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Private Placement of Securities

HomeCompany lawPrivate Placement of Securities
  • Private Placement
Private Placement of Securities
  • Author
    Rajat Khaneja
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A company can raise its capital in many ways. In this article, we shall discuss a method laid down in the Companies Act, 2013 which allows a company to raise funds on a private placement basis.

Private placement is a procedure through which a company can sell its securities directly to the pre-identified investors. The investors to whom the securities are privately offered can be friends and family, accredited investors or institutional investors. It is done on a private basis and no securities are offered to the public at large. Thus, this process is known as Private Placement of securities.

Section 42 of the Companies Act, 2013 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 deal with the private placement of securities.


A company cannot make a private placement of securities to the following:

  • Qualified institutional buyers
  • Employees of the company being offered securities u/s 62(1)(b)

Conditions for a Private Placement of Securities

Following conditions must be fulfilled during the private placement of the securities:

  • As per section 42 of the Companies Act, 2013, a private placement of securities can be made to a selected group of persons who have been identified by the board. The number of persons to whom the offer is made shall not exceed 200 in aggregate (excluding QIBs and employees offered securities under ESOP) in a financial year (as per Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014). The abovementioned limit of the number of persons is applicable for each class of security separately (for example, 200 persons for equity shares, 200 persons for debentures etc).
  • If any company makes an offer to allot or invites subscription, or allot, or enters into an agreement to allot securities to more than 200 persons, whether payment for such securities has been received or not, the same shall be deemed to be a public issue.
  • This restriction does not apply to the issue of securities by Non-Banking Financial Companies (NBFCs) registered with the Reserve Bank of India (RBI) and Housing Finance Companies (HFCs) registered with National Housing Bank (NHB). If RBI or NHB has not specified similar regulations, the provisions of the Companies Act, 2013 shall apply.
  • It is mandatory to pass a special resolution while issuing shares in a private placement. However, a board resolution is sufficient when a company is issuing non-convertible debentures within the limit specified in section 180(1)(c) of the Companies Act, 2013 (as per Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014). If the limit is exceeded as mentioned in section 180(1)(c) of the Companies Act, 2013, a special resolution is required to be passed once in a year provided the limit should be specified in that resolution.
  • No advertisement will be issued by the company during the issue of securities by private placement. No company offering securities under section 42 of the Companies Act, 2013 shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.
  • The payment to be made for subscribing the securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the bank accounts from where such payments for subscriptions have been received.
  • Issuer company must open a separate bank account in a scheduled bank for receiving amount against the issuance of securities under the private placement.
  • Issuer company shall allot its securities within 60 days from the date of receipt of the application money for such securities. If the company is unable to allot the securities within the said period, it shall repay the application money to the subscribers within 15 days from the date of completion of 60 days. 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 12% per annum from the expiry of the sixtieth day.
  • A return of allotment of securities shall be filed with the Registrar within 15 days of allotment in Form PAS-3 along with a complete list of all the allottees containing (As per notification dated 7th AUGUST 2018):
    • Full name, address, Permanent Account Number and E-mail ID of such security holder;
    • Class of security held;
    • Date of allotment of security;
    • Number of securities held, nominal value and amount paid on such securities; and
    • Particulars of the consideration received if securities were issued for consideration other than cash.
  • The Companies Amendment Act, 2017 refrain issuers from utilizing monies raised through private placement until allotment is made and the return of allotment is filed with the ROC. Thus, Return of Allotment in form PAS-3 needs to be filled immediately after allotment of securities for an issuer to be able to utilize proceeds from the private placement.
  • A company shall maintain a complete record of private placement offers in Form PAS-5. The same is not required to be filed with the registrar.
  • The form PAS-3 filed by a company (other than OPC and small company) shall be pre-certified by a practising CA, CMA or CS (the form filed by an OPC or a small company is not required to be certified by a practising CA, CMA or CS).
  • Note: As Per notification-7th AUGUST 2018 there is no longer a requirement of minimum subscription of Rs. 20,000

Procedure for Private Placement

The following procedure must be followed for a private placement of securities:

  • Hold a Board Meeting:
    • To grant in-principle approval for issue of securities on a private placement basis;
    • To identify persons to whom securities shall be allotted;
    • To approve draft private placement offer letter and record of private placement;
    • To open a separate bank account for receiving money;
    • To approve the notice of GM for approval of members;
  • Confirm whether Letters from all proposed allottees giving consent to subscribe the issue are received or not.
  • Prepare a list of allottees along with all the required details as per the format prescribed under the Form PAS-5.
  • Send a notice of general meeting along with an explanatory statement which shall include the following details:
    • Particulars of the offer including date of passing of Board resolution;
    • Kinds of securities offered and the price at which the securities are being offered:
    • Basis or justification for the price (including premium, if any) at which the offer or invitation is being made;
    • Name and address of the valuer who performed the valuation of securities;
    • The amount which the company intends to raise by way of such securities;
    • Material terms of raising such securities, proposed time schedule, purposes or objects of the offer, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects and principle terms of assets charged as securities.
  • Hold General Meeting and pass special resolution along with resolutions to approve the offer letter and authorize an officer of the company to give effect to the private placement.
  • File MGT-14 along with the special resolution and explanatory statement.
  • Dispatch private placement offer letter along with application form to the proposed allottees.
  • Receive application money against issue of securities in a bank account opened in a scheduled bank.
  • Hold Board Meeting for allotment of securities and allot securities within 60 days of receiving application money.
  • File form PAS-3 within 15 days of the allotment of securities along with the Special Resolution and List of allottees.
  • Issue corresponding share certificates; make respective entries in the register of members along with confirming the distinctive numbers and certificate numbers of the shares allotted.


Contravention of Section 42 attracts penalty which may extend to the amount involved in the offer or invitation or Rs. 2 Crore, whichever is higher, and the company shall also refund all monies to the subscribers within a period of 30 days of the order imposing the penalty.

Preferential allotment v. Private Placement

  • In a private placement, a company can issue any security but in a preferential allotment, a company can issue only equity shares or the securities convertible into the equity shares.
  • In a private placement, a company cannot issue shares to the employees covered under the scheme u/s  62(1)(b) and to the qualified institutional buyer or can issue securities only to the identified persons but in preferential issue, there is no such prohibition.
  • In a private placement, a company can issue shares only in exchange for money but in a preferential allotment, a company can issue shares for kind but the valuation of that will be done by the registered valuer.
  • In a private placement, an offer letter shall be in the form PAS-4 but there is no such prescribed format for the preferential allotment.
  • Allotment under private placement shall be done within 60 days of receipt of money but under preferential allotment, shares shall be allotted within 12 months from passing of the special resolution.
  • In a private placement, a separate bank account is required but there is no such requirement under preferential allotment.

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