MEANING:

When the company issues securities to a person other than the shareholders’ and employees of the company that is, to selected persons or group of person then such kind of issue is known as “private placement”.

Explanation 1 to section 42 of the Companies Act, 2013 defines private placement. For example, if an offer of securities for shares is made to a select and small group of friends, customers, or connections, it is a private placement. Private placement offer can be made only through the issue of a ‘Private Placement Offer Letter’.

The term private placement was first coined in the case of Sahara India Real Estate Corporation Limited and Sahara Housing Investment Corporation Limited which raised 27000crore rupees from 3 crore investors, by issuing Optionally Fully Convertible Debentures, on the private placement basis. It was held by the SEBI that the said offer is a public offer by way of a private placement and it was also upheld by the Supreme Court.

LEGAL PROVISIONS OF PRIVATE PLACEMENT:

• Offer to a selected group of persons: Private placement shall be made to a select group of persons who have been identified by the Board i.e. identified persons. The number shall not exceed 50 or such a higher number as may be prescribed by Rule 14 of Companies (Prospectus and Allotment of Shares) Rules, 2014 which is 200. Offer to Qualified Institutional Buyers and employees shall not be taken into account while calculating the maximum number of offers or allotment.

• Process of offering securities: Private placement offer letter and application form shall be issued by the company to identified persons. The letter shall state the names and addresses of persons to whom they are made. There shall not be any right of renunciation.

• Deemed public offer: Because of the Sahara Case, the concept of the deemed public offer was introduced in company law. If conditions prescribed by section 42(2) of the Act are satisfied then such offer shall be deemed to be a public offer.

• Application money and banking channels: Every identified person shall apply in a private placement application form issued to such person. The application shall be paid either by cheque or demand draft or other banking channel but not by cash.

• Period of completion of allotment: Within 60 days of receipt of application money allotment shall be completed.

• Interest on delayed refunds: If the company does not complete the allotment within 60 days then the company shall repay the application money within 15 days thereof. If the default is made in repayment then the company shall repay the money with interest @12% p.a. from the 16^th day onwards.

• Utilization of application money: The money received shall be utilized only for adjustment against securities or for repayment of money where the company is unable to allot securities.

• Ban on advertisement and publicity: No use of advertisement or media or marketing or distribution channels or agents shall be made by the company for informing the public at large about the issue.

• Return on the allotment: Within 15 days of allotment made, a return for the allotment to be filed with the Registrar with the complete details of allottees and other prescribed information. If the default is made in filing then promoters and directors of the company shall be liable for a penalty of 1000 rupees for each day of default but not exceeding 25lakh rupees.

• Consequences of contravention: Penalty which may extend to amount raised through private placement or 2crore rupees, whichever is lower shall be paid by promoters and directors who are liable for default.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.