## Private Placement — Section 42
### Concept
A private placement is an offer or invitation to subscribe to securities made to a selected group of persons by a company (other than by a public offer) through a private placement offer-cum-application. It is the principal route for non-public fund-raising.
### Pre-condition
- A Special Resolution (SR) must be passed before making any private placement offer.
### Cap on number of offerees
A private placement shall not be made to more than 200 identified persons in a financial year. Key features of this 200 cap:
- Identification of the 200 persons is done by the Board of Directors.
- The limit of 200 is counted separately for each kind of security — i.e., 200 for equity shares, another 200 for preference shares, another 200 for debentures.
- The following are excluded from the 200 count:
1. Qualified Institutional Buyers (QIBs), and
2. Employees who are offered securities under an ESOP scheme.
Consequence of breach: If a company offers/invites/allots securities to more than 200 identified persons, it is deemed to be a public offer and all public-offer provisions kick in — prospectus, listing, etc.
### Other key restrictions
- No fresh offer can be made unless the earlier offer is completed, withdrawn or abandoned.
- The company shall not release public advertisement or use media, marketing, distribution channels or agents to inform the public at large about the issue. (This is what makes it 'private'.)
### Multiple offers in a year
A company may make more than one issue of securities in a financial year to identified persons — subject to the overall maximum of 200 identified persons in that FY.
### Carve-out for NBFCs and HFCs
If an NBFC registered with RBI or Housing Finance Company registered with NHB is complying with the RBI/NHB regulations for private placement, then Rule 14(2) (the 200-person cap) does not apply to them.
### Process after offer is accepted
| Stage | Rule |
|---|---|
| Allotment of securities | Within 60 days of receipt of application money. |
| Failure to allot in 60 days | Application money must be repaid within 15 days from expiry of the 60 days. |
| Failure to refund in those 15 days | Money must be repaid with interest @ 12% p.a. from expiry of the 60th day. |
| Money received on application | Must be kept in a separate bank account of a scheduled bank, used only for (a) adjustment against allotment, or (b) repayment. |
| Return of Allotment | Form PAS-3, filed with ROC within 15 days of allotment, including list of allottees with name, address, PAN, email, class of security, number of securities, nominal value, amount paid, and consideration particulars (if non-cash). |
Penalty for default in filing PAS-3: Company, its promoters and directors are liable to a penalty of ₹ 1,000 per day during which default continues (per default), capped at ₹ 25 lakhs.
Important: The company shall not utilise the money raised until allotment is made AND the return of allotment is filed with ROC.
### Manner of Issue — explanatory statement and resolutions
The explanatory statement to the SR must disclose:
- Particulars of the offer, including date of passing Board Resolution; kind of securities offered; price; justification for the price; name and address of the valuer who performed the valuation; AND
- Amount the company intends to raise; purpose of the offer; contribution by Promoter/Director (as part of the offer or separately); and principal terms of assets charged as security.
#### Special carve-outs on resolutions
1. Non-convertible debentures (NCDs): A Board Resolution is sufficient if the amount to be raised does not exceed the Section 180(1)(c) borrowing limit. If it does, then one SR per year suffices for all such NCD offers during that year.
- Section 180(1)(c) limit: [money to be borrowed + already borrowed] ≤ [paid-up share capital + free reserves + securities premium]. Borrowings here exclude temporary loans (repayable on demand or within 6 months, e.g., cash credit, and not for capital expenditure) obtained from banks in the ordinary course.
2. QIB offers: One SR per year is sufficient for all offers of securities to QIBs during the year.
### Filing of resolutions
A copy of the Board Resolution and Special Resolution must be filed with the ROC before issuing the private-placement offer-cum-application.
### Issuing the offer-cum-application
- Issued to identified persons in Form PAS-4, serially numbered, and addressed to the identified person.
- Must be sent within 30 days of recording the name of such person.
- Offer carries no right of renunciation.
- The identified person applies through a letter along with subscription money, paid by cheque, demand draft, or other banking channel — never in cash.
#### Payment-source rules
- Joint holders: Payment from the bank account of the first-named applicant.
- Otherwise: Bank account of the person subscribing.
- The company must keep a record of these bank accounts.
#### Land-border countries
Offers to a body corporate incorporated in (or person who is a national of) a country sharing a land border with India can be made only if government approval under FEMA is obtained by the offeree and attached with the offer-cum-application.
### Record-keeping
Company must maintain a complete record of private placement offers in Form PAS-5.
### Penalty for default
- Company, promoters and directors: Fine of lower of ₹ 2 crores or the amount raised through the private placement.
- Company must refund the money with interest @ 12% p.a. within 30 days of the order.