Private placement is a method of raising equity capital (we covered another way of raising equity capital Rights Issue in an earlier post).

Private placement is an offer made to a specific group of persons to subscribe to the securities of a company. The method has certain limitations – a company cannot make an offer to more than 50 persons (the 50 persons limit is the prevailing limit but changes as per ROC notification from time to time). Under Private placement, a company can issue more than once class of securities to different subsets of the group of persons mentioned above.

It is important to note that more than 1 private placement cannot run in parallel – A company cannot make a new offer unless the previous offer is closed or withdrawn. This needs to be borne in mind when a company is looking to raise capital from multiple parties simultaneously.

Under Private placement, a company cannot receive the consideration in cash – it must be through cheques or other banking channels. The share application money must be kept in a separate bank account till securities allotment is completed.

Key considerations before receiving money

• Careful planning is required (to factor in the statutory notice to be given for given for EGM) Even for shorter notice min 3 days required to be approved by 90% of shareholders.
• A key aspect to be kept in mind is that it is mandatory to get a valuation report from registered valuer (in case of equity or equity like securities). The issue price cannot be less than fair value recommended in the valuation report. At the time of board meeting, the valuation report is to be tabled, based on which offer price is set
• An EGM needs to be convened for approving the private placement by special resolution (75% of the shareholders have to approve). Subsequently MGT 14 needs to be filed.

Key considerations after receiving money

• The offer related documents have to be filed within 30 days to the ROC.
• The issuing company has to complete the allotment of securities within 60 days from the date of allotment. In case the company is unable to comply with that, the share application money needs to be returned to the counterparty within 15 days thereafter. If not, an interest rate of 12% per annum shall be levied on the share application money
• Non compliance to this requirement may entail penalties equal to the offer amount or 2 crores whichever is lesser on the directors / promoters
• Finally, the allotment of securities need to followed by payment of stamp duty and issuance of share certificates