AMENDMENTS IN PRIVATE PLACEMENT PROVISIONS AND THEIR IMPLICATIONS

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. 7^th 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: -

Original provisions	Amended provisions	Impact
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 7^th of August 2018 which envisages some important amendments like: -

Original Provision	Amended Provisions	Impact
One Special Resolution was adequate for all the issues of Non-convertible debentures in a year.	Special Resolution not required for issue of Non-convertible debentures which are within the prescribed limits** mentioned in Section 180(1)(c) and a Board resolution would suffice. (Second Proviso to Sub-rule 1). Above the said limit, the original provision would still apply.	The benefit has been extended now which does not require the Board to go to the shareholders for borrowing amounts within the prescribed limits.
Funds to be received mandatorily from the Bank account of the subscriber	This provision is not applicable to cases of consideration received other than cash (Second Proviso to sub-rule 5).	The provision has been made clearer which will avoid ambiguity.
---	Explanatory Statement inclusions have now been enhanced (Proviso to sub-rule 1).	This will lead to more transparency but for equity shares or securities convertible into equity shares, rules for preferential allotment*** still apply wherein disclosures to be given in the explanatory statement are mandated.
---	Compulsory reporting to the registrar of the Board/Special Resolution(E-form MGT-14) passed to approve the Private Placement before issuing any Private Placement offer letter. (Sub-rule 8)	Stricter norms shall now keep a check on non-compliances.
PAS-5(Record of persons to whom the offer has been made) and PAS-4 (Private Placement Offer Letter) to be filed with the ROC and, SEBI (in case of listed), within 30 days from the date of circulation of Offer letter.	No such provision in the amended rules.	Simpler reporting.
Value of offer shall be with the minimum investment size of twenty thousand rupees of face value of securities.	No mention of any minimum investment amount.	Retail investors can be tapped       Easier to invest as small ticket sizes will be available.       Shareholding percentage can be controlled in small size or closely held companies. It was deliberated by the legislators that since there is no requirement for minimum paid up share capital in the private and public company, this requirement will be in spirit of ease of doing business (Source: Draft Rules)

Other provisions like Exemptions to NBFCs and Housing Finance companies, maintaining of identified persons’ record in PAS-5 etc. have been retained.

***What is to be noted here, is, the Companies (Share Capital and Debentures) Rules 2014 have not been amended yet which contain provisions with respect to Preferential Allotment of Shares [Section 62(1)(c)], which go hand in hand with Section 42 compliances. Also, the rules contain references to Prospectus & Allotment Rules and thus it is required to amend them as the later have been now modified.

Taking an overall view, in some instances, the new Private Placement provisions have been simplified and made more convenient. On the other hand, compliances have been made more stringent to avoid investor risks. Hoping that these new provisions help to regulate the fundraising in a better manner and at the same time prove beneficial for the companies. MCA clarifications and further amendments shall be awaited in cases of ambiguity.

** Approval of shareholders not required to borrow funds by the directors including by way of Debentures if the total amount to be borrowed along with the amount already borrowed does not exceed the paid up capital, free reserves and securities premium account.