Companies Act Section 42 — Issue of shares on private placement basis
CHAPTER III PROSPECTUS AND ALLOTMENT OF SECURITIES
Commercial / Corporate
Summary
Sub-section (1) allows a company to make a private placement of its securities, but only if it follows the rules laid out in this section.
Sub-section (2) states that a private placement can only be made to a select group of people identified by the company's Board, called "identified persons." The number of such persons must not exceed fifty, or a higher number as may be prescribed by rules. This limit excludes qualified institutional buyers and employees who are offered securities under an employee stock option scheme as per section 62(1)(b). The placement is subject to conditions that may be prescribed.
Sub-section (3) requires a company making a private placement to issue a private placement offer and application in the form and manner prescribed, to the identified persons whose names and addresses are recorded by the company as prescribed. The offer and application cannot carry any right of renunciation, meaning the identified person cannot transfer the right to subscribe to someone else. Explanation I defines "private placement" as an offer or invitation to subscribe or issue securities to a select group of persons by a company, other than through a public offer, using a private placement offer-cum-application that meets the conditions of this section. Explanation II defines "qualified institutional buyer" as per the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended. Explanation III says that if a company, whether listed or unlisted, offers to allot, invites subscription, allots, or agrees to allot securities to more than the prescribed number of persons, regardless of whether payment has been received or whether the company intends to list its securities, it will be treated as an offer to the public and governed by the provisions of Part I of this Chapter.
Sub-section (4) says that every identified person who wants to subscribe must apply using the private placement offer and application issued to them, and must pay the subscription money by cheque, demand draft, or other banking channel, not by cash. The proviso states that a company cannot use the money raised through private placement unless the allotment is made and the return of allotment is filed with the Registrar as per sub-section (8).
Sub-section (5) prohibits a company from making a fresh offer or invitation under this section unless the allotments from any earlier offer or invitation have been completed, or that earlier offer or invitation has been withdrawn or abandoned. The proviso allows a company to make more than one issue of securities to a prescribed class of identified persons at any time, as long as the maximum number of identified persons under sub-section (2) is not exceeded.
Sub-section (6) requires a company making an offer or invitation under this section to allot its securities within sixty days from the date of receiving the application money. If it cannot allot within that period, it must repay the application money to subscribers within fifteen days after the sixty-day period ends. If the company fails to repay within that time, it must repay the money with interest at twelve percent per annum from the expiry of the sixtieth day. The proviso states that application money received must be kept in a separate bank account in a scheduled bank and can only be used for two purposes: adjustment against allotment of securities, or repayment of money when the company is unable to allot securities.
Sub-section (7) prohibits a company issuing securities under this section from releasing any public advertisements or using any media, marketing, distribution channels, or agents to inform the public at large about the issue.
Sub-section (8) requires a company making any allotment of securities under this section to file a return of allotment with the Registrar within fifteen days from the date of allotment, in the prescribed manner. This return must include a complete list of all allottees with their full names, addresses, number of securities allotted, and other relevant information as prescribed.
Sub-section (9) states that if a company defaults in filing the return of allotment within the period prescribed under sub-section (8), the company, its promoters, and directors are liable to a penalty of one thousand rupees for each day the default continues, but the total penalty cannot exceed twenty-five lakh rupees.
Sub-section (10) says that, subject to sub-section (11), if a company makes an offer or accepts monies in contravention of this section, the company, its promoters, and directors are liable for a penalty that may extend to the amount raised through the private placement or two crore rupees, whichever is lower. The company must also refund all monies with interest as specified in sub-section (6) to subscribers within thirty days of the order imposing the penalty.
Sub-section (11) overrides sub-sections (9) and (10) by stating that any private placement issue not made in compliance with sub-section (2) will be deemed to be a public offer, and all provisions of this Act, the Securities Contracts (Regulation) Act, 1956, and the Securities and Exchange Board of India Act, 1992, will apply to it.
Official Text
(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 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: Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities.
(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.
(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, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.
(9) If a company defaults in filing the return of allotment within the period prescribed under sub-section (8), the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.
(10) Subject to sub-section (11), if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing the penalty.
(11) Notwithstanding anything contained in sub-section (9) and sub-section (10), any private placement issue not made in compliance of the provisions of sub-section (2) shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be applicable.]