EASING THE PROCESS OF PRIVATE PLACEMENT: ANALYZING THE COMPANIES LAW

COMMITTEE REPORT

(Project towards partial fulfilment of assessment in the subject of Company Law II)

SUBMITTED BY: SUBMITTED TO:

RISHABH NAUTIYAL (1171) MRS. KRATI RAJORIA

SHALINA ABHALE (913) ASSISTANT PROFESSOR

SEMESTER V FACULTY OF LAW

NATIONAL LAW UNIVERSITY, JODHPUR

SUMMER SESSION

(JULY- NOVEMBER 2016)

 ACKNOWLEDGEMENT

We take this opportunity express our gratitude and personal regards to Mrs. Krati Rajoria,
for inspiring and guiding us during the course of this project work.
We also owe our sincere thanks to the library staff at National Law University, Jodhpur, for
the co-operation and facility extended from time to time during the progress of this project
work.
Finally, we would like to sincerely thank our family for always instilling in us the confidence
to finish our tasks to the best of our abilities.

Rishabh Nautiyal (1171) & Shalina Abhale (1237)

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 TABLE OF CONTENTS

I. Introduction ........................................................................................................................ 4

II. Private Placements under Companies Act, 2013. .............................................................. 5

A. Definition of private placement .................................................................................. 6

B. Maximum Limit for Private Placement Offers in a Year. ........................................... 6

C. Other conditions for private placement ....................................................................... 6

D. Compliance required under the Rules. ........................................................................ 7

E. Penalty for non-compliance. ....................................................................................... 8

F. Position of unlisted public companies. ........................................................................... 8

G. Preferential allotment provisions ................................................................................ 9

H. Industry Impacts of the 2013 Act. ............................................................................. 10

III. Analysing the Companies Law Committee Report ...................................................... 12

IV. Concluding Remarks ..................................................................................................... 14

Bibliography ............................................................................................................................ 15

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 I. INTRODUCTION
Companies raise funds for working capital, capital expenditure, and general corporate
purposes by issuing securities. Securities do not necessarily mean shares—it may be bonds,
debentures, preference shares, and convertibles. Companies raise such funds by issuing
securities either by way of public offers or through private placements. Public offers are few
and far between. This option is available only to listed companies,1 and given the level of
preparation involved, companies cannot afford to go public every now and then. Hence, the
most common way of raising capital by companies is through private placements, which is
the issue of securities other than public or rights offers. All offers of securities by private
companies are private placements. In fact, private placement is one of the most favoured
methods used by companies to raise funds.2 Before the passage of the Companies Act, 2013,
the law on private placements was governed by the Companies Act, 1956, SEBI Guidelines
and the Unlisted Public Companies (Preferential Allotment) Rules, 2003. However, these
provisions were in no way sufficient to address the plethora of complex issues which derive
out of company practices in modern times. A striking example of this was seen in the 2012
case of Sahara India Real Estate Corporation Ltd. and Ors. v. Securities and Exchange
Board of India and Anr., where these provisions were patently misused. The Sahara case was
an instance where a large amount of money was raised from the public (over 3 million
investors), calling it a private placement. However, this was rejected by the SAT and later the
Supreme Court in its judgement on August 31, 2012. Pursuant to that, the law relating to
private placements has seen a complete overhaul, so that the Companies Act, 2013 subjects
private companies to a greater control and compliances and withdraws most of the
exemptions available to private companies under the Companies Act, 1956.

After commencement of Companies Act, 2013 from 01stApril 2014 compliance requirement
of Companies has been increased. Therefore it’s difficult for the Private Company to
continue and for peoples to incorporate new Companies. The new Company law was pain for
the youth. Although it allows a single-person company to be set up, when it needs to draw in
fresh investment, it will be forced, for all practical purposes, to become a multi-share-holder
Company. However small it is, it will have to meet full secretarial Standards.

1
Section 55A read with Section 67(3) and 73 of Companies Act, 1956 & Section 23 of Companies Act, 2013.
2
Private Placement- Much Needed Overhaul, available at
https://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/companies-act-2013-Key-highlights-and-
analysis.pdf.

4
 II. HYPOTHESIS AND OBJETIVES
In the second month of this year, the Companies Law Committee Report3 (“CLCReport”)
detailed its recommendations to ease the present company law regime in India. Though all its
proposals are complementary to the ease of doing business in the country, one of the more
sweeping suggestions have been related to the private placement of securities.

The project tries to analyse the various changes that the CLC report plans to bring in to
increase the ease in private placement though the latest overhaul of the Companies Act, 1956.
The paper tries to analyse the following aspects:

 Relinquishment of PAS-4
 Right of renunciation
 Permitting simultaneous offers

Research Questions

1. How private placement works in India after the new Companies Act?
2. Whether the CLC report 2016 has an impact on the operations of private placements?

Research Objectives

1. To analyse how private placement works.

2. To assess the working of private placements till 2013 and the changes there onwards.
3. To analyse the CLC Report from February, 2016.
4. To understand the impact of the report and the objective it tries to fulfill.

3Report of The Companies Law Committee, Ministry of Corporate Affairs, February 2016 (“CLC Report”)

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 III. PRIVATE PLACEMENTS UNDER COMPANIES ACT, 2013.

A. DEFINITION OF PRIVATE PLACEMENT

 Part II of Chapter III of the 2013 Act deals exclusively with private placements.
Private placement has been defined in explanation II(ii) to section 42 of the Act as:

“private placement” means any 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

 It is to be noted that the provisions for private placement apply to issue of “securities”
and not “shares”. The new provisions cover a whole host of instruments such as
shares, bonds, debentures and other marketable securities.4
 Section 42(4) provides that any offer or invitation not in compliance with the
provisions of the section shall be treated as a public offer and all provisions of the
Act, SCRA and SEBI Act shall be required to be complied with in such a case.

B. MAXIMUM LIMIT FOR PRIVATE PLACEMENT OFFERS IN A YEAR.

 Offer can be made only to 200 persons in a financial year as per Section 42(2). Unlike
the 1956 Act, under which the number of members in a private company was
restricted to 50, private companies under the Act can have members up to 200.
 As per rule 3.12(2)(b) of the Draft Companies Rules, 2013 (“Rules”), an offer or
invitation for private placement shall be made to not more than two hundred persons
in the aggregate in a financial year, excluding the qualified institutional buyers and
employees of the company being offered securities under a scheme of employees
stock option as per provisions of section 62(1)(b) of the Act.

C. OTHER CONDITIONS FOR PRIVATE PLACEMENT

1. Section 42(5) of the Act states that all monies payable towards subscription of
securities by private placement shall be paid through cheque or demand draft or other
banking channels but not by cash.
2. All securities under private placement are to be allotted within a period of 60 days
from the receipt of application money. If not the securities are not allotted within the

4
Karandeep Makkar, Companies Act, 2013 – Private placement norms made stringent, available at
http://taxguru.in/company-law/companies-act-2013-private-placement-norms-stringent.html.

6
 specified period, the application money is to be refunded within a period of 15 days
from completion of 60 days’ time.5
3. The entire amount raised by the issue of offer or invitation will have to be parked in a
separate bank account and cannot be used until allotted. [Proviso to section 42(6)]
4. The particulars of every private offer shall be filed with the Registrar within 30 days
of circulation of offer letter.6
5. The companies offering or inviting subscriptions under private placement cannot
advertise or utilize any marketing media.7

D. COMPLIANCE REQUIRED UNDER THE RULES.

Part II of Rules deals with private placement. Rule 3.12 prescribes certain additional
requirements to be complied with in case of private placement:

1. A private placement offer letter shall be accompanied by an application

form addressed specifically to the person to whom the offer is made and shall be sent
to him, either in writing or in electronic mode, within thirty days of recording the
names of such persons in accordance with section 42(7) of the Act. No person other
than the person so addressed in the application form shall be allowed to apply through
such application form and any application not so received shall be treated as invalid.
2. The proposed offer of securities or invitation to subscribe securities must be approved
by the shareholders of the company, by way of a special resolution, for each of the
offers/ invitations.
3. The offer or invitation shall be made to not more than two hundred persons in the
aggregate in a financial year, excluding the qualified institutional buyers and
employees of the company being offered securities under a scheme of employees
stock option as per provisions of clause (b) of sub-section (1) of section 62 of the Act.
4. The number of such offers or invitations shall not exceed four in a financial year and
not more than once in a calendar quarter with a minimum gap of sixty days between
any two such offers or invitations.
5. The value of such offer or invitation shall be with an investment size of not less than
fifty thousand rupees per person.

5
Companies Act. 2013, Section 42(6).
6
Companies Act. 2013, Section 42(7).
7
Companies Act. 2013, Section 42(8).

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 6. The payment to be made on subscription of securities shall be made from the bank
account of the person subscribing to such securities. However, monies payable on
subscription to securities to be held by joint holders shall be paid from the bank
account of the person whose name appears first in the application.

E. PENALTY FOR NON-COMPLIANCE.

Section 42(10) of the Act prescribes the penalty for contravention of section 42. If a company
makes an offer or accepts monies in contravention of the section, the company, its promoters
and directors shall be liable for a penalty which may extend to the amount involved in the
offer or invitation or two crore rupees, whichever is higher. Also, the company is required to
refund all monies to subscribers within a period of thirty days of the order imposing the
penalty.

F. POSITION OF UNLISTED PUBLIC COMPANIES.

In December2011, the Ministry of Corporate Affairs had issued Unlisted Public Companies
(Preferential Allotment) Amendment Rules, 2011 (“2011 Rules”) and made the preferential
allotment rules as applicable to public companies more stringent. Some of the provisions of
2011 Rules are listed below:

1. The offer for preferential allotment cannot be made to more than 49 persons.
2. Any offer or invitation not in compliance with provisions of section 81(1A)read with
section 67(3) of the 1956 Act would be treated as public offer and provisions of the
SCRA and SEBI Act will need to be complied with.
3. The money payable on subscription should be paid only by way of cheque or DD or
other banking channels but not by cash.
4. Allotment of securities should be completed within 60 days from the receipt of
application money. If not so allotted, the company should repay application money
within 15 days thereafter, failing which it should be repaid along with an interest at
the rate of 12% per annum.
5. The application money should be kept in a separate bank account and should not be
utilized prior to allotment.
6. Company offering securities cannot release any public advertisements or utilise any
media, marketing or distribution channels or agents to inform the public at large about
the offer.

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The private placement provisions as contained in the Act have incorporated the provisions of
the 2011 Rules. While the 2011 Rules were applicable to public companies only, the
provisions of the Act on private placement will apply to all companies.8

G. PREFERENTIAL ALLOTMENT PROVISIONS

 Rule 4.11(1) of the Rules provides for issue of shares on preferential basis under
section 62(1)(c) of the Act. Explanation (i) to Rule 4.11(1) provides the definition of
preferential offer.

‘Preferential Offer’ means an issue of shares or other securities, by a company to any select
person or group of persons on a preferential basis and does not include shares or other
securities offered through a public issue, rights issue, employee stock option scheme,
employee stock purchase scheme or an issue of sweat equity shares or bonus shares or
depository receipts issued in a country outside India or foreign securities.

 In terms of Rule 4.11(1), an issue of shares on preferential basis should also comply
with conditions laid down in section 42 of the Act.
 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 deal with
preferential issue of securities by a listed company. Regulation 2(z) defines
“preferential issue” as an issue of specified securities by a listed issuer to any select
person or group of persons on a private placement basis and does not include an offer
of specified securities made through a public issue, rights issue, bonus issue,
employee stock option scheme, employee stock purchase scheme or qualified
institutions placement or an issue of sweat equity shares or depository receipts issued
in a country outside India or foreign securities.

The government has asked SEBI to set up a committee to look into compatibility of market
watchdog’s regulations for private placement of securities with the proposed measures in this
regard in the new Companies Bill.9

8
Karandeep Makkar, Companies Act, 2013 – Private placement norms made stringent, available at
http://taxguru.in/company-law/companies-act-2013-private-placement-norms-stringent.html.
9
SEBI set to Align Private Placement Norms With Companies Bill, available at
http://www.thehindu.com/business/Industry/sebi-to-align-private-placement-norms-with-companies
bill/article4904487.ece.

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 H. INDUSTRY IMPACTS OF THE 2013 ACT.
The Companies Act, 2013 is likely to curb malpractices in private placement and also ensure
greater co-ordination between the SEBI and MCA by regulating such offers. Provisions of the
act that will especially curb malpractices include10:

 Use of the term “securities” instead of “shares”: Use of the term “shares” in
Companies Act, 1956 restricted regulations of issuances of various other instruments
by Company to raise funds. Companies manipulated this loophole by using other
terminology or nomenclature for instruments used to raise funds, thereby easily
escaping the regulatory oversight. Having understood these practices, the government
decided to cover the issue of all types of securities in the 2013 Act, thereby
minimizing the chances of further manipulation.
 Restriction on the number of persons to whom a private placement offer can be
made in a year: The number has been restricted to 200 in aggregate for a financial
year and not more than 4 such offers shall be made in a financial year. The limit on
number of such persons will also act as a deterrent in indirectly allotting shares to
more than the prescribed number of people.
 Use of banking channels for private placement: Since the subscription money will
have to be paid through a cheque or demand draft or other normal banking channels,
opportunities to launder money will go down.
 Requirement to complete allotment in 60 days: It has been specified that allotment
should be made within 60 days of receiving application money. This proposal will
curb a common practice under which companies would accept funds as application
money without adequately complying with regulations for accepting deposits. These
companies would accept application money and then refund them, as there was no
time-table for allotment of shares or refund of funds raised.
 It has been specifically provided that where the private placement does not comply
with the provisions of the 2013 Act, it shall be treated as a public offer and that all
provisions of the SCRA and SEBI would apply. This will ensure greater co-ordination
between the two regulators.

10
New Companies Act, 2013-Insight Series, Volume III, KMPG in India, 6 September, 2013, available at
http://www.kpmg.com/IN/en/services/Tax/FlashNews/New-Companies-Act-2013-Insight-Series-VolIII.pdf.

10
  However, the provisions are severe and small companies will face unnecessary
problems in raising funds through group companies or other family members and
relatives.11

11
Vinod Ladha & Nidhi Kothari, Fallout of the Sahara case: Companies Bill, 2012 too strict on private
placement provisions, available at http://www.moneylife.in/article/fallout-of-the-companies-bill-2012-too-strict-
on-private-placement-provisions/30344.html.

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 IV. ANALYSING THE COMPANIES LAW COMMITTEE REPORT

Proposal 1: Relinquishment of PAS-4

The Companies Act, 2013 (“Act”) is the guiding law to the mechanism of private placement
of securities.12Under the concerned provisions, the primary requirement of issuing shares
through private placement is the filing of an offer letter through PAS-4 form (“PAS-4”).13
The PAS-4 requirement was responsible for additional time and costs even though the
number of subscribers to the securities were relatively lesser as compared to a public issue.

Thus, in order to curb this thwart, the CLC Report has recommended the doing away of PAS-
4.14 However, to ensure that there is no circumvention of procedure, it has also proposed that
the requisite disclosures earlier made in PAS-4 should now be made in an explanatory note
attached to the notice for general meeting convened to pass as special resolution for private
placement. This shall ensure adequate disclosure and investor protection. The disclosures to
be attached to the explanatory note relate to the pricing/price band, objects, valuation report
of securities, intention of promoters/directors/key managerial personnel for the subscription
of offer, the title and name of the proposed allottees and the subsequent share of capital they
will hold post the offer amongst other things. Further, the CLC Report, in the same line of
proposal, has suggested that all the relevant information which is now being filled in PAS-4
be moved into the explanatory notice.15

It is interesting to note that till 18th March 2015,16 it was required that PAS-4 was circulated
and filed for preferential allotment even to existing members of a company. However, the
Companies (Share Capital and Debentures) Amendment Rules 2015 relinquished the
requirement of PAS-4 to be circulated and filed for preferential allotment to existing
members. It has been seen that because of this relinquishment, companies are able to avoid
the process of rights issue, thus saving them from substantial inconvenience and time.

12 Section 42 r/w 62, Companies Act, 2013

13As per the rules under Companies (Prospectus and Allotment of Securities) Rules, 2014.
14 ¶3.4, CLC Report.
15 This information may consist of matters such as any investigations conducted on the company under the Act or

any previous company law in the last 3 financial years, related party transactions entered into by the offeree in the
last 3 financial years, summary of reservations or adverse remarks made by the auditors in the last 5 financial years,
etc.
16 Which is when the Companies (Share Capital and Debentures) Amendment Rules 2015 came into effect.

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The CLC Report has taken it a notch further by recommending its absolute discontinuation.
As has been seen from the experience mentioned above, it will affirm ease in raising capital
while ensuring that investors are still protected through adequate disclosures in the securities
application form.

Proposal 2: Right of renunciation

The Report further proposes the right of renunciation of securities which are offered in
pursuance to a rights issue to its members. The Act provides that the shares offered in
pursuance of a rights issue may be renounce in favour of ‘any other person’.17 The Act
further provides that post the period of rights issue or whenthe offer-recipient has declined
the offer and hasn’t renounced the offer in favour of a certain person, then the board of
company is entitled to dispose those shares in a way that it is not disadvantageous to the
shareholders and the company.18 It has been noted by the professionals and the CLC Report
that this provision is being manipulated to evade the preferential allotment mechanism which
requires a special resolution to be passed at the general meeting and PAS-4 to be filed and
circulated.

The CLC Report, suggesting a preventive mechanism, advocates the procedure given in the
(English) Companies Act, 2006 (“ECA”).19The ECA provides20 that an offer shall be
considered a private concern of the recipient on the condition that it is made to a person
already connected with the company. Further, he/she may renounce the rights only in favour
of another who is already connected with the company. The ECA dictates21 that a ‘person
already connected with the company’ could be (1) an existing member or employee of the
company; (2) a member of the family of a person who is or was a member or employee of the
company; (3) the widow or widower, or surviving civil partner, of a person who was a
member or employee of the company; (4) an existing debenture holder of the company, or (5)
a trustee (acting in his capacity as such) of a trust of which the principal beneficiary is a
person amongst the aforementioned.

The authors believe that the ECA will act as adequate inspiration for formulating our own
mechanism to ensure that the renunciation provision is not misused. The authors applaud the

17 See Section 62(1)(a)(ii), Companies Act, 2013

18 See Section 62(1)(a)(iii), Companies Act, 2013
19 ¶3.13, CLC Report.
20Section 756(4)(a), (English) Companies Act, 2006
21Section 756(5), (English) Companies Act, 2006

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CLC Report’s proposition for curbing the misuse of the rights issue process thus propounding
fairness through proper sanctions for the bypassing of the pre-emption rights of the
shareholders.

Proposal 3: Permitting simultaneous offers

Presently, the Companies Act, 201322 prohibits a fresh offer or invitation unless the
allotments with respect to any offer or invitation made earlier have been completed or that
offer or invitation has been withdrawn or abandoned by the company. However, overhauling
the present mechanism, the CLC report has proposed allowing a company to keeping more
than one offer for securities simultaneously to certain classes of investors subject to
prescribed rules.23 This proposal seems to be a splendid attempt at increasing the amount of
funds that a company can raise at a given point of time.

V. CONCLUDING REMARKS
The CLC Report has made sweeping recommendations with an intent to liberalize the
business model that India propagates. The ease in raising funds for companies and reducing
the time taken in the process shall inevitably increase the allure of investing in India. Without
prejudice to any other government policy, it can indubitably be stated that Modi
government’s ease of doing business campaign is on the right track.

22 Section 42(3), Companies Act, 2013

23 ¶3.6, CLC Report.

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 BIBLIOGRAPHY
Books

1. A. Ramaiya, ‘Guide to the Companies Act’, (Nagpur: LexisNexis Butterworths

Wadhwa, Vol. 1, 17th ed., 2010).
2. A.K Majumdar & G.K. Kapoor, Taxmann’s Company Law, (New Delhi, 16th ed.,
2013).

Articles

1. Private Placement- Much Needed Overhaul, available at

https://www.pwc.in/en_IN/in/assets/pdfs/publications/2013/companies-act-2013-Key-
highlights-and-analysis.pdf.
2. Yashesh Ashar, Issue of Capital by Private Companies under the Companies Act,
2013, November 29, 2013, available at http://indiacorplaw.blogspot.in/2013/11/guest-
post-issue-of-capital-by-private.html.
3. Karandeep Makkar, Companies Act, 2013 – Private placement norms made stringent,
available at http://taxguru.in/company-law/companies-act-2013-private-placement-
norms-stringent.html.
4. C. R. L. Narasimhan, Sahara judgment and beyond, October 14, 2012, available at
http://www.thehindu.com/opinion/columns/C_R_L__Narasimhan/sahara-judgment-
and-beyond/article3994783.ece.
5. Deepak Jodhani & Simone Reis, SC To Sahara: It's Not Private!, Sep 08,2012,
available at http://thefirm.moneycontrol.com/story_page.php?autono=755420.
6. Garima S Singh, An Analysis of Hon’ble Supreme Court Judgement dated 31.08.2012
in the matter of Sahara India Real Estate Corporation Ltd. & Others vs. SEBI, <
http://newjurist.com/analysis-of-supreme-court-judgment-in-sahara-real-estate-
corporation.html>.
7. Ashwin Mathew, SEBI’s Jurisdiction | Analysis of the Supreme Court judgment in the
Sahara case, <
http://www.legal500.com/assets/images/stories/firmdevs/2012/khaitan__co_-
_analysis_of_sahara_judgment_-_12nov12.pdf>
8. Vinod Ladha & Nidhi Kothari, Fallout of the Sahara case: Companies Bill, 2012 too
strict on private placement provisions, available at

15
 http://www.moneylife.in/article/fallout-of-the-companies-bill-2012-too-strict-on-
private-placement-provisions/30344.html.
9. SEBI set to Align Private Placement Norms With Companies Bill, available at
http://www.thehindu.com/business/Industry/sebi-to-align-private-placement-norms-
with-companies bill/article4904487.ece.
10. New Companies Act, 2013-Insight Series, Volume III, KMPG in India, 6 September,
2013, available at http://www.kpmg.com/IN/en/services/Tax/FlashNews/New-
Companies-Act-2013-Insight-Series-VolIII.pdf.

Cases

1. Sahara India Real Estate Corporation Ltd. and Ors. v. Securities and Exchange
Board of India and Anr (2012) 8 SCALE 101.

16