Private placement of shares or securities by unlisted public or private limited companies is an effective method for raising capital from a select group of investors. Governed by Section 42 of the Companies Act, 2013, it allows companies to offer or invite subscriptions for securities through a Private Placement Offer Letter (Form PAS-4). This process is restricted to a select group of individuals identified by the company’s board, ensuring confidentiality and compliance.

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What is Private Placement?

Private placement refers to issuing securities to a specific group of persons, excluding public advertisements or media promotions. It offers flexibility and is often preferred by companies seeking to raise funds without undergoing the complexities of a public offering.

Key securities issued under private placement include:

• Equity shares
• Preference shares
• Debentures

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When to Opt. for Private Placement?

Private placement is ideal in the following scenarios:

1. When issuing shares to non-shareholders or non-employees.
2. When offering shares to a selected group of existing shareholders.
3. When shares are issued for consideration other than cash (e.g., assets).

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Conditions for Private Placement

Private placement is subject to the following conditions:

1. A maximum of 200 persons (excluding qualified institutional buyers and ESOPs) can subscribe in a financial year.
2. The process must be authorized by the Articles of Association and approved by a special resolution in the general meeting.
3. Securities must not be issued below the value determined by a Registered Valuer.
4. The subscription money must be paid only through banking channels (no cash).
5. Securities must be allotted within 60 days of receiving application money.
6. A return of allotment (Form PAS-3) must be filed within 15 days of allotment.

Failure to comply with these regulations can lead to penalties, including fines up to ₹2 crores or the amount raised through the private placement.

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Procedure for Private Placement

To conduct a private placement, companies must follow these steps:

1. Pass a Board Resolution for appointing a valuer and approving the offer.
2. Issue a special resolution in the general meeting.
3. File Form MGT-14 within 30 days of the resolution.
4. Issue a Private Placement Offer Letter (Form PAS-4).
5. Open a separate bank account for application money.
6. Allot shares and update the Register of Members (MGT-1).
7. File Form PAS-3 (return of allotment) with the ROC.

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Benefits of Private Placement

• Confidentiality: Limited to a specific group of investors.
• Cost-Effective: Avoids costs associated with public issues.
• Faster Process: Streamlined procedures compared to public offerings.

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Penalties for Non-Compliance

If a company violates the provisions of private placement:

1. A penalty of up to ₹2 crores or the amount raised can be levied.
2. Refund of subscription money with interest at 12% p.a.

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FAQs About Private Placement

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For detailed assistance or guidance on private placement, contact Lal Ghai & Associates at www.lgassociates.org. With expert legal and compliance services, they ensure smooth execution of your private placement process.