2 October, 2018
A company can finance its operation through issue of securities, debt funding or a combination of both.
The three modes for securities financing are through
i) rights issue which involves further issue of share capital to existing shareholders;
ii) public issue means offering securities to public at large and
iii) private placement means any offer of securities or invitation to subscribe or issue of securities to a select group of persons by a company through private placement offer cum application (not exceeding two hundred (200) excluding Qualified Institutional Buyers and employees covered under Employee Stock Ownership Plan).
Amongst other modes of financing the most prevalent means of financing used by the Indian companies is through private placement of securities to the investors intending to invest in a company.
Section 42 of Companies Act, 2013 and Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018
Section 42 of Companies Act, 2013 ("Act") prescribes the procedure and conditions upon which private placement of securities is made.
The Report of the Company Law Committee ("CLC") issued in February 2016 recommended changes to private placement norms to simplify the processes, avoid duplication of disclosures, lessen regulatory interference and ensure greater self-regulation. This led to amendment of section 42 of the Act. Although the procedural requirements have been simplified and penalty for violation of norms of private placement has been significantly reduced the disclosure requirements have been enhanced significantly.
Some of the key amendments in the requirements are highlighted below:
Amendment in procedural requirements
1 No right of renunciation- The offer letter is required to be issued to specific persons without the right to renounce their right to subscribe in favour of other persons. It implies that the person whose name is recorded by the Company shall have an option to either accept or reject the offer only.
2 No minimum allotment size- Erstwhile Rule 14 restricted the investment size per person to INR 20,000/- of face value of securities which has now been dropped off.
3 Stringent Conditions on utilization of funds- Section 42 (4) read with Rule 5 provides for the most
significant amendment as to not permitting to utilise any monies raised through private placement till the allotment is complete and the return of allotment in Form PAS-3 is filed with the Registrar of Companies ("ROC") within 15 days of allotment thereby implying that till the names of the investors are recorded with the ROC the funds cannot be utilised which provides an added protection to the investors
4 Amendment in timelines for filing return of allotment- The timelines for filing the return of allotment in Form PAS-3 is filed with the ROC has been reduced to 15 days unlike the erstwhile provision of 30 days thereby indicating that filing of return of allotment is mandatory for utilization of funds for business purposes.
5 Relaxation in filing of PAS-4 and PAS-5 with ROCPrivate Placement Offer Letter in Form PAS-4 and record of persons to whom the offer letter is issued in Form PAS-5 are required to be maintained by the Company and are no longer required to be filed with the ROC. The requirement of filing of the offer letter with the Securities and Exchange Board of India ("SEBI") by listed issuers has also been dispensed with.
Simultaneous issue of different securities permitted- Section 42 (5) provides for the restriction as to no fresh issue of securities can be undertaken unless the previous offer of securities has been withdrawn, abandoned or securities have been allotted pursuant to the said offer. It has been clarified that there can be simultaneous issue of more than one security if they are different securities – e.g., issue of debentures and issue of equity shares can take place simultaneously.
The 200 person limit is to be reckoned for each kind of security, individually.
Amendment in Disclosure requirements
- Private placement offer cum application letter (offer letter)- The erstwhile 'private placement offer letter' has been replaced with the new 'private placement offer cum application letter' pursuant to rule 14(3) of Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018.
The intent of the CLC was to effectively reduce the duplication of disclosures and hence for the ease of doing business, have divided the offer letter in two parts. Part-A sets out extensive disclosure whereas Part-B is an application letter to be filled by the applicant. While the disclosures have been increased, the offer letter is no longer required to be filed with the ROC or SEBI.
Amendment in Penal provisions
- Introduction of penal provisions with respect to non-filing of Form PAS-3- If return of allotment in Form PAS-3 is not filed within 15 days from the date of allotment of securities, the Company, its promoters and directors shall be liable to a penalty of INR 1,000 (Rupees One thousand) for each day of default and is capped at INR 2,500,000 (Rupees Two million five hundred thousand).
- Change in penal provisions with respect to private placement- For a non-compliance of the private placement provisions, now the penalty is capped at the amount raised through the private placement process or INR 20,000,000 (Rupees Twenty million), whichever is lower. Earlier, the penalty imposed was capped at higher of the two amounts.
Conclusion
The changes to the private placement norms while they provide some respite have largely made compliances more cumbersome for issuance of securities. For instance, dropping of minimum investment size, separate shareholders' resolution, removal of unnecessary filing requirements are a welcome changes; however, the additional conditions on use of funds and increase in level of disclosures in the offer letter and a cut-off date for valuation increasescompliance for the companies. Further, given the penalties involved in case of default in complying with the provisions of Section 42 it is pertinent for the companies making private placement to strictly follow the requirements as laid down in the section.
For further information, please contact:
Neetika Ahuja, Associate Partner, Clasis Law
neetika.ahuja@clasislaw.com
