are each below 200. Hence, no violation. (Note: QIBs and ESOP allottees are excluded from this count anyway.)

### Example 2

Example 2 - Deemed Public Offer: Beta Ltd offered debentures to 220 persons (excluding QIBs and employees) in a financial year through private placement. What is the consequence?

Solution: Since the offer exceeds the 200-person limit, it is deemed to be a public offer. Provisions of Part I of Chapter III (public offer provisions including prospectus requirements) shall apply. The company is also liable for penalty.

### Example 3

Example 3 - Allotment and refund: Gamma Ltd received ₹5 crore as application money under PP on 1st April 2026. The company failed to allot securities. Calculate the timeline for action and interest liability if refund is delayed.

Solution:

Allotment deadline: 60 days from receipt = 31st May 2026.
If not allotted by 31st May 2026, refund must be made within next 15 days = by 15th June 2026.
If refund is delayed beyond 15th June 2026, company must pay interest @ 12% p.a. from 1st June 2026 (i.e., from the 61st day) onwards.

### Example 4

Example 4 - Minimum investment: Can Delta Ltd issue PP offers of ₹15,000 face value per person?

Solution: No. The minimum investment size under PP is ₹20,000 face value of securities per person. An offer of ₹15,000 violates Section 42 and the rules thereunder.

### Example 5

Example 5 - Advertisement restriction: Epsilon Ltd, while making PP, releases a newspaper ad announcing 'Subscribe to our new debentures - contact us for details'. Is this permissible?

Solution: No. Section 42(7) prohibits any public advertisement or use of any media/marketing channels to inform the public about the PP issue. This is a clear violation. The whole offer may be treated as a public issue with consequent penalties.

⚠️ Common exam mistakes

Counting QIBs and ESOP allottees within the 200-person limit - they are excluded.
Applying the 200-person limit in aggregate across all securities - it is per kind of security per financial year.
Believing Ordinary Resolution is enough - Special Resolution is required (except NCDs within Section 180(1)(c) limit).
Allowing right of renunciation in PP offer - the offer is personal and non-renounceable.
Accepting application money in cash - permitted modes are cheque, DD, or banking channels only.
Mixing application money with general company funds - must be kept in a separate scheduled bank account.
Forgetting the 60+15 day timeline: 60 days to allot, 15 days thereafter to refund, 12% p.a. interest from 61st day if both fail.
Making a fresh PP offer while previous PP offer is pending - this is prohibited unless the previous one is completed/withdrawn.
Releasing any public advertisement about the PP - strictly prohibited under Section 42(7).
Utilising application money before filing PAS-3 with ROC - money can be used only after filing the return.
Missing the minimum investment of ₹20,000 face value per person.
Forgetting the restriction on PP to body corporates from countries sharing land border with India without government approval.

Bare-Act text Section 42 read with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 · Companies Act, 2013 · click to expand

Section 42(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 under Rule 14], in a financial year subject to such conditions as may be prescribed. Section 42(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. Section 42(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 aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent per annum from the expiry of the sixtieth day. Section 42(7): No company issuing securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue. Section 42(8): A company making any allotment of securities under this section, shall file with the Registrar a return of allotment within fifteen days from the date of the allotment in such manner as may be prescribed.

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