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Acceptance of Depositsand
Issue of Securities [Rights Issue/ Pvt. Placement]
(under the Companies Act, 2013)ON: FRIDAY, JULY 22, 2016 AT : PHD CHAMBER OF COMMERCE AND INDUSTRY
Manoj Singh BishtCompany Secretary
Section 2(31) read with Rule 2(1)(c): Deposit includes any receipt of money by way of deposit or loan or any other
form, by a company, but does not include such categories of amount as may be prescribed in consultation with RBI. – Prescribed in Rule 2(1)(c).
Ejusdem Generis Rule – of the same kind, class, or nature. Deposit/loan – Specific any other form – General. "in any other form" has been used by the Legislature for two reasons :
(i) to cover any receipt of money which may not be a deposit or a loan but at the same time is refundable ;
(ii) to guard against any accidental omission by the Legislature as held by the Supreme Court in Siddeshwari Cotton Milts (P.) ltd. v.Union of India, MANU/SC/0359/19891989(39)ELT498(SC) , since it is not the category of refundable receipts and to anticipate all possible situations which may arise at any point of time in future
Deposits
Any amount received from Foreign or international banks / multilateral financial institutions/Foreign Government owned development financial institutions / foreign export credit agencies / foreign collaborators/ foreign body corporate /foreign citizens / foreign authorities / persons resident outside India subject to the provisions of Foreign Exchange Management Act,1999.
IMP Exclusion No. 1 – FEMA
Any amount received from any other CompanyIMP Exclusion No. 2 – Inter Corporate
Any amount received from a person who at the time of receipt was a director of a Company or
Any amount received from a person who at the time of receipt was a relative of the director of the private company
provided the director of the Company or relative of Director of the Private Company, furnishes a declaration that the amount given is not out of borrowed funds and board to disclose the details of money so accepted in Board’s Report.
IMP Exclusion No. 3 – Money received from Director(Co.) / Relatives(pvt. Co)
IMP Exclusion No. 3 – Money received from Director(Co.) / Relatives(pvt. Co) Contd.
o Amount received from Director of both i.e. public as well as private Company is exempted.
o Amount received from relative of director of PRIVATE CO. is exempted deposit.
Whether declaration is the basis for exclusion ? What will be the fate of loan given by a Director, if declaration is
not given by the Director ? Can we take declaration on plain paper/letterhead of the Director
/ Relative, as the case may be? Can we take loan from person who is a Director & Shareholder ?
IMP Exclusion No. 4 – Securities Application Money any amount received and held pursuant to an offer made in
accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for.
Without prejudice to any other liability or action, if the securities for which application money or advance for such securities was received cannot be allotted within 60 days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within 15 days from the date of completion of 60 days, such amount shall be treated as a deposit under these rules:
Any adjustment of the amount for any other purpose, shall not be treated as Refund.
IMP Exclusion No. 5 – Issue of Bonds/Debentures
any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within 10 years – increased from 5 to 10 yrs. Vide notification dated 29.06. 2016.
However, if such bonds or debentures are secured by the charge of any assets referred to in Schedule III of the Act, excluding intangible assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer
IMP Exclusion No. 6 – Issue of Non-Convertible Debentures
any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a recognised stock exchange as per applicable regulations made by Securities and Exchange Board of India.
IMP Exclusion No. 7 – Any amount received from an employee
any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit
Director who is an employee ? No condition w.r.t. declaration !
IMP Exclusion No. 8 – Held in trust Any non-interest bearing amount received AND held in trust. (Amended to replace the word “or” – 29.06.2016)
IMP Exclusion No. 9 – Advance/securityany amourt received in the course of, or for the purposes of, the
business of the company,-(a)as an advance for the supply of goods or provision of services
accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of 365 days from the date of acceptance of such advance. Provided that in case of any advance which is subject matter of any legal proceedings before any court of law, the said time limit of 365 days shall not apply
(b)as advance, accounted for in any manner whatsoever, received in connection with2[consideration for an immovable property] under an agreement or arrangement, provided that such advance is adjusted 3[against such property] in accordance with the terms of agreement or arrangement
IMP Exclusion No. 9 – Advance/security Contd.
(c) as security deposit for the performance of the contract for supply of goods or provision of services(d) as advance received under long term projects for supply of capital goods except those covered under item (b) above(e) as an advance towards consideration for providing future services in the form of a warranty or maintenance contract as per written agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less
(f) as an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government
(g) as an advance for subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications;
(e)/(f) and (g) above are inserted vide amendment dated 29-6-2016.Provided that if the amount received under items (a), (b) and (d) above becomes refundable (with or without interest) due to the reasons that the company accepting the money does not have necessary permission or approval, wherever required, to deal in the goods or properties or services for which the money is taken, then the amount received shall be deemed to be a deposit under these rules
IMP Exclusion No. 10 – Advance/security Contd.
Any amount brought in by the promoters themselves or their relatives by way of unsecured loan in pursuance of a stipulation of any lending institution on the promoters. Such exemption shall be available only till the loans of the Financial Institutions are not repaid and not thereafter. (I call it a “ 5 STAR EXCLUSION”)
Section 2(69) defines Promoter as person: Named as such in prospectus or in AR filed u/s 92 Who has Control over affairs of the Company – Direct/indirect, as
shareholder/director OR OTHERWISE. (Control defined u/s 2(27) In accordance with whose advice, directions, instructions, the
BOD of the Company is accustomed to act.
S73(1) – Prohibition cum permissionNo company to invite, accept or renew deposits from public, except as provided under Chapter V (only eligible Companies can accept deposits from public)
Doesn’t apply to banking company, NBFC – registered with RBI and other company as may be specified by CG in consultation with RBI
ELIGIBLE COMPANY – Public Co. + net worth of Rs. 100 cr or turnover of Rs. 500 Cr. + obtained prior approval by Special Resolution+ files MGT 14 with ROC before making invitation for acceptance of deposits.
• A company may, subject to the passing of a resolution in general meeting and subject to CAD rules, accept deposits from its members on such terms and conditions, including the provision of security, if any, or for the repayment of such deposits with interest, as may be agreed upon between the company and its members, subject to the fulfilment of the following conditions, namely:—
Conditions for acceptance of deposits are stipulated in:
Under S73(2) and Under CAD Rules.
Exemption Notifcation dated 5th June 2015 - Clause (a) to (e) of Section 73(2) [i..e. except provisions related to creation of security, if any] shall not apply to Private Company which accepts from its members monies not exceeding 100% of the aggregate of paid up share cap + free reserves, and such company company shall file the details to the ROC in such manner as may be specified – No form specified. It is mere obligation. No Bar on acceptance.
Acceptance of Deposits from Members [S73(2) – Applies to public deposit also
Conditions stipulated under S73 for Acceptance of DepositsIssuance of a circular to its members: statement showing the financial position of the company, credit rating obtained [ over and above this, the eligible companies must
obtain once in a year from a credit rating agency and file with ROC alongwith return of deposits in Form DPT 3. The credit rating referred to in clause (a) shall not be below the minimum investment grade rating or other specified credit rating for fixed deposits, from any one of the approved credit rating agencies as specified for Non-Banking Financial Companies in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998, issued by the Reserve Bank of India, as amended from time to time. – amendment dated 29.06.2016]
the total number of depositors and the amount due towards deposits in respect of any previous deposits
accepted by the company and other particulars prescribed in rules.
Conditions stipulated under S73 for Acceptance of Deposits Contd.filing a copy of the circular along with such statement with the Registrar within 30 days before the date of issue of the circular
depositing such sum which shall not be less than 15% of the amount of its deposits maturing during a FY and the FY next following : kept in a scheduled bank in a separate bank account to be
called as deposit repayment reserve accountcertifying that the company has not committed any
default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits;
Conditions stipulated under S73 for Acceptance of Deposits Contd.
providing such deposit insurance in such manner and to such extent as may be prescribed.
No Deposit Insurance facility available, as on date.Extension under Rules - the companies may accept deposits without
deposit insurance contract till the 31st March, 2017 or till the availability of a deposit insurance product, whichever is earlier
providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company In case where a company does not secure the deposits or secures such
deposits partially, then, the deposits shall be termed as "unsecured deposits" and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits
Conditions under [R3(1)]no company referred to under 73(2) and no eligible company shall accept or renew any deposit from members, whether secured or unsecured, which is: repayable on demand or upon receiving a notice, within a period of less than 6 months
or more than 36 months from the date of acceptance or renewal of such deposit [ ranging from 6 months to 36 months]
Exception - For short term fund requirement – Deposit can be accepted/ Renewed for 3 to 6 months. such deposits shall not exceed 10%, of the aggregate of the
paid-up share capital, free reserves and securities premium account] of the company
Conditions under [R3(2)]where depositors so desire, deposits may be accepted in joint names not exceeding three, with or without any of the clauses, namely, "Jointly", "Either or Survivor", "First named or Survivor", "Anyone or Survivor".
In case of deposit by members, Rule 3(2) must be read in strict sense to mean that the deposits can be held jointly with any other member(s) not exceeding three.
Conditions under [R3(3)]no company referred to in sub-section (2) of section 73 shall accept or renew any
deposit from its members, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits : exceeds 25%, of the aggregate of the paid-up share capital [Equity+ Pref] + free
reserves + securities premium account Provided that a private company may accept from its members monies not
exceeding 100% of aggregate of the paid up share capital, free reserves and securities premium account and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified. – vide notification dated 29.06. 2016
Exemption notification provided relief for pvt. Co. falling in paid up + free reserves.
Conditions under [R3(4)] – More stringent for eligible companiesNo eligible Company shall accept or renew:(a)any deposit from its members [10%] - if the amount of
such deposit + amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds 10% of the aggregate of the paid-up share capital [equity+ pref] + free reserves + securities premium account of the company
(b)any other deposit [25%] - if the amount of such Deposit + outstanding deposits as on the date of acceptance or renewal other than the deposit referred to in clause (a), exceeds 25%, of aggregate of the paid-up share capital [equity+pref] + free reserves + securities premium.
Conditions under [R3(5)]No Government company eligible to accept deposits under section 76 [ basically, which is an eligible company] shall accept or renew any deposit, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal exceeds 35%, of the aggregate of its paid-up share capital + free reserves + securities premium.
So concessional rate of 35% for Govt. Co. vs 25% for Non-Govt. Co.
rate of interest on deposits or brokerage payable shall not exceed the maximum rate of interest or brokerage prescribed by the Reserve Bank of India for acceptance of deposits by NBFCs. person who is authorized, in writing, by a company
to solicit deposits on its behalf and through whom deposits are actually procured shall only be entitled to the brokerage.
payment of brokerage to any other person for procuring deposits shall be deemed to be in violation of CAD Rules.
Restrictions on rate of interest and brokerage [R3(6)]
• the company shall not reserve to itself either directly or indirectly a right to alter, to the prejudice or disadvantage of the depositor, any of the terms and conditions of the deposit, deposit trust deed and deposit insurance contract after circular or circular in the form of advertisement is issued and deposits are accepted
No right to alter T&C - prejudice or disadvantage [R3(7)]
Circular to members under 73(2) – shall be sent by Regd. Post AD or speed post or by electronic mode in Form DPT 1 Newspaper advertisement is optional . Legislature has
used the word “the circular may be published”.Circular to public by an eligible company – shall be published in form of an advertisement in Form DPT 1 in 1 English Newspaper (in English Language‘) and in 1 Vernacular Newspaper (in vernacular language), having wide circulation in the state in which the Regd. Office of the company is situated.
And upload a copy of the circular on its website, if any.
Other Conditions
• Circular shall be valid until the expiry of 6 months from the date of closure of the FY in which it is issued or until the date on which the Financial statement is laid before the AGM/ Due date of AGM, WHICHEVER IS EARLIER
• Fresh circular or circular in the form of advertisement, as the case may be, shall be issued, in each succeeding FY, for inviting deposits during that FY.
VALIDITY PERIOD OF THE DEPOSIT CIRCULAR [R4(6)]
Appointment of trustee – 1 or more for creating security for the deposits.Trust Deed to be executed in DPT 2 atleast 7 days before the issuance of circular
or advertisementMeeting of depositors – request by 10% in value or event affecting interest of
deposits. Nomination for deposits.Furnish deposit receipts within 21 days fro the date of receipt of moneyMaintain liquid assets and create Deposit repayment reserve account – deposit
15% every fy with any scheduled bank. The said amount shall not fall below 15% of the amount of deposits maturing until the end of current FY and the next FY. The amount to be used only for repayment of deposits.
Register of Deposits Premature repayment of deposits – reduce rate of interest by 1%, exemption for
compliance of Rule 3 and armed forces. RETURN OF DEPOSITS IN DPT 3
Penal rate of interest – 18% p.a.
Other compliances
PENAL PROVISIONS UNDER THE ACT For failure to repay deposits accepted before commencement of the act as
per provisions, company, in addition to repayment with interest, liable for fine which shall not be less than Rs. 1 crore but could extend upto Rs. 10 crore. Officer who is in default will be punishable with imprisonment extending to seven years or fine extending to Rs 2 crore or both. [s74(3)]
Damages for Fraud - In case deposits were accepted with fraudulent intent or purpose and there is default in repayment, action under section 447 (non compoundable) and every officer responsible for accepting deposits be personally responsible without limitation of liability. [S75]
Punishment for contravention of Section 73 or Section 76 – refund is obvious, + fine not less than 1 Crore but could extend to Rs. 10 crore. Officer who is in default will be punishable with imprisonment extending to seven years or fine extending to Rs 2 crore or both. [s74(3)] and if knowingly – 447 would also trigger. [S76A]
For failure by a company to repay deposits or pay interest, any suit, proceedings or action may be taken by any person, group of persons or any association of persons who had incurred loss on that account – Class action suit.
OTHER PAINFUL MOMENTS• SECTION 164 (2) (b) – No person who is or has been a
director of a company which- has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for 1 year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of 5 years from the date on which the said company fails to do so. Proviso relief – appeal., vacation of office u/s 167.
• Can not pay dividend on equity shares. dividend on pref. shares can be paid.
Prohibition on issue of shares at a Discount[S53]A Company shall not issue shares at a discount
except as provided under S54Any share issued by a Company at a discounted
price shall be void (Drafting error. Amendment proposed in CB2016) What is the legal position as on date ?
Issue of Sweat Equity Shares [S54]Notwithstanding S53, a Company may issue Sweat Equity
shares of a class of shares already issued.The issue must be authorized by a Special ResolutionResolution must specify : the no. of shares, current market price, consideration, if any and the class or classes of directors or employees to whom such
equity shares are to be issued atleast 1 year has elapsed since the date on which the
company had commenced business
Few Important conditions stated in Rule 8
SR valid for 1 yearSweat equity shares shall not be issued for more than 15% of the existing paid up
EQUITY share capital in a year or shares of the issue value of Rs. 5 crore, whichever is higher.
Issuance of Sweat equity shares shall not exceed 25% of the paid up equity capital of the Company, at any time.
"Provided further that a startup company, as defined in notification number GSR 180(E) dated 17th February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, may issue sweat equity shares not exceeding 50% of its paid up capital upto five years from the date of its incorporation or registration". [Amendment dated 19th July, 2016]
Locked-in/ Non-transferable for 3 years from the date of allotment [Mention in Share certificate]
Valuation of fair price giving justification for such valuation.Valuation of IPR/Know How/ Value addition
Issue of preference shares [S55]Irredeemable preference shares can not be issued under the 2013
Act.If AOA permits, companies can issue of preference shares
redeemable within a period not exceeding 20 years from the date of their issue subject to conditions prescribed in Rule 9.
If it is convertible, it is subject to compliance of Section 62(1)(c) as well as Section 42.
If it is non-convertible, it is subject to compliance of Section 42 only.
Rule 9 stipulates requirement of SR, non subsisting default in redemption of pref. shares or payment of dividend due on any pref. shares, and other disclosure requirements etc.
Issue of preference shares [S55] Where dividend payable on Preference Shares
(cumulative or non-cumulative) is in arrears for a period of two years or more, such class of preference shareholders shall have a right to vote on all resolutions placed before a meeting of the company
Premium payable on redemption of preference shares issued w.e.f. 01.04.2014 will be provided only out of profits of the company
Issue of Debentures [S71 read with Rule 18]A company may issue debentures – fully convertible, Partly convertible or non-convertibleIssue of debentures convertible into shares requires compliance of Section 62(1)(c). Debenture Trustee to be appointed before issuing a prospectus or making an offer to
company’s members exceeding 500 personsCompany issuing debentures to execute debenture trust deed not later than 60 days after
the allotment of debenturesNo secured debentures can be issued with a redemption period beyond ten years from
the date of the issue; However, companies engaged in setting up infrastructure projects, Infrastructure Finance
Companies, Infrastructure Debt Fund Non-Banking Financial Companies and Companies permitted by a Ministry or department of the Central Govt. or RBI etc. to issued debentures for a period exceeding 10 yrs. BUT NOT EXCEEDING 30 yrs.
Issue of Debentures[S71 read with Rule 18]
A company (including manufacturing / infrastructure) issuing NCDs to create DRR equivalent to atleast 25% of the amount raised by the debenture issue before the debenture redemption commences
No DRR by All India Financial Institutions and Banking Companies for debentures issued;
NBFCs registered under RBI Act to create DRR of 25% for debentures issued through public issue; No DRR in case of privately placed debentures by them.
The company shall on or before 30th April each year invest or deposit a sum which is not less than 15% of the amount of its debentures maturing during the year ending on 31st day of March of the next year – Deposit with any scheduled bank (free from any charge or lien) / in unencumbered securities of Central Govt./State Govt. etc.
In case of Partly convertible debentures, DRR shall be created in respect of Non-Convertible portion of debentures.
DRR shall not be utilised by the company except for the purpose of redemption of debentures.
Also, the amount remaining invested or deposited, as the case may be, shall not at any time fall below 15% of the amount of the debentures maturing during the year ending on the 31st March of that year.
Issue of Debentures[S71 read with Rule 18]Rule 18 doesn’t apply to any amount received by a Company against issue of commercial paper or any other similar instrument issued in accordance with the guidelines or regulations or notification issued by the RBI. [Amendment dated March 18, 2015]
Unless the scheme framed by RBI specifies so, the Offer of foreign currency convertible bonds or foreign currency bonds issued in accourdance with Scheme framed by RBI shall not require compliance of Rule 18. [Amendment dated March 18, 2015]
Rights IssueSection 62(1)(a)(ii) :unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right
Deemed to include a right to renounce – statutory right.
Renunciation leading to allotment to more than 200 persons – is it a deemed public issue ?
Rights IssueSection 62(1)(a)(ii) :after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company
What is Preferential Offer‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and
does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities;
“shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.
Issue on Preferential Basis under 62(1)(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) of 62(1),
either for cash or for consideration other than cash, VALUATION REPORT PLUS + subject to conditions prescribed in Rule 13
Compliance with sec 42 and rules made thereunder is mandatory.
Issue on Preferential Basis under 62(1)(c)FULLY PAID UP -the securities allotted by way of preferential offer shall be made
fully paid up at the time of their allotment.The company shall make disclosures in the explanatory statement to be
annexed to the notice of the general meeting pursuant to section 102 of the Act (object of issue, basis for price etc)
Allotment on preferential basis to be made within 12 months from the date of passing of SR
NEW SR after 12 months - if the allotment of securities is not completed within 12 months from the date of passing of the special resolution, another special resolution shall be passed for the company to complete such allotment thereafter.
PRICING FOR CONVERTIBLE SECURITIES – Decide at the outset – (i) either upfront or (ii) not earlier than 30 days to the date the holder of convertible security becomes entitled to apply for shares, based on valuation report given not earlier than 60 days of the date of entitlement . – Disclosure in the explanatory statement of the Notice of GM. – Recent amendment dated 19th July, 2016
Conversion [62(3)]Nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company: Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.
PRIOR APPROVAL OF THE SHAREHOLDERS Only Debentures and Loan. Conversion of Loan into equity in absence of prior approval – discussion on SRM Energy Limited 2011 SAT Judgment.
Conversion of debentures/Loan - Govt. Co. [S62(4)]Notwithstanding anything contained in sub-section (3), where any
debentures have been issued, or loan has been obtained from any Government by a company, and if that Government considers it necessary in the public interest so to do, it may, by order, direct that such debentures or loans or any part thereof shall be converted into shares in the company on such terms and conditions as appear to the Government to be reasonable in the circumstances of the case even if terms of the issue of such debentures or the raising of such loans do not include a term for providing for an option for such conversiono Public interest
Provided that where the terms and conditions of such conversion are not acceptable to the company, it may, within sixty days from the date of communication of such order, appeal to the Tribunal which shall after hearing the company and the Government pass such order as it deems fito Law of contract…. Protected to an extent !
Govt. to consider financial position etc. [S62(5)]In determining the terms and conditions of conversion under sub-section (4), the Government shall have due regard to the financial position of the company, the terms of issue of debentures or loans, as the case may be, the rate of interest payable on such debentures or loans and such other matters as it may consider necessary.
Resultant increase in authorized capital [ S62(6)] Where the Government has, by an order made under sub-
section (4), directed that any debenture or loan or any part thereof shall be converted into shares in a company and where no appeal has been preferred to the Tribunal under sub-section (4) or where such appeal has been dismissed, the memorandum of such company shall, where such order has the effect of increasing the authorised share capital of the company, stand altered and the authorised share capital of such company shall stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into.
In my view, liability for payment of stamp duty would be on the company. No exemption.
Clause (i) of Explanation II to sub-section (2) of Section 42 defines Private Placement :"Private Placement" means 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 a private placement offer letter and which satisfies the conditions specified in this section“Exhaustive definitionOffer of securities or invitation to subscribe securitiesSelect group of person – More than 1. Securities and not only shares.
Private Placement [S42]
Offer of securities or Invitation to subscribe to securitiesNo. of persons to whom offer can be made [Twin Conditions] : Not exceeding 50 persons per offer/invitation
(excluding QIBs and Employee stock options). Not exceeding 200 persons in aggregate, in a financial
year(excluding QIBs and Employee stock options).These limits are for each kind of security i.e. equity,
preference, debenture.
Private Placement [S42]
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 (200), 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 and shall accordingly be governed by the provisions of Part I of this Chapter.
Explanation I to sub-section (2) of Section 42:
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 that offer or invitation has been withdrawn or abandoned by the company.
Does this apply to all kinds of securities or securities of the same class/ type ?
Legislature has used the words “ unless the allotment with respect to any offer or invitation made earlier” (Even explanation (ii) to Rule 14(2)(B) clarifies this position)
Explanation to Rule 2(b) clarifies two things. Firstly, that the 200 persons criteria is for each kind of security i.e. equity, preference and debentures and secondly, that the requirement of 42(3) shall apply in respect of each kind of security. Indicates, allotment pursuant to offer made under 42 only.
Section 42(3)
PAS 4 – Offer letter [ Names to be pre-decided, offer letter must be received by in his name]
PAS 3 – File Return of allotment in FORM PAS 3, including the complete list of all security-holders, with their full names, addresses, number of securities allotted etc.
PAS 5 – Complete record of such offers to be maintained
GNL 2 within 30 days - ROC
Key Documents - Snapshot
Conditions stipulated in Rule 14Prior approval of shareholders – Special Resolution for each of the offers or
invitations. Explanatory statement – basis/ justification for price (including premium, if any) . For non convertible debentures – Previous SR only once in a year for all the offers or invitation for such debentures + relaxation
PAS 4 shall be accompanied by an application form, serially numbered and addressed specifically to the person to whom the offer is made
Shall be sent to him either in writing or in electronic mode within 30 days of recording the names of such persons in accordance with sec 42(7)
Mode of Delivery – “IN WRITING or IN ELECTRONIC MODE” – Regd. Post, speed post, courier, hand delivery, fax, email etc.
No person other than the person so addressed in the application form shall be allowed to apply. In case of of non compliance - it would be treated as an Invalid application.
Investment size per person – Not less than Rs. 20000/- of face value of the securities (Not applicable on NBFCs registed with RBI under RBI Act, 1934 and Housing finance companies registered with NHB under NHB Act, 1987, if they comply with relevant regulations in respect of offer or invitation to be issued on private placement basis. (however, shall comply, if no regulations specified by RBI/ NHB)
Deemed Public offer[S42(4)] / Separate Bank Account [S42(5)]
Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with.
o Draconian provision !All monies payable towards subscription of securities under this
section shall be paid through cheque or demand draft or other banking channels but not by cash.
Cheque or demand draft or NEFT/RTGS etc. but not by Cash. {Rule 14(2)(d) states that the payment must be received from the bank account of the person subscribing to such securities. And in case of joint holding – bank account of the person whose name appears first in the application}
Not by conversion of Loan ?
Refund [S42(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 not able to allot the securities within that period – repay the
application money to the subscribers within 15 days from the date of completion of sixty days.
If fails to repay as above – liable to repay alongwith interest at the rate of 12 percent p.a. from the expiry of 60th day.
keep Application monies in separate bank account in a scheduled bank. New account to be opened for every new case falling under sec 42 ? Legislature has used the words - “ separate bank account” and not
the words “open a bank account and deposit cheques/demand drafts in such bank account”.
Such monies shall not be utilised for any purpose other than— (a) for adjustment against allotment of securities; or (b) for the repayment of monies where the company is unable to allot securities.
All offers covered under this section shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and
such persons shall receive the offer by name, and that a complete record of such offers shall be kept by the company in Form PAS 5 and
complete information about such offer shall be filed with the Registrar {in Form GNL 2} within a period of thirty days of circulation of relevant private placement offer letter.
No company offering 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 offer.
PAS5 and GNL 3 [S42(7)] and Public Advertisement [S42(8)]
Return of Allotment :file with the Registrar a return of allotment in FORM PAS 3, including the complete list of all security-holders, with their full names, addresses, number of securities allotted etc.
Penal Provision : If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable
for a penalty which may extend to the amount involved in the offer or invitation or Rs. 2 Crore, whichever is higher, and
the company shall also refund all monies to subscribers within a period of 30 days of the order imposing the penalty.
Return of Allotment[S42(9)] / Penal Provision [S42(10)]
