Private Placement Offer Letter (Form PAS-4)

Introduction:

A company may choose to issue securities in order to meet its funding requirements. The issue is that the firm does not have enough funds to run its operations and day-to-day activities. For firms in the financial sector, establishing a debt-equity ratio is also critical in attracting financing. A private placement is distinct from other types of securities offerings. The firm wants to offer shares to a limited set of people, which we might refer to as the company’s Investors. Despite the fact that it is a private placement, it cannot be considered a public offering of securities.[1]

A private placement shall be made only to a select group of persons identified by the Board (hereinafter referred to as “Identified Persons”), whose number shall not exceed fifty or such higher number as may be prescribed in a financial year, subject to the conditions set forth in Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

The document that a company provides when making a Private Placement Offer to a specific set of people is known as a Private Placement Offer Letter. Furthermore, when a company receives funds through a private placement, it must issue this document in Form PAS-4 and distribute it to the people who have been identified.[2]

Explanation II to sub-section (1) of section 42 of the Companies Act 2013 defines a private placement as an offer of securities or invitation to subscribe securities to a select group of persons by a company other than by way of the public offer through the issuance of a private placement offer letter that meets the conditions specified in this section. To choose, an offer or invitation to subscribe to securities should be made.[3]

Important Points to Keep in Mind When Considering a Private Placement Under the Companies Act of 2013

• Such in a financial year, no more than 200 offers of securities or invitations to subscribe for securities may be made (excluding QIB and Employee under ESOP). If more than 200 (separately for each type of security) are offered, regardless of receipt of payment, it will be considered a public offer. (NBFCs and Housing Finance Companies are exempt if they follow their own rules.)
• Section 179(3) of the Act requires the company to convene a Board meeting for the purpose of issuing shares to a certain group of people, who will be identified by the Board at the Board Meeting. Due to an exemption notification issued June 5, 2015, private companies are free from filing such resolutions in MGT-14. Within 30 days after the Special Resolution’s passage, the company must file an e-form MGT-14.
• The company is unable to use subscription funds until a PAS-3 return of allocation has been submitted with the ROC.
• The Right to Renouncement does not apply to such shares.
• The funds will be held in a separate bank account and utilized solely for the distribution of such shares.
• There are no monetary tractions permitted.
• There will be no new offers or invitations issued until the allocation for any existing offer or invitation has been fulfilled.
• Within 30 days of registering the person’s name, the offer letter must be sent to them, either in writing or electronically.
• The securities’ pricing must be justified, and a recognized valuer is chosen to do so.
• The allocation must be carried out within 60 days after receiving the funds.
• The money must then be returned until the 75th day, otherwise, interest of 12% per year will be charged if it is not returned.
• Whether approved share capital is adequate for the private placement of shares, and if not, whether the capital clause of the company’s memorandum of association has to be changed first.
• Whether the articles of association allow for the private placement of shares, and if not, whether the articles of association should be amended to allow for the private placement of shares.
• Confirm that the shares that will be offered via private placement are completely paid up.[4]

Private Placement Procedure

1. Call for a Board of Directors meeting:
2. At least seven days prior to the meeting, the Board of Directors must receive notice of the meeting.
3. The meeting agenda will be included in the notification.
4. Hold a Board Meeting:
5. Determine who you need to make an offer to and compile a list of them. Prepare an application for a private placement offer.
6. Adoption of a resolution approving the offer.
7. Meeting of the General Assembly At least 21 days before the meeting, all shareholders will be notified.
8. Hold an Extra General Meeting:
9. Present the offer letter in PAS-4 to the meeting’s shareholders.
10. Pass a special resolution authorizing the shares to be sold privately.
11. Distribute the Offer letter/Application:
12. Distribute the Offer letter together with the serial order and the shareholders’ addresses (can be sent in writing or electronically).
13. Within 30 days of the general meeting, send out an offer letter.
14. Filling out the form with the Registrar:
15. MGT-14 must be filed with the Registrar of Companies within 30 days of the special resolution being passed.
16. Establish a separate bank account for the payment of such subscriptions.
17. Filling out forms with the Registrar:
18. Submit PAS-4 and PAS-5 within 30 days of the offer’s distribution.
19. After receiving the allotment money, call a board meeting and present the list of allottees to the board. Passage of a Board Resolution for Share Allotment (Within 60 Days of receiving the allotment money).
20. Submit Form PAS-3 to ROC: Submit PAS-3 to the Registrar of Companies.
21. Within two months following the date of allotment of shares, issue a share certificate in Form SH-1 (as per Section 56).[5]

In the event of noncompliance, if the requirement of Section 42 read with rule 14(1) of the Companies (Prospectus and Allotment of Securities) Rules 2014 is not met, a penalty of Rs. 2 crores or the amount involved in the offer, whichever is smaller, may be imposed.

What is to be filed?[6]

The following information must be included in the Private Placement Offer Letter:

Information in General

• The company’s name, address, website, and other contact information, including both the registered and corporate offices;
• The company’s date of incorporation;
• The company’s and its subsidiaries’ businesses, including any branches or units;
• Brief particulars of the company’s management;
• Names, addresses, DIN, and occupations of the directors;
• Management’s perception of risk factors
• Details of default, if any, including the amount involved, duration of default, and current status, in repayment of – i) statutory dues; ii) debentures and interest thereon; iii) deposits and interest thereon; iv) loan from an institution;
• Names, titles, addresses, phone numbers, and email addresses of the company’s nodal/compliance officer, if any, for the private placement offer process;

Offer Specifications

• Date of board resolution;
• Date of general meeting resolution authorizing the offer of securities;
• Kinds of securities offered (i.e., whether share or debenture) and a class of security;
• price at which the security is being offered, including any premium, and justification of the price;
• name and address of the valuer who performed valuation
• The proposed time period for which the offer letter is effective;
• Purposes and purposes of the offer;
• The contribution made by the promoters or directors either as part of the offer or separately in support of such objects;
• Principle terms of assets charged as security, if applicable.

Disclosures regarding Directors’ interest, litigation, and so on

• Any financial or other material interest in the offer held by the directors, promoters, or key managerial people, as well as the effect of such interest as compared to the interests of others.
• Details of any litigation or legal action pending or taken by any Ministry or Department of the Government or a statutory authority against any promoter of the offeree company during the three years immediately preceding the year of the offer letter’s circulation, as well as any direction issued by such Ministry or Department or statutory authority upon the conclusion of such litigation or legal action.
• Director remuneration (for the current year and the previous three financial years);
• Related party transactions in the three financial years immediately preceding the year of offer letter circulation, including loans made, guarantees given, or securities provided v. Summary of auditor reservations, qualifications, or adverse remarks in the five financial years immediately preceding the year of offer letter circulation.
• In the case of the firm and all of its subsidiaries, details of any inquiries, inspections, or investigations begun or conducted under the Companies Act or any prior company legislation in the three years immediately preceding the year of distribution of the offer letter. Also, whether any charges were brought (whether pending or not), penalties were issued, and offenses were compounded in the three years immediately preceding the year of the offer letter, and if so, section-by-section information for the firm and all of its subsidiaries.
• Details of any major frauds committed against the firm in the last three years, if any, and the company’s response, if any.

Company’s Financial Status

• The company’s capital structure is in tabular form, as follows:
  • the authorized, issued, subscribed, and paid-up capital (number of securities, description, and aggregate nominal value);
  • the current offer’s size;
  • paid-up capital after the offer; after conversion of convertible instruments (if applicable); share premium account (before and after the offer).
  • a tabular representation of the issuing company’s existing share capital, including the date of allotment, the number of shares allocated, the face value of the shares issued, the price, and the form of payment for each allotment.
  • Provided, however, that the issuing firm must separately disclose the number and price at which each of the allotments was made in the year preceding the date of the offer letter, as well as any allotments made for considerations other than cash and the specifics of the consideration in each case;
• Profits of the company for the three financial years immediately preceding the date of distribution of the offer letter, both before and after making provision for tax;
• Dividends declared by the company for the said three financial years; interest coverage ratio for the last three years (cash profit after tax plus interest paid/interest paid)
• A summary of the company’s financial position as shown in the three audited balance sheets immediately preceding the date of distribution of the offer letter;
• An audited Cash Flow Statement for the three years immediately preceding the date of distribution of the offer letter;
• Any changes in accounting policies over the last three years and their impact on the company’s profits and reserves

A declaration by the Directors that

• the company has complied with the provisions of the Act and the Rules made thereunder;
• compliance with the Act and the rules does not imply that payment of dividends or interest, or repayment of debentures, if applicable, is guaranteed by the Central Government;
• the monies received under the offer shall be used only for the purposes and objects stated in the offer.

Conclusion

Private placement is one of the most frequent approaches used by businesses to obtain capital from investors and the general public. Companies who want to raise money in the simplest and quickest way feasible can do it by making a private placement of shares to a small group of people (under 200). The provisions of the Companies Act, 2013, read with the Rules, and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 regulate the private placement. A preferential allotment is when a listed business makes this sort of issue, whereas a private placement of securities is when an unlisted public limited company or a private limited company makes this type of issue to a restricted group of people. It is imperative that the company follows the procedure mentioned hereinabove.

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References:

[1] Gaurav Mahajan, Private Placement of Securities in India under Companies Act, 2013, Indian Legal Solution.

[2] Madhavi Gajjar, Issue of Securities through Private Placement, TaxGuru.

[3] Akanksha Negi, Private Placement under section 42 of Companies Act, 2013.

[4] Supra Note 3.

[5] T.G. Team, Private Placement Offer Letter, TaxGuru.

[6] https://www.mca.gov.in/MCA21/dca/downloadeforms/eformTemplates/NCA/Form_PAS-4.pdf