Private Placement of Securities under Section 42 of the Companies Act, 2013

Private Placement of Securities under Section 42 of the Companies Act, 2013

Not every company wants to (or can) raise money through a public offer. Private placement offers a faster, more targeted route to raise capital from a defined group of investors — friends, family, angel investors, or venture capital funds — while remaining within a structured, regulator-monitored process under Section 42.

•      Offer can be made only to persons identified by the Board (or Committee), not to the public at large.

•      Maximum of 200 persons in a financial year (aggregating all types of securities), excluding qualified institutional buyers and employees receiving securities under an approved ESOP scheme.

•      The offer must be made through a private placement offer letter in Form PAS-4, along with an application form serially numbered and addressed specifically to the identified person.

•      A separate bank account must be used to receive application money, and monies cannot be utilised until allotment is complete and the return of allotment is filed.

A special resolution (or, for certain limited categories like NBFCs and housing finance companies within specified limits, ordinary resolution) must be passed by shareholders approving the private placement offer, identifying the number of securities, price, and basis of valuation. A fresh offer/invitation cannot be made unless allotments with respect to any earlier offer have been completed, withdrawn, or abandoned.

•      Allotment must be made within 60 days of receipt of application money; if not, the money must be refunded within 15 days thereafter (failing which it is treated as a deposit under Section 73, with attendant consequences).

•      Return of allotment must be filed with the Registrar in Form PAS-3 within 15 days of allotment, along with a complete list of allottees.

If a company defaults in filing the return of allotment, the company, its promoters and directors are liable to a penalty which may extend to the amount raised through private placement, subject to a cap, or ₹2 crore, whichever is lower. Where the private placement contravenes the conditions of Section 42, the company must refund all money received to subscribers within 30 days, in addition to penalty.

•      Marketing or advertising a private placement offer publicly, which risks it being treated as a deemed public offer.

•      Exceeding the 200-person cap across multiple offers within the same financial year without realising the aggregation rule.

•      Utilising application money before allotment is complete and PAS-3 is filed.

•      Missing the 60-day allotment deadline and failing to refund within the subsequent 15 days, risking deposit reclassification.

Q1. Can a private placement offer be advertised publicly?

No, private placement offers must be made only to specifically identified persons through a serially numbered offer letter; any form of public advertising or marketing is not permitted and would risk the offer being treated as a public issue.

Q2. Is private placement available to public companies as well?

Yes, both private and public companies can raise funds through private placement under Section 42, subject to compliance with the applicable conditions, including additional requirements for listed companies under SEBI regulations.

Q3. What happens if allotment is not completed within 60 days?

The application money must be refunded to subscribers within 15 days of the expiry of the 60-day period; failure to refund attracts interest at 12% per annum from the expiry of the 60th day, and the amount may be treated as a deposit under Section 73.

Q4. Can the same offer letter be used for multiple rounds of private placement?

No, a fresh offer letter and fresh approval are required for each round; a company cannot make a subsequent offer until allotments under the earlier offer are complete, withdrawn or abandoned.

Q5. Can a private placement be made to convert existing debt into equity?

Yes, subject to compliance with the Section 42 process and any additional requirements (such as valuation and creditor consent) applicable to a debt-to-equity conversion.

Q6. Is a valuation report mandatory for private placement?

A valuation report by a registered valuer is generally required, particularly to support the pricing/basis of the offer disclosed in the explanatory statement for the special resolution, especially for preferential allotment scenarios.

Q7. Can a private placement be combined with a rights issue in the same round?

They are governed by different provisions (Section 62(1)(a) for rights issue, Section 42 for private placement) and are typically structured as separate, sequential processes rather than combined into a single filing, even if part of the same overall fundraising plan.

Private placement is one of the most commonly used fundraising routes for Indian startups and closely-held companies, but its procedural discipline — identified investors, timely allotment, and prompt PAS-3 filing — leaves little room for shortcuts. Companies should build their fundraising timeline around these statutory deadlines from the outset.