Private Placement Under Section 42, Explained

Private placement under section 42 of the Companies Act, 2013 is an offer of securities to a select group of persons the Board has identified, made outside the public-offer machinery. The section fixes who may be offered, forbids advertising, puts a sixty day clock on allotment, and holds one sanction in reserve that matters more than the fines: a placement that breaches the identified-persons rule is deemed to be a public offer. The whole section was substituted by the Companies (Amendment) Act, 2017 (Act 1 of 2018), section 10, with effect from 7 August 2018.

Who can a private placement under section 42 be offered to?

A private placement under section 42 goes only to "identified persons", and section 42(2) defines them by the act of identification: a select group of persons who have been identified by the Board. The count is capped at fifty "or such higher number as may be prescribed", excluding, in the section's own words, qualified institutional buyers and employees of the company being offered securities under an employees stock option scheme in terms of section 62(1)(b), in a financial year and subject to such conditions as may be prescribed.

Two things follow that are easy to get wrong. First, on the count: fifty is the statutory ceiling and it binds unless and until the rules prescribe a higher number, which is the only direction those rules may move it. This page does not state that number, because rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 was not read for it. Second, the exclusions are part of the count itself rather than a separate allowance: qualified institutional buyers and section 62(1)(b) employees sit outside the number entirely. What is a QIB covers the first exclusion.

Section 42(3) requires the company to issue a private placement offer and application in the prescribed form and manner to identified persons whose names and addresses are recorded by the company in the prescribed manner. Its proviso is the defining restriction: the private placement offer and application shall not carry any right of renunciation.

What the section forbids outright

Section 42(7) is a flat prohibition rather than a condition. No company issuing securities under the section shall release any public advertisements, or utilise any media, marketing or distribution channels or agents, to inform the public at large about the issue. A private placement that is marketed is not a private placement.

Section 42(5) blocks stacking offers: no fresh offer or invitation may be made unless allotments for any earlier offer have been completed, or that offer has been withdrawn or abandoned. The proviso allows more than one issue to such class of identified persons as may be prescribed, but only subject to the maximum number of identified persons under sub-section (2).

The money rules: sixty days, fifteen days, twelve per cent

Section 42(4) requires every identified person willing to subscribe to apply along with subscription money paid by cheque, demand draft or other banking channel, and not by cash. Its proviso locks the money down: a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar under sub-section (8).

Section 42(6) then runs the clock. The company must allot within sixty days of receiving the application money. If it cannot, it repays the application money to subscribers within fifteen days of the expiry of those sixty days, and if it fails to repay within that period it must repay with interest at twelve per cent per annum from the expiry of the sixtieth day. Its proviso requires the monies received to be kept in a separate bank account in a scheduled bank, usable only for adjustment against allotment or for repayment where the company cannot allot.

The return of allotment, and the two penalties

Section 42(8) requires a company making any allotment under the section to file a return of allotment with the Registrar within fifteen days from the date of allotment, in the prescribed manner, including a complete list of all allottees with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.

The sanctions sit in two places and measure different things:

Section 42(10) opens "Subject to sub-section (11)", and sub-section (11) is the heavier consequence. Notwithstanding sub-sections (9) and (10), any private placement issue not made in compliance with sub-section (2) shall be deemed to be a public offer, and all the provisions of the Companies Act, the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992 apply to it.

Explanation III to the section reaches the same conclusion from the other direction. If a company, listed or unlisted, offers to allot, invites subscription, allots, or agrees to allot securities to more than the prescribed number of persons, the offer is deemed to be an offer to the public and is governed by Part I of Chapter III, whether or not payment has been received and whether or not the company intends to list.

Where private placement sits next to the other issue routes

• Further issue of share capital, section 62 is the section a private placement of shares is run alongside, and the source of the employee exclusion.
• What is a preferential allotment covers how a listed issuer runs the same transaction under the market rules.
• Preferential allotment vs QIP compares the two routes a listed company actually chooses between.
• What is an anchor investor covers a different kind of pre-identified allottee, in a public issue rather than a placement.

Private placement under section 42 is a funding mechanism, not a signal about a company. Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.