Private Placement — Section 42 MCA Filing

Under Section 42(2) of the Companies Act 2013 read with Rule 14(2) of the Companies (Prospectus and Allotment of Securities) Rules 2014, a company cannot make a private placement offer to more than 200 persons in aggregate in a financial year, excluding Qualified Institutional Buyers and employees receiving securities under an ESOP scheme. This 200-person limit applies across all offers made during the year, including offers that are subsequently withdrawn. Offers made to more than 200 persons are deemed to be a public offer under Section 23 and attract the full prospectus disclosure and SEBI regulatory requirements. Each offer must be preceded by filing of Form PAS-4 (Private Placement Offer Letter) with the ROC as per Rule 14(3).

A company must pass a special resolution of shareholders under Section 42(2) of the Companies Act 2013 before making any private placement of securities. This special resolution must specify the type of securities, the price or price band, the basis of arriving at the price, and the relevant date for conversion (if applicable). The Board must also approve the Private Placement Offer Letter (Form PAS-4) before dispatch. For each new series or tranche of private placement, a fresh special resolution is required — the Supreme Court and MCA have clarified that one omnibus resolution cannot cover multiple tranches to different allottees. The special resolution must be filed with the ROC in Form MGT-14 within 30 days of passing under Section 117(3)(a).

Under Section 42(6) of the Companies Act 2013, all monies received on application in private placement must be kept in a separate bank account with a scheduled bank and must not be utilised for any purpose other than adjustment against allotment or refund until allotment is made. The company must make allotment within 60 days of receiving application money; failure to allot requires refund within 15 days of expiry of the 60-day period, failing which the company is required to pay interest at 12% per annum. Violation of these provisions — including utilising application money before allotment — renders the private placement void and exposes the company and every officer in default to a penalty of ₹2 crore under Section 42(10). The PAS-3 (Allotment Return) must be filed with the ROC within 15 days of allotment under Rule 14(4).

The Companies Act 2013 does not prescribe a statutory minimum price formula for private placement of shares by an unlisted company — Section 42 and Rule 14 require that the basis of arriving at the price be disclosed in Form PAS-4 but leave the valuation methodology to the company. However, where fresh equity shares are being issued to non-residents, the price must not be less than the fair market value determined by a SEBI-registered Category I Merchant Banker or a Chartered Accountant under the Discounted Cash Flow (DCF) method as required by Schedule I of FEMA Notification No. 20(R). For transfer of existing shares between residents and non-residents, the pricing guidelines under FEMA 20R are mandatory. Income tax implications under Section 56(2)(viia)/(viib) — the latter of which was abolished from April 1, 2025 — may also apply to issuance at a discount to FMV for resident recipients who are not individuals.

No. Section 42(7) of the Companies Act 2013 expressly prohibits a company from making any public offer or private placement of securities if it has defaulted in repayment of deposits accepted under Section 73 or 74, in payment of interest on deposits, in redemption of debentures, in payment of interest thereon, or in payment of any dividend declared. The bar remains operative until the default is made good. Similarly, a company whose name appears in the list of defaulting companies maintained by SEBI or whose securities have been suspended on a stock exchange under SEBI Circular directions may face additional restrictions. The company's directors must certify compliance with this provision in the Board resolution authorising the private placement, and false certification attracts liability under Section 448 (false statements) which is punishable with imprisonment up to two years and a fine.