[Opinion] Company & Its Directors Penalized for Using Private Placement Funds in Existing Account Before Filing Return of Allotment

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Last Updated on 22 November, 2024

Private Placement Compliance

Prof R Balakrishnan – [2024] 168 taxmann.com 403 (Article)

1. The Background of this Case

Private placement of securities can be made only to select persons or identified persons (as identified by the board of directors of a company). A company making a private placement cannot offer its securities through any public advertisements or utilise any marketing, media, or distribution agents or channels to inform the public about such an offer. If the offer is advertised or marketed, it will be considered a public offer and not a private placement by the company. The application monies received by the company on an application for private placement are required to be kept in a separate bank account with a scheduled commercial bank. The monies raised through private placement could only be used by the company after the securities are allotted and the return of allotment in e-form PAS-3 is filed with the Registrar of Companies within a period of 15 days from the date of allotment of securities.

In this particular case, M/s. Galaxeye Space Solutions Private Limited raised funds through a private placement route, and the company did not open a separate bank account as mandated by the provisions of the Companies Act 2013. Instead, they received the funds through their existing bank account, which was being operated for business purposes. Also, the company utilized the funds much before filing the return of allotment as mandated by the Act. Both these violations committed by the company led to penal actions against the company and its directors. The company, upon realising the violation committed by them, filed a suo-moto adjudication application, and the Adjudication Officer, after following the due procedure of law, levied a penalty of Rs.5 lakh upon the company and its directors, having considered that the company is a small company entitled to a reduced amount of penalty as provided in the Act. Let us go through this case in detail so that we will know the provisions of the Act, the compliances called for, and finally, the consequences of non-compliance, as well as the rationale behind this order issued by the Registrar of Companies of Chennai.

2. Provisions under the Companies Act 2013 relating to this case

The following are the relevant provisions under the Companies Act 2013 and the related rules relating to this case.

The Companies Act 2013 PART II —Private placement Section 42. Offer or invitation for subscription of securities on private placement
Section	Provisions
42(1)	A company may, subject to the provisions of this section, make private placement through an issue of a private placement offer letter.
42(2)	A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”) whose number shall not exceed fifty or such higher number as may be prescribed [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year and on such conditions as may be prescribed.
42(3)	A company making private placement shall issue private placement offer applications in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed.
42(4)	Every identified person willing to subscribe to the private placement basis shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash.
42 (5)	No fresh offer or invitation under this section shall be made unless the allotments with respect to any other offer or invitation made earlier have been completed or that offer, or invitation has been withdrawn or abandoned by the company.
42 (6)	A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money, and if the company is not able to allot the securities within that period, it shall repay the application money to subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest as the rate of twelve per cent per annum from the expiry of the sixtieth day.
42(7)	No company issuing securities under this section shall release any public advertisements or utilise any media marketing or distribution channels or agents to inform the public at large about such an issue.
42 (8)	A company making any allotment of securities under this section, shall file with the Registrar a return of allotment within fifteen days from the date of allotment in such manner as may be prescribed, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed
42(11)	Notwithstanding anything contained in sub-section (9) and sub-section (10), any private placement issue not made in compliance with the provisions of sub-section(2) shall be deemed to be a public offer, and all the provisions of this Act and the Securities Contracts (Regulation) Act 1956 and the Securities and Exchange Board of India Act 1962 shall be applicable.
Penal provisions for default/non-compliance if any
42 (9)	If a company defaults in filling the return of allotment within in the period prescribed under sub-section (8), the company, its promoter and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakhs rupees.
42(10)	(Subject to sub-section (11), If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and Directors shall be liable for a penalty which may extend to the amount raised through private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing the penalty.

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The statutory material is obtained only from the authorized and reliable sources
All the latest developments in the judicial and legislative fields are covered
Prepare the analytical write-ups on current, controversial, and important issues to help the readers to understand the concept and its implications
Every content published by Taxmann is complete, accurate and lucid
All evidence-based statements are supported with proper reference to Section, Circular No., Notification No. or citations
The golden rules of grammar, style and consistency are thoroughly followed
Font and size that's easy to read and remain consistent across all imprint and digital publications are applied

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