Private Placement and Prospectus

Private Placement and Prospectus

PRIVATE PLACEMENT AND PROSPECTUS

Contents

Public Offer and Private Placement (Section 23)

  1. A public company may issue securities—
    1. to public through prospectus (public offer); or
    2. through private placement; or
    3. through a rights issue or a bonus issue
  2. A private company may issue securities—
    1. by way of rights issue or bonus issue; or
    2. through private placement

Provisions related to Private Placement

(Section 42 read with Rule 14 of Prospectus & Allotment of Securities Rules)

What is 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 in Form No. PAS-4.

All such offers shall be made only to such persons whose names are recorded by the company max. 30 days prior to the invitation to subscribe.

A private placement offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the names of such persons.

No person other than the person so addressed in the application form shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid.

Maximum number of allotees in a financial yearthrough private placement[Section 42(2)]

The offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed in a financial year, otherwise such offer shall be considered as public offer.

According to Rule 14(2)(b),

  • such offer or invitation shall be made to not more than 200 persons in the aggregate in a financial year.
  • any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees stock option shall not be considered while calculating the limit of 200 persons

Note:

  • This restrictions would be reckoned individually for each kind of security that is equity share, preference share or debenture;
  • Any offer or invitation made to QIBs, or to employees of the company under a scheme of employees stock option shall not be considered while calculating the limit of 200 persons;

Minimum value of offer or invitation per person through private placement Rule 14(2)(c)

The value of such offer or invitation per person shall be with an investment size of not less than Rs. 20,000 of face value of the securities.

Special Resolution for making a private placement of securities [Rule 14(2)(a)]

A company shall not make a private placement of its securities unless

  • the proposed offer of securities or invitation to subscribe securities has been previously approved by the shareholders of the company, by a Special Resolution, for each of the Offers or Invitations

In case of offer or invitation for non-convertible debentures,

  • it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitation for such debentures during the year.

No fresh offer or invitation till completion or withdrawal of previous offer

No fresh offer or invitation to subscribe securities under private placement shall be made unless

  • the allotments with respect to any offer or invitation made earlier have been completed or
  • such previous offer or invitation has been withdrawn or abandoned by the company.

Such condition shall apply in respect of offer or invitation of each kind of security. So no offer or invitation of another kind of security shall be made unless allotments with respect to offer or invitation made earlier in respect of any other kind of security is completed.

Subscription money [Rule 14(2)(d)]

The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the Bank account from where such payments for subscriptions have been received.

Monies payable on subscription to securities to be held by joint holders shall be paid from the bank account of the person whose name appears first in the application.

Allotment of Securities [Section 42(6)]

A company making an offer or invitation under private placement shall allot its securities within 60 days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within 15 days from the date of completion of 60 days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of 12% per annum from the expiry of the 60thday.

Record of private placement offers [Section 42(9) & Rule 14(3)/(4)]

The company shall maintain a complete record of private placement offers in Form PAS-5.

A copy of such record along with the private placement offer letter in Form PAS-5 shall be filed with the Registrar with fee as provided in Companies (Registration Offices and Fees) Rules, 2014 and where the company is listed, with the Securities and Exchange Board within a period of thirty days of circulation of the private placement offer letter.

A return of allotment of securities under section 42 shall be filed with the Registrar within 30 days of allotment in Form PAS-5 and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of all security holders containing-

  1. the full name, address, Permanent Account Number and E-mail ID of such security holder;
  2. the class of security held;
  3. the date of allotment of security ;
  4. the number of securities held, nominal value and amount paid on such securities; and particulars of onsideration received if the securities were issued for consideration other than cash.

Penalty for default

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 2 crore rupees,

whichever is higher

Further, company shall also refund all monies to subscribers within a period of 30 days of the order imposing the penalty.

Provisions related to Public Offer

What is Prospectus?

According Section 2(70), prospectus means

  • any document described or issued as a prospectus and includes
    • a red herring prospectus referred to in section 32 or
    • shelf prospectus referred to in section 31 or
    • any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate;

Power of Securities and Exchange Board to regulate issue and transfer of securities, etc. (Section 24)

Subject to the provisions of Companies Act, 2013,

  • in case of listed companies or those companies which intend to get their securities listed on any recognised stock exchange in India, matters related to
    1. issue and transfer of securities; and
    2. non-payment of dividend,
      be administered by the Securities and Exchange Board by making regulations in this behalf.
  • in case of other companies, be administered by Central Government

Document containing offer of securities for sale to be deemed prospectus (Section 25)

Sub-section 1

Where a company allots or agrees to allot any securities of the company

  • with a view to all or any of those securities being offered for sale to the public,

any document by which the offer for sale to the public is made shall,

for all purposes,

be deemed to be a prospectus issued by the company;

Sub-section 2

For the purposes of this Act, it shall, unless the contrary is proved, be evidence that an allotment of, or an agreement to allot, securities was made with a view to the securities being offered for sale to the public if it is shown—

  1. that an offer of the securities or of any of them for sale to the public was made within six months after the allotment or agreement to allot; or
  2. that at the date when the offer was made, the whole consideration to be received by the company in respect of the securities had not been received by it.

Matters to be stated in prospectus (Section 26)

  1. Prospectus shall be dated and signed. This Sub-section tells the content of Prospectus.
  2. In case of right issue and further public issue, issuer is not bound to comply with the requirements of Sub-section 1.
  3. According to Explanation to Subsection 3, the date indicated in the prospectus shall be deemed to be the date of its publication.
  4. According to Sub-section 4, no prospectus shall be issued by or on behalf of a company or in relation to anintended company unless on or before the date of its publication, there has been delivered tothe Registrar for registration, a copy thereof signed by every person who is named therein asa director or proposed director of the company or by his duly authorised attorney.
  5. According to Sub-section 7, the Registrar shall not register a prospectus unless the requirements of this sectionwith respect to its registration are complied with and the prospectus is accompanied by theconsent in writing of all the persons named in the prospectus.
  6. According to Sub-section 8, no prospectus shall be valid if it is issued more than ninety days after the date onwhich a copy thereof is delivered to the Registrar.
  7. According to Sub-section 9, if a prospectus is issued in contravention of the provisions of this section,
    • the company shall be punishable with fine
      • which shall not be less than Rs. 50,000
      • but which may extend to 3 lakh rupees and
    • every person who is knowingly a party to the issue of such prospectus shall be punishable
      • with imprisonment for a term which may extend to 3 years or
      • with fine
        • which shall not be less than Rs. 50,000
        • but which may extend to three lakh rupees,
          or
      • with both.

Offer of sale of shares by certain members of company (Section 28)

  1. Where certain members of a company propose, in consultation with the Board of Directors to offer, in accordance with the provisions of any law for the time being in force, whole or part of their holding of shares to the public, they may do so in accordance with such procedure as may be prescribed.
  2. Any document by which the offer of sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the company.

Public offer of securities to be in dematerialised form (Section 29)

  1. Notwithstanding anything contained in any other provisions of this Act, every company making public offer shall issue the securities only in dematerialised form.
  2. Any other company, may
    • convert itssecurities into dematerialised form or
    • issue its securities in
      • physical form or
      • dematerialised

Shelf prospectus

What is Shelf Prospectus?

Shelf prospectus means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

According to Section 31

  1. Any class or classes of companies, as the SEBI may provide by regulations in this behalf, may file a shelf prospectus with the Registrar at the stage of the first offer of securities included therein which shall indicate a period not exceeding 1 year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus, and in respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required.
  2. A company filing a shelf prospectus shall be required to file an information memorandum containing all material facts relating to new charges created, changes in the financial position of the company as have occurred between the first offer of securities or the previous offer of securities and the succeeding offer of securities and such other changes as may be prescribed, with the Registrar within the prescribed time, prior to the issue of a second or subsequent offer of securities under the shelf prospectus:
    Provided that where a company or any other person has received applications for the allotment of securities along with advance payments of subscription before the making of any such change, the company or other person shall intimate the changes to such applicants and if they express a desire to withdraw their application, the company or other person shall refund all the monies received as subscription within 15 days thereof.
  3. Where an information memorandum is filed, every time an offer of securities is made under sub-section (2), such memorandum together with the shelf prospectus shall be deemed to be a prospectus.

Rule 10 – Shelf prospectus and Information Memorandum

The information memorandum shall be prepared in Form PAS-2 and filed with the Registrar along with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 within one month prior to the issue of a second or subsequent offer of securities under the shelf prospectus.

What is Red herring prospectus?

What is Red herring prospectus?

Red herring prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

According to Section 32

  1. A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.
  2. A company proposing to issue a red herring prospectus under sub-section (1) shall file it with the Registrar at least 3 days prior to the opening of the subscription list and the offer.
  3. A red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.
  4. Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised, whether by way of debt or share capital, and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board.

Issue and Allotment of Securities

Issue of application forms for securities (Section 33)

  1. No form of application for the purchase of any of the securities of a company shall be issued unless such form is accompanied by an abridged prospectus:
    Provided that nothing in this sub-section shall apply if it is shown that the form of application was issued—

    1. in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to such securities; or
    2. in relation to securities which were not offered to the public.
  2. A copy of the prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to him.
  3. If a company makes any default in complying with the provisions of this section, it shall be liable to a penalty of Rs. 50,000 for each default.

Allotment of securities by company (Section 39)

  1. No allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company by cheque or other instrument.
  2. The amount payable on application on every security shall not be less than 5% of the nominal amount of the security or such other percentage or amount, as may be specified by the Securities and Exchange Board by making regulations in this behalf.
  3. If the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of 30 days from the date of issue of the prospectus, or such other period as may be specified by the SEBI, the amount received under sub-section (1) shall be returned within such time and manner as may be prescribed.
  4. Whenever a company having a share capital makes any allotment of securities, it shall file with the Registrar a return of allotment in such manner as may be prescribed.
  5. In case of any default under sub-section (3) or sub-section (4), the company and its officer who is in default shall be liable to a penalty, for each default, of
    • Rs. 1000 for each day during which such default continues or
    • one lakh rupees,
      whichever is less.

Refund of Application Money [Rule 11]

  1. If the stated minimum amount has not been subscribed and the sum payable on application is not received within the period specified therein, then the application money shall be repaid within a period of 15 days from the closure of the issue and if any such money is not so repaid within such period, the directors of the company who are officers in default shall jointly and severally be liable to repay that money with interest at the rate of 15% per annum.
  2. The application money to be refunded shall be credited only to the bank account from which the subscription was remitted.

Return of Allotment [Rule 12]

  1. Whenever a company having a share capital makes any allotment of its securities, the company shall, within 30 days thereafter, file with the Registrar a return of allotment in Form PAS-3, along with the fee as specified in the Companies (Registration Offices and Fees) Rules, 2014.
  2. There shall be attached to the Form PAS-3 a list of allottees stating their names, address, occupation, if any, and number of securities allotted to each of the allottees and the list shall be certified by the signatory of the Form PAS-3 as being complete and correct as per the records of the company.
  3. In the case of securities (not being bonus shares) allotted as fully or partly paid up for consideration other than cash, there shall be attached to the Form PAS-3 a copy of the contract, duly stamped, pursuant to which the securities have been allotted together with any contract of sale if relating to a property or an asset, or a contract for services or other consideration.
  4. Where a contract referred to in sub-rule (3) is not reduced to writing, the company shall furnish along with the Form PAS-3 complete particulars of the contract stamped with the same stamp duty as would have been payable if the contract had been reduced to writing and those particulars shall be deemed to be an instrument within the meaning of the Indian Stamp Act, 1899, and the Registrar may, as a condition of filing the particulars, require that the stamp duty payable thereon be adjudicated under section 31 of the Indian Stamp Act, 1899.
  5. A report of a registered valuer in respect of valuation of the consideration shall also be attached along with the contract as mentioned in sub-rule (3) and sub-rule (4).
  6. In the case of issue of bonus shares, a copy of the resolution passed in the general meeting authorizing the issue of such shares shall be attached to the Form PAS-3.
  7. In case the shares have been issued in pursuance of clause (c) of sub-section (1) of section 62 by a company other than a listed company whose equity shares or convertible preference shares are listed on any recognised stock exchange, there shall be attached to Form PAS-3, the valuation report of the registered valuer.

Liability for Untrue Statement in Prospestus

The Golden Rule or Golden Legacy (New Brunswick, etc., Co. v. Muggeridge)

It is the duty of those who issue the prospectus to be truthful in all respects. Those who issue a prospectus hold out to the public great advantages which will accrue to the persons who will take shares in the proposed undertaking. Public is invited to take shares on the faith of the representation contained in the prospectus. The public is at the mercy of company promoters. Everything must, therefore, be stated with accuracy. Nothing should be stated as a fact which is not so and no fact should be omitted, the existence of which might in any degree affect the nature or quality of the privileges and advantages which the prospectus holds out as inducement to take shares.

If concealment of any material fact has prevented an adequate appreciation of what was stated, it would amount to misrepresentation. Thus, even if every specific statement is literally true, the prospectus may be false if by reason of the suppression of other material facts, it conveys a false impression.

What is an Untrue Statement?

A statement included in a prospectus shall be deemed to be untrue, if the statement is misleading in the form and context in which it is included.
Further, where any inclusion or omission of any matter in a prospectus is likely to mislead, the prospectus shall be deemed, in respect of such omission, to be a prospectus in which an untrue statement is included.

Onus for Proof of Mis-statement

The burden of proof in a suit by an allottee that he has been misled by the misstatement in the prospectus lies on the allottee. He must prove the following:

  1. The misrepresentation was of a fact;
  2. It was in respect of a material fact. What is a material statement of fact will depend upon the circumstances of each case.
  3. He acted on the misrepresentation; and
  4. He suffered damages in consequence.

Remedies for Misrepresentation in Prospectus

  1. The first remedy against the company is to rescind the contract. A person who takes securities on the faith of a prospectus containing false statements, may apply to the Court for setting contract aside, and striking off his name from the register of members. He may also claim his money back.
  2. The second remedy against the company is to sue for damages for deceit. This suit is founded on the tort of deceit, and is not a case of fraud on the part of directors or promoters. The allottee may recover damages from the company for any loss he may have suffered if the invitation to take securities is emanating from the company and the persons making it on behalf of the company have fraudulently mis-represented material facts.

Remedies against Directors or Promoters

A person who subscribed for shares on the faith of a false prospectus may claim from directors or promoters:

  1. damages for fraudulent misrepresentation,
  2. Compensation under Section 35 of the Act,
  3. Damages for non-compliance with the requirements of Section 26 of the Act.

(i) Damages for fraudulent misrepresentation

An allottee may sue the director for damages for deceit, if there are fraudulent misrepresentations in the prospectus. But the directors will not be liable for damages for mis-statement if they believed them to be true

(ii) Compensation for untrue Statement

As per section 35(1), where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company, then, the following persons are liable to pay compensation to every person who has sustained loss or damage by reason of untrue statement included in a prospectus:

  1. every person who is a director of the company at the time of the issue of the prospectus;
  2. every person who has authorised himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time;
  3. every person who is a promoter of the company;
  4. every person who has authorised the issue of the prospectus; and
  5. is an expert referred to in sub-section (5) of section 26
    The above stated liability shall be without prejudice to any punishment to which any person may be liable under section 36.

When civil liability can be avoided [Section 35(2)]

No person referred above shall be liable for civil action if he proves:

  1. that having consented to become a director of the company, he withdrew his consent before the issue of the prospectus, and that it was issued without his authority or consent; or
  2. that the prospectus was issued without his knowledge or consent, and that on becoming aware of its issue, he forthwith gave reasonable public notice that it was issued without his knowledge or consent;
    or

Further an expert may also escape the liability, if he proves that having given his consent under Section 26 to the issue of the prospectus, he withdrew it in writing before delivery of a copy of the prospectus for registration to the Registrar.

Criminal Liability for Mis-statements in Prospectus (Section 34)

Where a prospectus, issued, circulated or distributed under this Chapter, includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorises the issue of such prospectus shall be liable under section 447.
But a person shall not held guilty under this section if he proves that such statement or omission was immaterial or that he had reasonable grounds to believe, and did up to the time of issue of the prospectus believe, that the statement was true or the inclusion or omission was necessary.

Punishment for fraudulently inducing persons to invest money (Section 36)

Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into, or to offer to enter into,—

  1. any agreement for, or with a view to, acquiring, disposing of, subscribing for, or underwriting securities;
    or
  2. any agreement, the purpose or the pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities; or
  3. any agreement for, or with a view to obtaining credit facilities from any bank or financial institution,
    shall be liable for action under section 447.

Punishment for personation for acquisition, etc., of securities (Section 37)

  1. Any person who—
    1. makes or abets making of an application in a fictitious name to a company for acquiring, or subscribing for, its securities; or
    2. makes or abets making of multiple applications to a company in different names or in different combinations of his name or surname for acquiring or subscribing for its securities; or
    3. otherwise induces directly or indirectly a company to allot, or register any transfer of, securities to him, or to any other person in a fictitious name,
      shall be liable for action under section 447.
  2. The provisions of sub-section (1) shall be prominently reproduced in every prospectus issued by a company and in every form of application for securities.
  3. Where a person has been convicted under this section, the Court may also order disgorgement of gain, if any, made by, and seizure and disposal of the securities in possession of, such person.
  4. The amount received through disgorgement or disposal of securities under subsection (3) shall be credited to the Investor Education and Protection Fund.

Punishment for fraud (Section 447)

Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud,

  • shall be punishable with imprisonment
    • for a term which shall not be less than 6 months
    • but which may extend to 10 years
  • and shall also be liable to fine
    • which shall not be less than the amount involved in the fraud,
    • but which may extend to 3 times the amount involved in the fraud

Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than 3 years.

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