HOW DOES THIS PRIVATE PLACEMENT OF SHARES WORK?

May 25, 2022

Private Placement is typically a process through which Companies issue securities to pre-selected persons by way of issuing offer letters.  Nowadays, the startups are raising funds through dilution of equity to the investors. Investors are ready to invest in the ideas, team and founders of the Startup. So understanding the process of issuing the securities is very important for Founders, CFOs, Investors and Directors of the Companies.

The process of issuing equity shares on Private Placement basis involves series of activities based on a complete understanding of the applicable sections of the Companies Act, 2013. We are talking only about the resident investors.

The steps in the process are hereunder:

1. Let’s start from the very beginning, which is pricing. The minimum price at which the shares can be issued has to be arrived at for which a valuation reportis to be obtained from a registered valuer in accordance with 42 and 62 (1)(c) of the Companies Act, 2013. So by passing Board Resolution, a registered valuer is to be appointed for completing the task.
2. After pricing is fixed, private placement offer letters are to be issued for which necessary approvals from the Board & from Members by way of a Special Resolution are to be taken.
3. A private placement offer letter shall be serially numbered and addressed specifically to the person to whom the offer is made and shall be sent within thirty days of recording the name of such person by the board.
4. Filing of Form MGT-14 for the special resolution passed with the concerned Registrar of Companies (ROC) is a must. Only after filing, the PAS-4 (Detailed Private Placement Offer Letter) can be sent to the Investors. Record of Private Placement offers in Form PAS-5 is also to be maintained.
5. It is mandatory for the company to open a separate bank account in a scheduled bank for keeping the subscription money and it should not be utilized for any other purpose.
6. The board shall ensure that the payment made for subscription of securities shall be received from the bank account of the identified person only.
7. The allotment of securities should be completed within 60 days from the date of receipt of the application money and the Return of Allotment of securities in Form PAS-3 should be filed within 15 days of allotment as per the Act.
8. All monies payable towards subscription of securities shall be paid by the investors specifically through their bank account by way of cheque or demand draft or other banking channels but not by cash. Please note that the monies should come from the respective investor’s bank account or joint bank account. It should not be from his company or a partnership firm.
9. The Company shall not utilize the money raised through Private Placement unless allotment is done and return of allotment (PAS-3) is filed.
10. The share certificates shall be issued within two months of receipt of payment towards the Private Placement offer and all the statutory records of the company as in the Minutes’ book and Registers should be updated accordingly.

Important points:

1. The propectus should include a  statement given by the Board that all monies received out of the issue shall be transferred to a separate bank account maintained with a Scheduled Bank
2. An offer can be made under a Private Placement Offer Letter to not more than 200 people. Not just the limitation of allotment to 200 people but even an invitation to subscribe cannot be made to more than 200 people. The 200 people limit excludes Qualified Institutional Buyers and Employees and the limit of 200 people is calculated individually for each kind of security. There cannot be a public announcement of such offers.
3. Special Resolution passed in EOGM for circulation of private placement offer letters is valid at the discretion of the Board but opening and closing date of offer should be clearly mentioned in the offer letter.
4. The Private Placement Offer Letter does not carry any renunciation right. The person to whom the offer is said by the Company can either accept the offer or reject it.
5. The company shall file copy of board resolution in form MGT-14 for issue of securities within 30 days of passing of resolution as per the provisions of Section 179(3). However, private companies are exempted from filing form MGT-14 for all the board resolutions passed pursuant to Section 179(3).
6. A Company is not allowed to make another Private Placement Offer until existing one is completed.

In case of any questions, you can write us on blogs@complyhappy.com and find your answers.