[Opinion] Consequences of Utilizing the Proceeds of Private Placement before Filing the Return of Allotment
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- Last Updated on 6 April, 2023
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Prof R Balakrishnan – [2023] 149 taxmann.com 36 (Article)
1. A Brief about Private Placement
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.
2. Framework of Companies Act on private placement
Section 42 of the Companies Act, 2013 provides that a company can make a private placement to a select group of persons, other than by way of a public issue through a private placement offer letter. Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 provides the regulations relating to the private placement by companies. The companies making a private placement are prohibited in releasing any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue. The Rules state that the company should offer or invite to subscribe its securities through a private placement offer letter in Form PAS-4.
The application monies received by the company on application for private placement is 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. The e-form PAS-3 is required to be filed within 15 days from the date of allotment of securities.
3. Provisions under the Companies Act 2013 relating to this case
The following are the relevant provisions under the provisions of the Companies Act 2013 and the related rules, relating to this case.
| Section 42 (Issue of Shares on Private Placement basis) | |
| Section/Rule | Provisions |
| 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.
Provided that a company shall not utilise monies through private placement unless allotment is made and return of allotment is filed with the Registrar in accordance with sub-section (8).
|
| 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 so far such securities 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 sixty days. Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purposes other than-
(a) For adjustment against allotment of securities
(b) For the repayment of monies where the company is unable to allot its securities.
|
| 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(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 lakh 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. |
| Companies (Prospectus and Allotment of Securities) Rules 2014 | |
| Rule 14(6) | A return of allotment of securities under section 42 of the Companies Act 2013 shall be filed with the Registrar of Companies within fifteen days of allotment in Form PAS-3 and with the fee as provided in the Companies (Registration offices and Fees) Rules, 2014 along with a complete list of all the allottees containing: –
(i) The full name, address, permanent Account Number and e-mail ID of such security holder; (ii) The class of security held; (iii) The date of allotment of security; (iv) The number of securities held, nominal value and amount paid on such securities and particulars of consideration received if the securities were issued for consideration other than cash. |
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