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Private Placement – Meaning, Types, and Advantages

Private Placement

While planning on a strategic financial manoeuvre, companies often opt for private placement to issue financial securities like shares and convertible securities to a select group of investors. In compliance to Section 42 of the Companies Act 2013, private placement involves offering securities to a chosen set of individuals, steering away from a public offer. This process is facilitated through a private placement offer-cum-application form, with strict conditions outlined in the Act.

Notably, in private placement, the absence of a prospectus distinguishes it from other forms of security issuance. This streamlined approach provides companies with flexibility while ensuring compliance with regulatory provisions.

In this upcoming article, we shall further discuss the technicalities of private placement while also exploring its benefits, regulatory landscape, and the strategic considerations that companies weigh when opting for this distribution strategy.

What is Private Placement?

Private placement, as defined by Section 42 of the Companies Act, 2013, encompasses any offer or invitation to subscribe or issue securities by a company to a chosen group of individuals. This method diverges from a public offer and involves the use of a private placement offer-cum-application form, meeting the specified conditions in Section 42.

  • Maximum Allotment Limit: Section 42 stipulates that a company can maximise 200 securities in a year through private placement. Surpassing this limit categorises the issue as public, necessitating adherence to the procedural requirements of a public issue.
  • Transition to Public Issue: If the company exceeds the yearly limit of 200 allotments, it triggers a transition from private to public issue status. The company must then follow the comprehensive procedures outlined for public issues.
  • Exclusion of Prospectus: In the private placement process, companies are not required to issue a prospectus. This distinction from public offerings streamlines the process, emphasising a more targeted approach to a select group of investors.

Compliance with Section 42 of the Companies Act 2013 ensures that private placement remains a viable and regulated method for companies to issue securities to a specific cohort of investors without the extensive requirements associated with a public offering.

Types of Private Placement

Private placement offers two distinct avenues—preferential allotment and qualified institutional placement (QIP)—for companies to issue securities to select entities, fostering strategic financial initiatives.

Preferential Allotment

  • In preferential allotment, a listed company can issue securities to specific entities, such as institutions or promoters, at a predetermined price. Eligibility criteria for investors are delineated in Chapter XIII of SEBI (DIP) guidelines, with potential lock-in periods for investors’ holdings.
  • Noteworthy is the requirement for companies to seek approval from their shareholders before proceeding with preferential allotment. Recently, SEBI has relaxed this norm to aid in the revival of companies like Satyam Computers.

Qualified Institutional Placement (QIP)

  • Qualified institutional placement involves a listed company issuing shares or convertibles exclusively to institutional buyers. This process aligns with the provisions outlined in Chapter XIIIA of SEBI (DIP) guidelines.
  • QIP serves as a mechanism for listed companies to raise funds domestically, promoting reliance on the domestic market rather than seeking funds from foreign markets.

These private placement avenues provide companies with strategic options for raising capital and fueling growth while adhering to regulatory frameworks set forth by SEBI guidelines. Stay tuned to explore further insights into private placement strategies and their implications in corporate finance.

Advantages of Private Placement

Private placement as a financing strategy brings forth multiple advantages, allowing companies to streamline the capital-raising process and much more. We shall discuss these in the points below;

  • Speedy Financing: Private placement accelerates the capital-raising process. Unlike the time-consuming procedures associated with a public issue of shares, private placement allows companies to secure capital swiftly, often within a few months.
  • Economical: Opting for private placement proves to be cost-effective. Companies can bypass expenses related to the preparation and printing of prospectuses, application forms, transportation, and extensive advertising required for a public issue.
  • Confidentiality: Private placement operates within a circle of selected business groups, ensuring a confidential process. Unlike public issues that demand extensive disclosures, private placement maintains a higher level of confidentiality throughout the allocation process.
  • Market Stability: The private placement market exhibits greater stability compared to the stock market. With less volatility, private placement provides a more controlled environment for companies seeking capital without the fluctuations often witnessed in the public stock market.
  • Raising Small Capital: Private placement offers the flexibility to raise smaller amounts of capital. This is particularly advantageous for companies with modest capital requirements, eliminating the need for a public issue, which is more suitable for substantial capital needs.

Process of Private Placement Process

A private placement journey involves several key steps if one wants to ensure a smooth and compliant process. Let’s break down the process:

  • Drafting the Offer Letter: Begin by crafting a comprehensive offer letter (Form PAS-4), detailing key aspects like share quantity, price, and payment terms. Remember, a maximum of 200 investors can be approached in a financial year, excluding QIBs and ESOP beneficiaries.
  • Approval of Shareholders: Convene a general meeting to secure shareholders’ approval through a special resolution. The explanatory statement accompanying the meeting notice should align with legal requirements.
  • Private Placement Threshold: There’s a cap—private placement can’t extend to more than 200 individuals annually (excluding QIBs and ESOP participants). Avoid non-compliance, as breaching this limit triggers additional obligations and penalties.
  • Private Placement Subscription: Subscription to securities must occur through a bank account maintained by the subscriber. The company should refrain from utilising the subscription funds until the return of allotment is filed with the Registrar of Companies (ROC).
  • Allotment of Private Placement: Ensure securities are allotted within 60 days of receiving application funds. If the timeline is unmet, refund the application money within 15 days. Submission of private placement offers and application forms (Form PAS-4 and PAS-5) is mandatory.
  • Filing Return of Allotments: Following allotment, submit a return of allotment (Form PAS-3) to the ROC within 15 days. Include a comprehensive list of security holders and a copy of the special resolution from the general meeting.
  • Necessary Documents: Maintain critical documents, including the offer letter, a record of private placement offers, and a comprehensive list of security holders. Keep these documents intact for at least eight years, and maintain an updated record of private placements in Form PAS-5.
  • Procedure for Making a Private Placement Offer: Adhere to the prescribed procedure—issue the offer only to recorded names, ensuring payments originate from the subscriber’s bank account.
  • Non-compliance Penalties: Strictly adhere to private placement provisions to avoid penalties. Non-compliance may lead to fines or imprisonment for company officers, ranging from ₹25,000 to ₹2 crores.

FAQs about Private Placement

Private placement offers several advantages over other equity financing methods. These include less burdensome regulatory requirements, reduced cost and time, and the ability for a company to maintain its status as a private entity.

Examples of private placement companies include Real Estate Investment Trusts (REITs), Non-Traded REITs, Hedge Funds, Equipment Leasing Agreements, Tenants-in-Common, and various oil and gas limited partnerships.

Private placement involves the sale of securities to a select group of investors, such as accredited individuals, private equity firms, or institutional investors. On the other hand, an IPO is the initial public offering of securities through a stock exchange, making them available to the general public.

In a private placement, a company sells its shares to a pre-selected group of investors in a private setting. This process allows the company to raise external funds without navigating the regulatory hurdles associated with an IPO, thus maintaining a private status.

An IPO (initial public offering) occurs when a company sells shares publicly for the first time. In contrast, a PO (public offering) happens when a company sells shares publicly again after its IPO. A company can have only one IPO but may conduct multiple POs.

Companies may choose private placements for various reasons, including a faster share-selling process compared to an IPO, fewer regulatory requirements reduced ongoing regulatory obligations compared to being public, and the ability to retain more control over the company.

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