Private Placement

PRIVATE PLACEMENT UNDER COMPANIES ACT,2013

  1. INTRODUCTION

Whenever company wants to raise funds, for the expansion of business or for new projects, they can either take loan from the bank or financial institutions or by issue of share capital. Part II of chapter III of Companies Act,2013 talks about private placement. The issue of share capital is not for public at large, but only for selected people or groups. A company may make a private placement through issue of offer letters to selected groups or people.

  1. WHAT IS PRIVATE PLACEMENT

Companies act, 2013 provides various option for raising finds and issue of securities, one of them is Private Placement. Section 42 of companies act, 2013 talks about private placement.

List of section and rules that are used while issuing securities through private placement are:

  1. Section 42 of companies act, 2013
  2. Rule 14 of companies(prospectus and allotment of securities) rules, 2014

Explanation II of section 42 of Companies act defines “private placement” as an offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section.

Basic elements are:

  1. An offer or invitation by a company
  2. To subscribe or issue of shares
  3. To a selected group of people
  4. Other than by way of public offer

Earlier securities only include equity shares, but the amendment have wider the scope of securities, now the securities include equity shares as well as debentures.

  1. PROVISIONS AND CONDITIONS OF PRIVATE PLACEMENT

There are various conditions and provisions that had to be fulfilled while issuing securities through private placement. These are discussed below –

  • Offer of private placement should not be made to more than 200 people in one financial year. Qualified institutional buyers and employees of the company should not be counted in 200, to whom securities have been allotted through employee stock option scheme.

Qualified institutional buyers were defined in explanation II of section 42, it means qualified institutional buyer as defined in the Securities and Exchange Board Regulations, 2009. {sec 42(2)}.

It is important to note here that, if any company whether listed or unlisted makes an offer to invite for securities to more than people prescribed, then it will be treated as public offer.

We can understand this from renowned case of “Sahara India Real Estate Corporate Limited and Others v. Securities and Exchange Board of India and Anothers.”[1]

Sahara groups has two companies, Sahara India Real Estate Corporate Limited (SIRECL) and Sahara Housing Corporation Limited (SHICL). Both the companies on March 20008 and September 2009 resolved u/s 81(1) of companies act,1956 to raise funds as optionally fully convertible funds (OFCF) and together they raised 17,656 crores in 2 years.

Both the companies filed Red Herring Prospectus and information memorandum according to the prospectus there was no intent to get their securities listed on recognized stock exchange. The information memorandum provides that such issuance was not a public issuance but a private placement.

After an investigation by SEBI, it was decided by an order dated 26.06.2011 that the money was to be returned to the investors and it also restricts promoters from accessing further securities. The order was sustained by Securities Appellate Tribunal by order dated 18.10.2011, after the Sahara Group appealed before the tribunal against the order.

The issues before the court were:

  • Did SEBI have jurisdiction upon the matter at hand?
  • Was the issuance of OFCD a public issue?
  • Section-67 (3) provides that if offer is made to more than 49 people, the offer becomes public offer. So, does Section-67 (3) of the Companies Act make an offer of shares and debenture ipso facto, a public issue?
  • Section-73 provides that section companies intending to make offer to the public must make apply for a public stock market.So does Section-73 supersede Section-63?
  • Do the acts not cover the issue related to “hybird” securities?

It was contented by the appellants that their funds were hybrid instruments. Section 67 of companies act, 1956 which deal with offer of shares and debentures to the public, they didn’t include hybrid instruments. It only includes shares& debentures. Section 67 does not cover hybrid instruments. It was also contended by them that the Securities Contracts (Regulations) Act didn’t apply to them as the term ‘hybrid’ was included in the definition of ‘securities’ which was defined in Companies Act, 1956 but not in the SCR. Therefore, SEBI has no jurisdiction. It was also contended by them that the funds were raised by private placement through friends and associates without and advertisements and without violating any laws.

Contention made by the SEBI were that, the funds were not raised by private placement but by public issuance. Further, the issuance of the bond was made to more than 49 investors and therefore, it was to be registered to public stock exchange under Section-73 of the Companies Act, 1956. Further, SEBI contented that they had the power as under Section-55A as the Appellant had violated Section-73.  SEBI contended that the funds were transferable and thus, marketable. This means they came under the definition of debentures. In addition, they also contented for their jurisdiction on the matter.[2]

The decision made by the Supreme Court was that “the appellant has to refund the money to the investors within three months with an interest of 15% per annum”. The court further decided that the expressions in the disputed provisions were broad to incorporate the “hybrid” security.[3]

  • The value of offer per person shall not be less than INR 20,000 of ‘face value’ of securities. (1)
  • All offers covered under this section shall be made only to such persons whose names were recorded by the company prior to the invitation to subscribe, and that such person shall receive the offer by name, and that a complete record of such offers shall be kept by the company in such manner as may be prescribed and complete information about such offer shall be filed with the registrar within a period of thirty days of circulation of relevant private placement offer letter. {sec 42(7)}
  • All monies payable under this section shall be made through cheque or demand draft or other banking channels but not by cash. {sec 42(5)}.
  • Company offering securities under private placement should not release any advertisement or utilize any media, marketing or agent to inform the public at large about this offer. {sec42(8)}.
  • The application money received under this offer should be kept in a separate bank account in a scheduled bank and should not be used other than-
  • For adjustment against allotment of securities or
  • For the repayment of monies where the company is unable to allot securities {sec42(6)}
  • According to section 42(3) no fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or withdrawn.
  • After receiving the application money company have to allot securities within 60 days from the date when the application money was received, and if company fails to do so then it has to repay the application amount within 15 days from the date of completion of 60 days. And if company again fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the ratio of 12% per annum from the expiry of the sixtieth day. {sec42(6)}
  • Any offer or invitation made not incompliance with the provision of section 42 shall be treated as public offer. {sec42(4)}
  • If an organization makes an offer or acknowledges monies in negation of this segment, the organization, its advertisers and chiefs will be subject for a punishment which may stretch out to the sum engaged with the offer or 2 crore rupees, whichever is higher, and the organization will likewise discount all monies to supporters inside a time of 30 days of the request forcing the punishment.{sec42(10)}.
  1. CERTIFICATE OF SHARES

After allotting the shares, the allotee is entitled to receive a certificate, called the share certificate, which certifies that he is the possessor of specified number of shares in the company. Every company making such allotment is entitled to convey a certificate of shares to the allotee within two months after the allotment. The burden to proof is on the company to show that the share certificate has been dispatched.[4]

It is a right of an allottee to get certificate of shares and it cannot be defeated by putting a right of lien or any dues owned by the allottee to the company. Lien is not exercisable against the responsibility to issue certificate to allottees.[5]

  • CONCLUSION

From above we can conclude that, companies act, 1956 have loopholes with respect to private placement, and which comes in the light of court through the Sahara Group case. the Sahara group judgment is an achievement to corporate landscape. The amendments of 2013 have safeguarded the investors and it also strict the laws regarding raising funds through private placement.


[1](2013) 1 SCC 1

[2]Vinod Kumar Gautam, Sahara India Real Estate Corporation Limited v. SEBI, R&A Associates (June 20, 2020)

[3]Sankalpa Koirala, “Shahara Real Estate Corporation Limited and Others v. Securities Exchange Board of India &Anr.” , The Company Ninja, July 22 2020, <https://thecompany.ninja/sahara-real-estate-corporation-limited-and-others-v-securities-exchange-board-of-india-and-anr/>

[4]Cardiff Chemicals Ltd. Fortune Bio-tech ltd. (2005) 126 Comp. Cas 275 (CLB)

[5]Trishla Jain v. OswalAgro Mills Ltd, (1996) 86 Comp, Cas 48(CLB)

By Hanuwant Singh Rathore

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