Before we go further to discuss the provisions relating to Private Placement, it is also necessary to understand the said term. Before the introduction of Companies Act 2013, the term Private Placement was not defined under any law though the ICDR regulations defines the term Preferential Allotment as any allotment to one or more shareholder or person instead of all the existing shareholders.

The Companies Act 2013 defines Private Placement to mean 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 private placement offer letter.

• An offer of securities or invitation to subscribe securities shall be made through a private placement offer letter in (draft) Form No. 3.4 to a selected group of persons by a company (other than by way of public offer) only if the proposed offer has been approved by the shareholders of the Company, by way of a Special Resolution. - It is important to take note that now all type of securities are covered under the ambit of Private Placement.

  The offer or invitation shall be made to such number of persons not exceeding 200 persons in aggregate in a financial year. The limit excludes any offer to qualified institutional buyers and employees of the company under ESOP. The names of people to whom the offer is made should be recorded with the company prior to the invitation.

• The provisions of Draft Rules in this regard specifies the manner in which the private placement offer shall be made which provides
  • that the number of such offers or invitations shall not be more than 4 in any financial year and
  • such offer shall not be brought more than once in a calendar quarter with a minimum gap of 60 days between any two such offers or invitations and
  • The value of such offer or invitation shall not be less than Rs 50000/- per person.The value will be the total value of shares including the premium if any.
• As per the provisions of draft rules an application form shall be accompanied by a private placement offer letter 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 30 days of recording the names of such persons
• It is important to take note that any allottee to who shares are allotted under Private Placement shall not transfer the same to more than 20 persons during a quarter and transfer in contravention of the same, shall not be registered by the Company.
• No fresh offer or invitation shall be made unless allotment in respect to earlier offer is completed or the earlier offer or invitation has been withdrawn or abandoned by the company.
• The subscription money may be paid through cheque or demand draft or other banking channel but not by cash. This provision will help in reducing the circulation of black money.
• The allotment of securities should be completed within 60 days of the receiving application money for private placement. if the company is not able to complete allotment within 60 days, then it shall refund the money within 15 days of the expiry of such 60 days.
• The application money shall be kept in separate bank account and shall not be utilized for any purpose other than for adjustment against allotment of securities or for repayment of money where the company is unable to allot securities.
• Complete record of private placement offers and acceptances shall be maintained by the company in (draft) Form No. 3.5. Complete information about the offer shall be filed with the Registrar of Companies in (draft) Form No. 3.3 within a period of 30 days of circulation of relevant private placement offer letter.
• No company shall release any advertisement or utilize any media, marketing or distribution channels or agents to inform the public at large about the offer.
• A return of allotment shall be filed with the Registrar in Form No.3.3 by the company making allotment of securities including complete list of all the security holders mentioning their full details.
• The provisions of the draft rules shall not be applicable to any Non-Banking Financial Company which is registered with the Reserve Bank of India under RBI Act, 1934

• No specific provisions on private placement exist in the Act of 1956.. Unlisted companies were required to follow Unlisted Public Companies (Preferential Allotment) Rules, 2003 while making private placement and listed companies were required to follow the guidelines or regulations of SEBI.
• Though section 67(3) of the Companies Act, 1956 puts a restriction on the number of persons to whom the shares shall be allotted under single offer or invitation by providing that no offer or invitation of shares and debentures shall be made which will result whether directly or indirectly in such shares or debentures being made available for purchase or subscription to more than 49 persons at a time.

• Over the last two years, the controversy over the money raised by Sahara group companies played out with the markets regulator SEBI where it termed the said funds raised as 'private placement'. The regulator ordered the Sahara group companies – Sahara India Real Estate Corporation (now known as Sahara Commodity Services Corporation Ltd) and Sahara Housing Investment Corporation to refund Rs. 19,400 crore raised from 2.21 crore investors. The Sahara group companies stated that the funds were raised through private placement of optionally fully convertible debentures, which were outside the definition of ‘securities’ specified in SEBI regulations. These companies also contented that since they were unlisted companies, the issue of these debentures was outside the jurisdiction of SEBI. SEBI however contented that the method of raising capital violated various regulations and given that the offer was made to more than 50 persons at a time, it could not be termed as a private placement and was required to abide with the conditions prescribed by SEBI for such issuance.

  The Securities Appellate Tribunal (SAT) and the Supreme Court has also upheld the SEBI order regarding refunding money to investors.

• While Sahara is a high profile case, there are several other instances as well, where companies have manipulated and misused laws and regulations on private placement.
• Lacunae in the legal provisions of the Companies Act, 1956 regarding private placement have lead to increase in malpractices.
  • Provisions of the Companies Act, 1956 are is narrow and covered only shares and not all securities, while SEBI defines the term 'securities'
  • While a private placement can be made only to a maximum of 49 persons at one go, there isno provision to prevent companies from convening multiple board meetings to approve such allotments. As aresult, companies started calling several meetings and made allotment to 49 allottees at each such meeting, thereby manipulating the law.
  • Companies also took advantage of the overlapping of powers between the MCA and SEBI to make multiple private placements.

• The Companies Act, 2013 is likely to curb malpractices in private placement and also ensure greater coordination between SEBI and MCA by regulating such offers.
• Provisions of the Act that will curb malpractices:
• Use of term ‘securities’ instead of 'shares' - Use of the term shares in the 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 the practices, the government decided to cover issue of all types of securities in the Companies Act and thus minimizes chances of manipulation.
• Restriction on number of persons to whom a private placement offer can be made in a financial year – The number of persons to whom invitation or offer for private placement can be made in a financial year has been restricted to 200 in aggregate for a financial and not more than 4 such offers shall be made in a financial year. The limit on number of persons to which the securities allotted under private placement can be transferred will also act as deterrent in indirectly allotting shares to more than the prescribed number of persons.
• 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 under private placement should be made within 60 days of receiving the 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 from any person, use the money for various purposes 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 Act, it shall be treated as a public offer and that all provisions of the Securities Contract Regulation Act 1956 and SEBI would apply. This will ensure greater coordination between the two regulators.