Revised, stringent private placement framework becomes effective: a step-by-step guide to compliance

CS Vinita Nair, Partner, Vinod Kothari & Company

corplaw@vinodkothari.com

 

Substitution of Section 42 was one of the major amendments proposed under Companies (Amendment) Act, 2017. MCA on August 7, 2018 enforced Section 10 of Companies (Amendment) Act, 2017 amending Section 42 of Companies Act, 2013 (‘Act, 2013’) with effect from 7th August, 2018.

MCA amended Companies (Prospectus and Allotment of Securities) Rules, 2014 (‘PAS Rules’) to substitute Rule 14 dealing with private placement with effect from 7th August, 2018. Comparison/ mapping of Rule 14 of PAS Rules can be read here.

This article provides the revised procedure for private placement under Act, 2013 in the light of aforesaid amendments:

Phase 1: Prior to issuance of Private Placement Offer cum Application Letter (PPOAL)

  1. Passing of Board resolution under Section 179 (3) (c) for issue of securities;
  2. Delegating the power in relation to identifying persons, making of offer addressed to such identified persons, distributing of offer letter, allotment of securities to a Committee of Board or Committee of Management or officers of the Company;
  3. Filing of resolution passed under 1 and 2 with the Registrar pursuant to Section 117 (3) (g) of Act, 2013 in e-Form MGT 14;
    • Private companies are exempted from the requirement to file eform MGT-14 under Section 117 (3) (g) for resolutions passed under Section 179 vide  Notification dated 5th June, 2015. However, such private companies will also be required to file MGT-14 for board resolution passed for issue of securities under private placement.
  4. Seeking approval of shareholders by way of special resolution for issue of securities by way of private placement;
    • Separate approval of shareholders shall not be required in case of issuance of non-convertible debentures if the proposed amount to be raised is within the borrowing limits approved by the shareholders under Section 180 (1) (c) of the Act, 2013.
    • Explanatory statement to specify the matters provided in proviso to Rule 14 (1) reproduced hereunder:
      • Particulars of the offer including date of passing of Board resolution;
      • Kinds of securities offered and the price at which security is 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 valuer who performed valuation;
      • Amount which the company intends to raise by way of such securities;
      • Material terms of raising such securities, proposed time schedule, purposes or objects, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects, principle terms of assets charged as securities.
  1. Filing of resolution passed under 4 above with the Registrar pursuant to Section 117 (3) (a) of Act, 2013 in e-Form MGT 14;
  2. Identification of persons to whom offer is required to be made by the Board or Committee/ officers delegated with the power by the Board;
  3. Ensuring the number of persons to whom the offer to be made does not exceed 200 (reckoned individually for each kind of security that is equity share, preference share or debenture) in a financial year.
    • Limit is not applicable in case of NBFCs, HFCs if they are complying with regulations made by the Reserve Bank of India or the National Housing Bank in respect of offer or invitation to be issued on private placement basis.
  4. Recording the names and addresses of the person in the record of private placement maintained in Form PAS-5;
  5. Opening of separate bank account for receipt of application money;

Phase 2: Issuance of PPOAL

  1. Sending of PPOAL in Form PAS 4 to the identified persons within 30 days of recording the name of such person. PPOAL shall not carry right of renunciation;
    • 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.

Phase 3: Post issuance of PPOAL

  1. Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash;
  2. Payment shall be made for subscription to securities from the bank account of the person subscribing to such securities in the separate bank account of the Company;
    • This shall not apply in case of issue of shares for consideration other than cash.
  3. Company shall keep record of the bank account from where such payment is received;

Phase 4: Allotment of securities

  1. Allotment shall be made by the Board or Committee/ officers delegated with the power;
  2. Return of allotment shall be filed in e-Form PAS -3 with the Registrar within 15 days of allotment;
  3. Company shall utilize the amount only after filing the return of allotment;
  4. Company shall issue share certificates/ debenture certificates within a period of two months from the date of allotment;
  5. Entry shall be made in the register of members/ debenture holders within 7 days of after the Board of Directors or its duly constituted committee approves the allotment of securities.
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