Raising capital is a crucial step for any company looking to grow, and one common route is through private placement. Private placement refers to the process by which a company offers or invites a select group of individuals or entities to subscribe to or purchase its securities, distinct from a public offer. This method of raising capital is conducted through a private placement offer-cum-application and must comply with specific conditions outlined in the relevant provisions of the Companies Act, 2013. Unlike public issues, private placement enables faster access to funds but comes with strict compliance mandates, including limitations on the number of offerees, mandatory filing requirements, time-bound allotments, and fund-handling protocols.
This article explains the key compliance requirements under Section 42 and briefly discusses real-life cases where companies faced action for non-compliance, highlighting why careful adherence to the provision is essential.
Key Compliance Requirement under the Act
| Section | Compliance Mandate |
| 42(2) | A private placement shall be made only to a select group of persons who have been identified by the Board, whose number shall not exceed fifty or such higher number as may be prescribed [excluding the qualified institutional buyers and employees being offered securities under a scheme of employees stock option in terms of section 62], in a FY. |
| 42(3) | A company making private placement shall issue private placement offer and application in prescribed form and manner to identified persons, whose names and addresses are recorded by the company. Private placement offer and application shall not carry any right of renunciation.
(If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public). |
| 42(4) | Every identified person willing to subscribe to the private placement issue 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.
(a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar) |
| 42(5) | 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 or abandoned by the Company.
(Subject to the maximum number of identified persons under sub-section (2), a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.) |
| 42(6) | A company making an offer or invitation under this section shall allot its securities within 60 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 the subscribers within 15 days from the expiry of 60 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 at the rate of 12%. p.a. (monies received on application shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than adjustment against allotment or repayment. |
| 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 shall file with the Registrar a return of allotment within 15 days from the date of the allotment, including a complete list of all allottees, with their full names, addresses, number of securities allotted and other information prescribed. |
| 42(11) | any private placement issue not made in compliance of 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, 1992 shall be applicable. |
| 62(1) | Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered—
a) To existing shareholders…… b) to employees under a scheme of employees’ stock option, or c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed.
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| Rule 13(1) | In case of any preferential offer made by a company to one or more existing members only, the provisions of sub-rule (1) and proviso to sub-rule (3) of rule 14 of Companies (prospectus and Allotment of Securities) Rules, 2014 shall not apply. |
| Rule 13(2) | Where a preferential offer is made by a listed company, it shall comply with the provisions of the Companies Act, 2013 and SEBI regulations; and where made by an unlisted company, it shall comply with the Act and the rules made thereunder, subject to the compliance with the following requirements:
a) the issue is authorized by its articles of association; b) the issue has been authorized by a SR; c) The company shall make all the specified disclosures in the explanatory statement to be annexed to the notice of the general meeting. d) Allotment of securities on a preferential basis shall be completed within 12 months from the date of passing of the SR. e) If allotment is not completed within 12 months, a fresh special resolution shall be required. f) The issue price of shares or other securities, whether for cash or non-cash consideration, shall be determined based on a valuation report of a registered valuer. g) Where convertible securities are offered on a preferential basis with an option to convert into equity shares, the price of resultant equity shares shall be determined either: i. upfront at the time of offer, based on the valuation report of a registered valuer; or ii. at the time of conversion, not earlier than 30 days before the entitlement date, based on a valuation report not older than 60 days from such date. (the company shall decide the method under (i) or (ii) at the time of offer and disclose the same) h) Where shares or other securities are allotted for non-cash consideration, such consideration shall be valued by a registered valuer, along with justification report. i) Where a preferential issue is made for non-cash consideration, such consideration shall be accounted for as follows: i. If it is a depreciable or amortizable asset, it shall be recorded in the balance sheet in accordance with applicable accounting standards; or ii. In other cases, it shall be expensed in accordance with accounting standards. |
| Rule 13(3) | The price of shares or other securities to be issued on preferential basis shall not be less than the price determined on the basis of valuation report of a registered valuer. |
Rule 14 of The Companies (Prospectus and Allotment of Securities) Rules, 2014
| Sub rule | Compliance mandate |
| 1 | For the purposes of Section 42(2) and 42(3), a company shall not make an offer or invitation to subscribe to securities through private placement unless the proposal has been previously approved by the shareholders of the company, by a SR for each of the offers or invitations.
The explanatory statement annexed to the notice for shareholders’ approval, the following disclosure shall be made: – a) particulars of the offer including date of passing of BR; b) kinds of securities offered and the price at which security is being offered: c) basis or justification for the price; d) name and address of valuer who performed valuation; e) amount which the company intends to raise by way of such securities; f) material terms of raising such securities, proposed time schedule, purposes or objects of offer, contribution being made by the promoters or directors either as part of the offer or separately in furtherance of objects; principle terms of assets charged as securities. (this sub-rule shall not apply in case of offer or invitation for. non-convertible debentures, where the proposed amount to be raised through such offer or invitation does not exceed the limit as specified in clause (c) of sub section (1) of section 180 and in such cases relevant BR under clause (c) of subsection (3) of section 179 would be adequate.)
No offer or invitation of any securities under this rule shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with the private placement offer cum application letter.
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| 2, 7 | A private placement offer or invitation shall not be made to more than 200 persons in aggregate in a financial year, excluding QIBs and employees under ESOPs under Section 62(1)(b). The limit of 200 persons shall be reckoned separately for each kind of security (equity shares, preference shares, or debentures).
(This rule shall not apply to NBFCs registered with the Reserve Bank of India and Housing Finance Companies registered with the National Housing Bank, provided they comply with the respective regulations governing private placement. However, sub-rule (2) shall apply where such regulations are not prescribed by the RBI or NHB.) |
| 3 | A private placement offer-cum-application letter shall be issued in Form PAS-4, serially numbered and specifically addressed to the identified person, and sent in writing or electronically within 30 days of recording such person’s name under Section 42(3).
Only the person so addressed may apply, any other application shall be invalid. |
| 4 | The company shall maintain a complete record of private placement offers in Form PAS-5 |
| 5 | Subscription money for securities shall be paid only from the subscriber’s bank account, and the company shall maintain records of the account. In case of joint holders, payment shall be made from the bank account of the first applicant. |
| 8 | A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the Registry.
Provided that private companies shall file with the Registry copy of the Board resolution or special resolution with respect to approval under clause (c) of sub section (3) of section 179 |
Private Placement Compliance: Key Adjudications and Learnings
Private placement is a convenient route for companies to raise capital; however, any lapse in compliance with the Companies Act, 2013 can attract heavy penalties. Below are some important adjudication orders on private placement that highlight common mistakes and key compliance lessons.
| Company | Authority | Provision Violated | Nature of Non-Compliance | Penalty (includes penalty for other violations) |
| M/S, Shreni Sillrfis Limited | ROC, Mumbai by order dated 31st Jan 2025 | Violation of Section 42(6) of the Companies Act 2013 | The money was received in the existing regular bank account of the Company and no separate account was opened for private placement, thereby contravening the provisions of Section 42(6) of the Companies Act, 2013. | The Adjudicating Officer imposed a total penalty of Rs. 30 Lakhs on the Company and its promoters /directors. |
| Acceler Edtech Private Limited | ROC, Pune by order dated 30th Dec, 2024 | Violation Of Section 42 (8) of the Companies Act, 2013 | The applicant company filed e form PAS-3 (Return of Allotment) with a delay of 30 days.
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Penalty of Rs. 15,000 was imposed on the Company and Rs. 15,000 was imposed on the Director. |
| Mahameru Benefit Funds Nidhi Limited | ROC, Coimbatore By order dated 20th Dec 2024 | Non-compliance with Section 42 read with Rule 14(6). | The Company has made incomplete PAS 3 disclosures, i.e., not mentioned full details in the List of Allottees. | A penalty under Section 450 of the Companies Act, 2013 has been imposed. The company and each officer in default were fined Rs. 10,000 each. |
| M/S. Soundarambigai Benefit Fund Nidhi Limited | ROC, Chennai, Tamil Nadu By order dated 2nd Sept 2024 | Violation Of Rule 14(6) of the Companies (Prospectus and Allotment of Securities) Rules, 2014. | The Company has made incomplete PAS 3 disclosures, i.e., not mentioned full details in the List of Allottees. | Penalty of Rs. 10,000 was imposed on the Company and Rs. 10,000/- was imposed on CFO.
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| Planify Capital Ltd | ROC, Delhi & Haryana by order dated 3rd April 2024 | Violation Of Section 42 (7) of the Companies Act, 2013 | The Company issued securities in an open forum. It used Planify platform for raising securities, putting pitch information, raising money from general public through platform amounts to issuance of public advertisements or utilisation of media. | ROC imposed a penalty of Rs. 2 Crore on the company and a Director and Rs.1 Crore on 3 other directors. |
| Dab Games Private Limited | ROC, NCT of Delhi and Haryana by order dated 26th July 2024. | Violation of Rule 14(8) of the Companies
(Prospectus and Allotment of Securities) Rules, 2014 |
The company was required to issue PAS 4 after filing of Special Resolution to the ROC. However, there was an inadvertent delay of 12 days while filing of form with ROC resulting in non-compliance of Rule 14(8). | A penalty of Rs. 5,000 each was imposed on the Company and the two defaulting directors. |
*Reference: Orders of ROC and RD
Insight
These cases clearly show that even small procedural lapses in private placement can result in heavy penalties and regulatory action. Companies and their officers must exercise due care, maintain proper documentation, and strictly follow prescribed timelines to remain compliant.
CS Suresh Pandey
Practising Company Secretary
SPG & Associates
9968300649
suresh@spgindia.co.in
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