Companies Act 2013 majorly specifies only 3 modes of raising finance for companies viz: Public Issue, Rights Issue and Private Placement.
Generally, for need based funding, companies always prefer private placement as an alternative for raising funds as the investors are usually identified beforehand. Also, Private companies have only two alternatives of raising funds, public issue not being applicable. Private Placement has therefore been the most utilized and at the same time, the more strenuous process owing to the restrictive provisions and heavy compliances mentioned in the Act and the Rules framed thereunder.
Vide the Companies Amendment Act 2017, the earlier Section 42 has now been replaced with a complete new section. Currently, only the provisos to the sub sections of Section 42 have been enforced w.e.f. 7th of August 2018. Along with the Section, Rule 14 w.r.t. Private Placement in the Companies (Prospectus & Allotment of Securities) Rules, 2014 has also been amended to bring about the effective changes.
Why the Amendment?
- To avoid any interpretation by the users, which is otherwise intended by the legislators
- To simplify the whole process and cutting down on too many reporting requirements
- To make compliances more stringent for Investor interest
Here in below, we have tried to encompass to highlight the amendments introduced: –
|Private Placement to be conducted through issuance of Private Placement Offer letter
||Private Placement Offer letter is now, Private Placement Offer letter cum Application form
||Multiple documentation has been done away with.
||Proviso to 42(3) says that Private Placement Offer and Application shall not carry a right of renunciation
||The newly added proviso debars any other interpretation expressly.
||Proviso to 42(4) monies received through private placement shall not be utilized unless allotment of securities has been completed & return of allotment has been filed (PAS-3) with the Registrar of Companies (ROC)
||This shall avoid non-compliances and protect Investors’ interest. Statutory data shall be updated with authorities regularly.
|Return of allotment – PAS-3 to be filed with ROC within 30 days from the date of allotment
||PAS-3shall now have to be filed within 15 days vide sub- section (8).
||Time limit has been reduced to urge quick compliances.
||*More than one issue of securities permitted to select class of persons
||Ease of raising funds through multiple type of securities issue with different rights and features.
*The earlier provision – “prohibiting any fresh offer or invitation unless the allotments with respect to any offer or invitation made earlier are completed or that offer or invitation has been withdrawn or abandoned by the company”; has been maintained in the new sub section (3) as well but the above mentioned proviso has been added to the same.
The plain reading of this proviso does not provide a clear interpretation of who shall be this class of identified persons as the same has not been prescribed; but owing to the draft Prospectus & Allotment Rules released by MCA on 15.02.2018, it can be inferred that it wanted to provide this exemption to classes like qualified institution buyers and employees of the company. There is a bit of an ambiguity now, as the amended rules do not provide any clarity.
The modified Rule 14 of Private Placement of The Companies (Prospectus & Allotment of Securities) Rules, 2014 has also been notified on 7th of August 2018 which envisages some important amendments like: –
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