# Private Placement: Use of Funds, Allotment & Refund Rules
Section 42 imposes strict discipline on how money raised through private placement may be used, how quickly securities must be allotted, and what happens if the company fails to allot.
## 1. Deemed Public Offer
If a company (listed or unlisted) makes an offer/invitation to more than 200 persons in a financial year (the prescribed number), it is deemed to be a public offer. The company can no longer hide behind the private placement provisions — it must comply with the entire Chapter III dealing with public issues.
> The 200-person ceiling is per financial year, per kind of security, and excludes QIBs and employees under ESOP.
## 2. Mode of Application Money
Every identified person willing to subscribe must apply through the private placement application form, and the subscription money must be paid by:
- Cheque, OR
- Demand draft, OR
- Other banking channel
Cash is strictly prohibited. This is to maintain an audit trail and prevent money laundering.
## 3. Restriction on Utilisation
Money raised through private placement cannot be utilised until:
- Allotment is made, AND
- The return of allotment is filed with the Registrar.
## 4. No Fresh Offer Until Earlier Offer Closed
A company cannot float a fresh private placement offer unless:
- Allotment in respect of an earlier offer has been completed, OR
- The earlier offer has been withdrawn or abandoned.
This prevents companies from running multiple parallel private placement issues to dodge the 200-person cap.
## 5. Time Limit for Allotment & Refund
| Stage | Time Limit |
|---|---|
| Allotment from receipt of application money | 60 days |
| Refund if allotment not made within 60 days | 15 days from expiry of 60-day period |
| Interest on failure to refund within 15 days | 12% p.a. from expiry of the 60th day |
## 6. Separate Bank Account
Application money must be parked in a separate bank account in a scheduled bank, and may be used only for:
(a) Adjustment against allotment of securities, OR
(b) Refund where the company cannot allot securities.
No other use — even temporary use as working capital — is permitted.
## 7. No Public Advertisement
A company issuing securities through private placement shall not:
- Release public advertisements, OR
- Use any media, marketing, distribution channels, or agents to inform the public at large about the issue.
Doing so converts a private placement into a public offer in substance.
## 8. Penalty for Contravention [Section 42(10)]
If a company makes an offer or accepts money in contravention of Section 42:
- The company, its promoters and directors are liable for a penalty.
- Quantum: amount raised through the private placement OR ₹2 crore, whichever is lower.
- In addition, the company must refund all monies with interest to subscribers within 30 days of the order imposing the penalty.