Introduction
Section 42 of the Companies Act 2013 deals with the issue of shares on a private placement basis by a company. In this blog, we will take a closer look at the various aspects of Section 42 and its implications for companies.
What is private placement?
Private placement refers to the sale of securities to a select group of investors, as opposed to a public offering. The securities are not offered to the general public, and the sale is made through a private placement memorandum (PPM) or an offering circular.
When can a company issue shares through a private placement?
A company can issue shares through private placement only if it complies with the provisions of Section 42 of the Companies Act 2013. The section lays down the conditions that a company must fulfill before it can make a private placement of shares.
Conditions for private placement
The following are the conditions that a company must fulfill before it can make a private placement of shares:
The issue of shares must be authorized by the Articles of Association of the company.
The issue must be approved by a special resolution passed by the shareholders of the company.
The company must file the offer letter with the Registrar of Companies within 30 days of the issue of shares.
The offer letter must contain all the relevant details, such as the number of shares being offered, the price at which they are being offered, and the terms and conditions of the offer.
The company must not make more than two private placements in a financial year, and the number of persons to whom such securities are to be allotted cannot exceed 200.
The securities must be allotted within 60 days from the date of receipt of the application money.
Implications of non-compliance with Section 42
Non-compliance with the provisions of Section 42 can lead to serious consequences for the company. The Securities and Exchange Board of India (SEBI) can impose penalties on the company, and the shareholders who have subscribed to the securities can also take legal action against the company.
Advantages of Private Placement
Private placement has several advantages for companies, including:
It allows companies to raise capital quickly and easily without the need for a public offering.
It enables companies to raise capital from a select group of investors who are interested in the company’s business and growth prospects.
It can be a more cost-effective way of raising capital compared to a public offering, which involves significant regulatory compliance costs and underwriting fees.
It can be a useful way for companies to test the waters before going public, as it allows them to gauge investor interest and demand for their securities.
Disadvantages of Private Placement
While private placement has many advantages, there are also some disadvantages, including:
It is limited to a small group of investors, which can make it harder for companies to raise large amounts of capital.
It can be difficult to find investors who are interested in the company’s securities, particularly if the company is not well-known or established in the market.
It can be a riskier investment for investors, as the securities are not publicly traded and may be less liquid than publicly traded securities.
There is a risk of regulatory non-compliance, which can result in penalties and legal action.
Conclusion
Section 42 of the Companies Act 2013 lays down the conditions that a company must fulfill before it can make a private placement of shares. It is important for companies to comply with these provisions to avoid penalties and legal action. Private placement can be a useful tool for companies to raise funds, but it must be done in accordance with the law.
Read more useful content:
Frequently Asked Questions (FAQs)
1. What is the maximum number of persons to whom securities can be allotted through private placement?
The number of persons to whom securities can be allotted through private placement cannot exceed 200 in a financial year.
2. Is it mandatory to file the offer letter with the Registrar of Companies?
Yes, it is mandatory for the company to file the offer letter with the Registrar of Companies within 30 days of the issue of shares.
3. Can a company make more than two private placements in a financial year?
No, a company cannot make more than two private placements in a financial year.
4. What is the time limit for the allotment of securities through private placement?
The securities must be allotted within 60 days from the date of receipt of the application money.
5. Can a company issue shares through a private placement without the approval of shareholders?
No, a company cannot issue shares through a private placement without the approval of shareholders. The issue must be approved by a special resolution passed by the shareholders of the company.
6. What are the consequences of non-compliance with Section 42?
Non-compliance with the provisions of Section 42 can lead to penalties imposed by the Securities and Exchange Board of India (SEBI), and the shareholders who have subscribed to the securities can also take legal action against the company.
7. Can a public company issue shares through a private placement?
No, a public company cannot issue shares through a private placement. Private placement is only allowed for private companies.
