Strategic Fundraising: Part 1 – Private Placements in India — Procedure and Common Mistakes

Fundraising is a critical step for companies that seek growth and capital to support their business. The Companies Act, 2013 (“Companies Act”) offers several avenues to raise funds in a structured and compliant manner. Among these, private placements and rights issues are the most common methods, each having distinct processes, benefits, and legal considerations that the companies must evaluate. This 2-part blog piece will discuss the key differences between private placements and rights issues, outlining their legal framework, procedural requirements, and practical implications to help companies determine the most suitable route for raising capital.

PRIVATE PLACEMENTS

A private placement is a method of raising capital, by offering securities to a select group of identified investors, rather than the public at large.[1] Companies can raise capital through private placements by offering securities to investors for subscription (like equity shares, preference shares, debentures, etc. that are considered securities under the law).[2]

For startups and growing companies, private placements are the most common route for accessing capital. This method is ideal, and the most commonly followed when companies are looking for external funding.

LEGAL FRAMEWORK

The Companies Act provides specific legal and procedural steps for raising capital through private placements. The significant requirements are discussed below:

Permissibility under AoA: The Articles of Association (“AoA”) of the company must authorise the company to issue securities via private placements.[3] If the AoA has no enabling provision, it must be amended through a special resolution before proceeding.[4]

Board Approval: The Board of Directors (“Board”) has to approve the proposed offer through private placement and the list of the proposed investors.[5] A company can make an offer to a limit of 200 persons in the aggregate for each kind of security (i.e. equity share, preference share or debenture) in a financial year.[6]

Authorised Share Capital Limit: If the intended issuance would result in paid-up capital exceeding the authorised share capital of the company, then the authorised share capital should be increased prior to offering the securities to investors. An ordinary resolution must be passed in a general meeting approving the increase in authorised share capital, followed by filing Form SH-7 (Notice to the Registrar of any Alteration in Share Capital) with the jurisdictional Registrar of Companies (“RoC”) within 30 days of the ordinary resolution.[7]

Valuation Report: In case shares are being allotted via private placements, their price must be determined by the valuation report prepared by a registered valuer.[8] The basis for the price, including premium, if any, at which the offer or invitation is being made; along with the name and address of valuer who performed valuation must be provided in the explanatory statement annexed to the notice for shareholders’ approval.[9]

Shareholder Approval: A special resolution must be passed in a general shareholder meeting to authorise the offer and issue through private placement.[10]

Offer Letter: The private placement offer letter is to be issued to the identified group of investors in the prescribed form (Form PAS-4 – Private Placement Offer Cum Application Letter).[11]

Receipt of Money: The investors must subscribe by paying the application, allotment, and subsequent call(s) money through proper banking channels (cheque, demand draft, etc.) and not through cash transactions.[12] The company must keep the received funds in a separate bank account. Further, the company is prohibited from using such sums prior to filing the return of allotment with the RoC.[13]

Allotment of Securities: The securities offered must be allotted to the group of investors within 60 days of receiving the subscription money. If the securities are not allotted within 60 days, the company is liable to refund the subscription money within 15 days, failing which the company must pay interest at 12% per annum.[14]

ROC Filing: A return of allotment under Form PAS-3 (Return of Allotment) must be filed with the RoC within 15 days of the allotment[15]; along with a complete list of all the allottees containing the relevant details (name, address, class of security, number of securities, nominal value, amount paid, etc.).[16]

Issue of Securities: For securities in physical form, certificates must be issued within 2 months of allotment.[17] If issued in dematerialised form, the company must credit the securities directly to the demat accounts of the investors through the depository system.

Records to be maintained: The company must maintain a record of each private placement conducted under the Form PAS-5 (Record of a Private Placement Offer).[18] Further, the annual filing of Form MGT-7 (Annual Return) must include the number of shares issued, allotment details, and updated shareholding pattern.[19] 

RECENT ROC ENFORCEMENT: REAL CASES, REAL CONSEQUENCES

RoCs across India are now conducting systematic surveillance audits, leveraging digital monitoring tools, and imposing substantial penalties for non-compliance/violations of private placement provisions. Companies are also reaching out to RoCs to get the default adjudicated. What was once considered “routine non-compliance” now carries significant financial and reputational consequences for companies and their directors personally. For instance, below are two orders of RoC imposing penalties:

Ambium Finserve Private Limited: A penalty of INR 10,00,000 was imposed on Ambium Finserve Private Limited and INR 1,00,000 upon 5 (five) of its directors as the company had issued a new offer for private placement without completing the process of allotment of a previous offer.[20]

Curebay Technology Private Limited: A penalty of INR 2,00,000 was imposed upon Curebay Technology Private Limited and INR 1,00,000 upon 2 (two) of its directors for failure to file the return of allotment in Form PAS-3 within the prescribed timeline and utilisation of money before the filing of Form PAS-3.[21]

Private placements represent a strategic pathway for companies seeking efficient capital mobilization while maintaining regulatory compliance. The procedural framework outlined above, though comprehensive, serves as a protective mechanism ensuring transparency and stakeholder protection. Companies that meticulously follow these requirements not only avoid regulatory penalties but also build investor confidence and establish a foundation for future fundraising success.

References:

1. Section 42, Companies Act 2013.
2. Under Indian law, securities are defined under section 2(h), the Securities Contracts (Regulation) Act, 1956.
3. Rule 13(2)(a) of the Companies (Share Capital and Debentures) Rules, 2014.
4. Section 14, the Companies Act 2013.
5. Section 42(2), the Companies Act 2013 r/w Rule 14(1), the Companies (Prospectus and Allotment of Securities) Rules, 2014.
6. Rule 14(2), the Companies (Prospectus and Allotment of Securities) Rules, 2014.
7. Section 64(1), the Companies Act, 2013 r/w Rule 15, the Companies (Share Capital & Debentures) Rules, 2014.
8. Section 62(1)(c), the Companies Act, 2013.
9. Rule 14(1), the Companies (Prospectus and Allotment of Securities) Rules, 2014.
10. Rule 14(1), the Companies (Prospectus and Allotment of Securities) Rules, 2014.
11. Rule 14(3), the Companies (Prospectus and Allotment of Securities) Rules, 2014.
12. Section 42(4), the Companies Act, 2013.
13. Section 42(6), the Companies Act, 2013.
14. Section 42(6), the Companies Act, 2013.
15. Section 42(8), the Companies Act, 2013.
16. Rule 14(6), the Companies (Prospectus and Allotment of Securities) Rules, 2014.
17. Section 56(4)(b), the Companies Act, 2013.
18. Rule 14(4), the Companies (Prospectus and Allotment of Securities) Rules, 2014.
19. Rule 11(1), the Companies (Management and Administration) Rules, 2014.
20. Order of Registrar of Companies & Adjudication Officer, Punjab & Chandigarh, dated May 27, 2024, https://www.mca.gov.in/bin/dms/getdocument?mds=377ApZyOdCxYooXRfWP8Wg%253D%253D&type=open
21. Order of Registrar of Companies & Adjudication Officer, Cuttack (Odisha), dated May 22, 2024, https://www.mca.gov.in/bin/dms/getdocument?mds=0a2nJS0xa%252BPubiWfMT%252FD%252FQ%253D%253D&type=open

For any queries or discussions, you can reach out to our contributors:

Akash Kumar (akash@asqlegal.com)

Asutosh Mahapatra (asutosh@asqlegal.com)

We want to acknowledge the efforts of Mr. Siddharth Sharma (IV Year, B.B.A. LL.B. (Hons.), National Law University Odisha) in assisting us with this blog piece.