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January 8, 2018
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Section 42 of the Companies Act, 2013 (‘Act’ for short) provides the procedure for offering or inviting for subscription of securities on private placement.  This section came into effect from 01.04.2014.  This section has been substituted by Companies (Amendment) Act, 2017 (‘amended act’ for short) vide clause 10.  The amendment Act got the assent of the President on 03.01.2018 but none of the provisions came into effect.  Section 1(2) of the amended Act provides that the act shall come into force on such date as the Central Government may, by notification in the Official Gazette appoint and different dates may be appointed for different provisions of this Act and any reference in any provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision.

In this article the newly substituted section 42 of the Act is discussed.   The newly substituted section provides that a company may, subject to the provisions of section 42 make a private placement of securities.

Private placement

Explanation 1 to new section 42 defines the expression ‘private placement’ as an offer or invitation to subscribe or issue of securities to a select group of persons by a company, other than by way of public offer, through private placement offer-cum-application, which satisfies the conditions specified in this section.

Qualified Institutional Buyer

Explanation 2 to new section 42 defines the expression ‘Qualified Institutional Buyer’ as the qualified institutional buyer as defined in the Securities Exchange Board of Indi (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended from time to time, made under the Securities and Exchange Board of India Act, 1992.

Placement to a group of persons

The erstwhile section 42 provides that a company may make private placement through issue of a private placement offer letter.   The new section provides that a private placement shall be made only to a select group of persons who have been identified by the Board, whose number shall not exceed 50 or such higher number as may be prescribed.  This number excludes the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of 62(1)(b) of the Act in a financial year subject to such conditions as may be prescribed.


A company making private placement shall issue private placement offer and application in such manner and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed.  The private placement offer and application shall not carry any right of renunciation.


If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to lists its securities or not on any recognized stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of Chapter III of the Act.

Application money

Every identified person willing to subscribe to the private placement issue shall apply in the private placement.  The applicant shall pay subscription money either by cheque or demand draft or other banking channel and not by cash. A company shall not use this money unless allotment is made and return of allotment is filed with the Registrar of Companies.

Fresh offer

No fresh offer or invitation shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.  Subject to the maximum number of identified persons, a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.


A company, making an offer or invitation, shall allot its securities within 60 days from the date of receipt of the application money for such securities.   If the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within 15 days from the expiry of sixty days.   If the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest @ 12% per annum from the expiry of the 60th day.

Deposit in bank

Monies received on application shall be kept in a separate bank account in a scheduled bank.  It shall not be utilized for any purpose other than-

  • for adjustment against allotment of securities; or
  • for the repayment of monies where the company is unable to allot securities.


No company issuing securities shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue.

Return of allotment

A company making any allotment of securities shall file with the Registrar of Companies, a return of allotment within 15 days from the date of allotment in such manner as may be prescribed, 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.


If a company defaults in filing the return of allotment within the above said period the company, its promoters and directors shall be liable to a penalty for each default of ₹ 1000/- for each day during which such default continues but not exceeding ₹ 25 lakhs.

If a company makes an offer or accepts monies in contravention of section 42, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or ₹ 2 crores, whichever is lower.  The company is also to refund to all monies with interest to subscribers within a period of 30 days of the order imposing of penalty.

Deemed public offer

Any private placement issue not made in compliance of the provisions of section 42, it shall be deemed to be a public offer and all the provisions of the Act and Securities Contracts (Regulation) Act, 1956 and Securities and Exchange Board of India Act, 1992 Act shall be applicable.


By: Mr. M. GOVINDARAJAN - January 8, 2018



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