Norms for Private Placement of Securities Simplified

The MCA made major changes in the Companies (Prospectus and Allotment of Securities) Rules, 2014 (“PAS Rules”) twice on August 07, 2018 and September 10, 2018 (“Amendment Rules”).

The Amendment Rules substituted Rule 14 which relates to the ‘Private Placement of Securities’ and have given clarity in relation to group of persons who can be proposed allottees in the preferential allotment that they must be ‘identified by the board of directors of the issuer’.

Some of the other substantive changes are set out below:

  • No right of renunciation being available under PAS-4 and no requirement of disclosure and maintaining of records of bank accounts by the issuer where consideration for the private placement is consideration other than cash.
  • The issuers cannot utilise the monies raised through private placement until the return of allotment is filed with the RoC. The return has to be filed within 15 days, as opposed to 30 days in the old PAS Rules. In case of failure to do the filing within 15 days, the promoters and directors of the issuer can be made liable to pay Rs. 1,000 for each day during which the default continues upto a maximum of Rs. 25 lakhs.Further, the Amendment Rules also require that PAS-4 shall be issued only after the filing of board and shareholders’ resolution with the RoC.
  • Earlier, issuers were required to file Form PAS-4 and Form PAS-5 with the RoC and SEBI (in case of listed issuers). The Amendment Rules dropped this filing requirement.
  • An issuer is allowed to make more than one issue of securities to “such class of identified persons as may be prescribed”. The specification on what would constitute “such class of identified persons as may be prescribed” is awaited. Earlier it was a blanket ban on commencement of another private placement until completion, withdrawal or abandonment of an on-going preferential issue.
  • No need to disclose in the explanatory statements annexed to notice of shareholders’ meeting,the details of persons to whom preferential allotment has been made during the year. There is also a relief from disclosing the post issue shareholding pattern.
  • The requirement of investment size of minimum Rs. 20,000/- of face value of the securities per person has been scrapped.
  • Earlier, a shareholders’ resolution was required to be passed once a year for private placement of NCDs during that year. The Amendment Rules permit private placement of NCDs pursuant to board resolution, without obtaining shareholders’ resolution so long as the proposed amount to be raised does not exceed the borrowing limit specified under Section 180(1)(c) of the Companies Act, 2013.
  • The Amendment Rules have provided elaborate disclosure requirements in PAS-4 such as:
    • Name of the allottee, father’s name, complete address, phone number, e-mail, PAN and bank account details;
    • default in annual filing under the Companies Act;
    • intention of promoters, directors and key managerial personnel to subscribe to the offer (not applicable for NCD issuance);
    • proposed time within which the allotment shall be completed;
    • name of the proposed allottees and the percentage of post private placement capital that may be held by them (not applicable for NCD issuance);
    • change in control in the issuer company, if any, that would occur consequent to the private placement;
    • justification for the allotment proposed to be made for consideration other than cash together with the valuation report of the registered valuer;
    • details of significant and material orders passed by the regulators, courts and tribunals impacting the going concern status of the company and its future operations;
    • pre-issue and post-issue shareholding pattern of the issuer in the format prescribed which includes details such as number of shares and percentage of shareholding; and
    • mode of payment for subscription
  • It has been made mandatory for unlisted public companies to issue securities in dematerialized form. Such unlisted public companies shall also have to ensure that all their existing securities have been converted into dematerialised form.