Private Placement of securities in India under Companies Act, 2013


Author: Cs. Gaurav Mahajan

*This article has been written by the author while pursuing Certificate Course on Research Methodology with us.


The private placement is the one out of the most common methods adopted by various companies to raise funds from the investors/ general public. Companies, who are interested in raising money with the easiest and quickest possible manner and one of the available options is to make a private placement of securities to a selected bunch of persons not exceeding 200 in numbers. The private placement is governed by the provisions of the Companies Act, 2013 read with the Rules and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. When this type of issue is made by any listed company, it is called a preferential allotment while an issue of securities to a select group of persons by an unlisted public limited company or a private limited company is termed as private placement of securities.


All types of companies, whether listed or unlisted shall comply with Section 42 of the Companies Act, 2013 and relevant Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. The company shall ensure that the proposed issue of shares does not exceed its Authorized Capital and in case the proposed issue will exceed its Authorized Capital then, at first necessary steps have to be taken to complete the process of increasing the Authorized Capital of the company.

As per Section 42, the Board of Directors can approve the preferential issue of the securities subject to the final approval of the shareholders of the company. The board of the issuing company must identify the persons to whom the preferential issue shall be made, and such a number shall not exceed 50 in a financial year.

However, Rule 14(2) prescribes that a company can make an offer to subscribe the securities of the company to 200 persons in the aggregate in a financial year and the count of 200 shall be available separately for each class of security that is being issued i.e. 200 for non-convertible debenture, 200 for preference shares and 200 for equity shares respectively. The restriction of 200 persons in the aggregate in a financial year shall not apply in following two categories of companies:

  1. Non-Banking Finance Company (NBFC) regd. with Reserve Bank of India (RBI) or
  2. Housing Finance Company (HFC) regd. with National Housing Bank (NHB).

The proposed preferential allotment shall be subject to the approval of the shareholders by way of special resolution only and the said offer cannot be re-announced in favour of any third party unlike in case of Right Issue. The company making a private placement shall issue a private placement offer letter and application in Form PAS-4 to the identified persons and shall be sent to them either in writing or by email within 30 days after obtaining the approval of the shareholders. The company making an offer on a private placement basis shall maintain a complete record of the identified persons in Form PAS-5.

The identified persons to whom the offer is made and also who is willing to subscribe to the private placement offer shall apply to the issue in the application form enclosed with the private placement offer letter and the payment for the same shall be made only by way of demand draft or cheque or by way of online transfer (i.e. IMPS/ NEFT/ RTGS), no cash payment shall be made by the identified person and received by the company for this issue.

The company making the private placement offer shall have a separate bank account with an authorized dealer for this private placement offer and also receive such payments into such account opened and shall not utilize the monies received unless the allotment process is completed, and the company also the return of allotment of the private placement is filed with the Registrar of Companies.

The company shall have to allot the securities within 60 days of the receipt of the application money and in case of failure, the company shall refund the money within 15 days of the expiry of the 60 days the company has to pay an interest @ 12% per annum from the expiry of the 60th day to the applicant, in case it fails to refund the application money within 75 days from the receipt of application money.

Every company, which makes an allotment of securities under private placement shall file a return of allotment in Form PAS-3 within 15 days from the date of allotment along with the prescribed fee with the Registrar of Companies.


The proposed preferential allotment shall be subject to the passing of a special resolution by the approval of the shareholders. Each of the offer letter to the private placement shall be approved and the explanatory statement annexed to the notice convening the meeting of shareholders for approval of the private placement shall contain the following disclosures:

  1. Details about the offer; the purpose and objects of the issue, including the date of the passing of the Board Resolution.
  2. Kind of security offered to the issue i.e. equity share or preference share or debenture.
  3. The price at which the security is being offered.
  4. Valuation report to support the basis of arriving at the price for which the invitation is being made.
  5. The amount of money, which the company intends to raise by way of preferential issue/ private placement.
  6. The proposed time schedules and material terms of issue.
  7. The intention of the promoters or directors to subscribe to the offer or separately in furtherance of the objects.
  8. Principal terms of assets charged as security in case of issue of non-convertible debentures.

In case the company is offering non-convertible debentures (NCDs), a special resolution is not required if the amount proposed to be raised by way of the offer is within the limits specified by Section 180(1)(c) of the Companies Act, 2013 as per which the Board of Directors are authorized to borrow monies, which taken together with the money already borrowed does not exceed the paid-up capital, free reserves and share premium of the company and the Board has passed necessary resolution to borrow monies by way of issue of debenture under Section 179(3)(c) of the Act.


Specified securities held by the promoters and persons belonging to the promoter group can be transferred amongst the promoters or promoter group or a new promoter subject to compliance with the provisions of the Substantial Acquisition of Shares and Takeovers Regulations and the continuation of the lock-in in the hands of the transferee for the remaining period.

Generally, the securities allotted are subject to certain conditions and are non-transferable, i.e. for a period of three years from the date of trading approval for members of the promoter or promoter group, and one year for persons other than those belonging to the promoter or promoter group.


Earlier, shareholders resolution was required to be passed once in a year for private placement of non-convertible debentures (NCDs). The Recent Amendments allows private placement of NCDs pursuant to board resolution without obtaining shareholders resolution up to the borrowing limits specified under Section 180(1)(c) of the Companies Act, 2013. However, borrowing limits are to be approved by the shareholders of the issuer company by way of special resolution.

To enhance the liquidity in the market, the market regulator has been taking essential steps in this regard. According to SEBI, the primary market for debt securities has grown since 2007, to meet the easy and affordable funding requirements, some of the issuers take recourse in issuing several issues of corporate bonds/ debt securities in a single month/ quarter/ year. Preferential Allotment of Securities is an offer or invitation to subscribe to the securities or an issue of securities to a select group of persons by an company, unlike a rights issue which is made to all the existing shareholders or a public issue which is made to the public at large. SEBI has proposed that issuers can have only one International Securities Identification Number (ISIN) to enhance the liquidity and easy transferability. In case, the further restrictions are implemented, it may lead to a situation of liquidity mismatch and bunching of liabilities for the issuer.


According to the Companies (Acceptance of Deposit) Rules 2014, if the company fails to allot the securities within 60 days of the receipt of the application money, the company shall refund the money within 15 days of the completion of the 60 days, the company have to pay an interest @ 12% per annum from the expiry of the 60th day to the applicant, in case it fails to refund the application money within 75 days from the receipt of application money and this amount would be treated as deposit under the prescribed rules.

If any issue of securities which exceeds the prescribed number (i.e. 200 persons in number), such an issue shall be deemed to be a public issue and the provisions relating to a public issue shall be applicable to that issue as per explanation to Section 42(2). It is immaterial, whether the issue is made in India or outside India.

As per section 42(10) of the Companies Act, 2013, if a company accepts application money in contravention of the above section, the company along with its promotors and directors would be liable for the monetary penalty, which may extend to the total amount involved in the private placement offer or Rs. 2 Crore whichever is higher, and the company shall also refund all the collected amount to the subscribers to the offer within a period of 30 days of the order imposing the penalty.



Criminal Appeal No. 1706 of 2015 (Arising out of SLP (Crl.) No.6701 of 2015)

Bench: Pinaki Chandra Ghose & R.K. Agrawal, JJ. [Decided on 16/12/2015]

Prevention of Money Laundering Act, 2002 (hereinafter referred to as “PMLA”) read with the Code of Criminal Procedure, 1973 (hereinafter referred to as “CRPC”) and SEBI Act, 1992 – Offence committed under section 3 of the PMLA – Bail sought under section 439 of the CRPC appellant floating as many as 27 companies – Monies collected through front company routed through these companies – Whether appellant entitled for bail – Held, No.

This appeal, by special leave, is directed against the judgment and order passed by the Hon’ble High Court of Calcutta, whereby the Hon’ble High Court has rejected the appellant’s application for bail under Section 439 of the CRPC. The appellant was arrested on 25.03.15 in relation to an offence alleged to have been committed under Section 3 of the PMLA.

The appellant is the Chairman of Rose Valley Real Estate Construction Ltd. (hereinafter referred to as “Rose Valley”), a public company incorporated and regd. under Companies Act in the year 1999. Certain non-convertible debentures (NCD’s) were issued by the Rose Valley by the ‘private placement method.’ No advertisements etc. were issued to the public. The said debentures were issued to the employees of the company and to their friends and associates after fulfilling the formalities for a private placement of debentures. Thus, the appellant collected money by issuing secured debentures by way of private placement in compliance with the guidelines issued by the SEBI from time to time. Further, the appellant had floated as much as 27 companies and routed the monies collected by his front companies through these companies.

Decision: Appeal dismissed.

Reason: We have heard the learned counsel for the parties. At this stage we refrained ourselves from deciding the questions tried to be raised at this stage since it is nothing but a bail application. We cannot forget that this case is relating to “Money Laundering” which we feel is a serious threat to the national economy and national interest. We cannot brush aside the fact that the schemes have been prepared in a calculative manner with a deliberative design and motive of personal gain, regardless of the consequence to the members of society.

We note that admittedly the complaint is filed against the appellant on the allegations of committing the offence punishable under Section 4 of the PMLA. The contention raised on behalf of the appellant that no offence under Section 24 of the SEBI Act is made out against the appellant, which is a scheduled offence under the PMLA, needs to be considered from the materials collected during the investigation by the respondents. There is no order as yet passed by a competent court of law, holding that no offence is made out against the appellant under Section 24 of the SEBI Act and it would be noteworthy that a criminal revision praying for quashing the proceedings initiated against the appellant under Section 24 of SEBI Act is still pending for hearing before the High Court.

We have noted that Section 45 of the PMLA will have an overriding effect on the general provisions of the Code of Criminal Procedure in case of conflict between them. As mentioned earlier, Section 45 of the PMLA imposes two conditions for grant of bail, specified under the said Act. We have not missed the proviso to Section 45 of the said Act which indicates that the legislature has carved out an exception for grant of bail by a Special Court when any person is under the age of 16 years or is a woman or is sick or infirm. Therefore, there is no doubt that the conditions laid down under Section 45A of the PMLA, would bind the Hon’ble High Court as the provisions of special law having an overriding effect on the provisions of Section 439 of the Code of Criminal Procedure for grant of bail to any person accused of committing an offence punishable under Section 4 of the PMLA, even when the application for bail is considered under Section 439 of the Code of Criminal Procedure.

We cannot brush aside the fact that the appellant floated as many as 27 companies to allure the investors to invest in their different companies on a promise of high returns and funds were collected from the public at large which were subsequently laundered in associated companies of Rose Valley Group and were used for purchasing moveable and immoveable properties.

We further note that the High Court has called for all the relevant papers and duly taken note of that and thereafter after satisfying its conscience, refused the bail. Therefore, we do not find that the High Court has committed any wrong in refusing bail in the given circumstances. Accordingly, we do not find any reason to interfere with the impugned order so passed by the High Court and the bail, as prayed before us, challenging the said order is refused. Consequently, the appeal is dismissed.

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