Private Placement - Raising Capital Without a Prospectus

Not every offer of securities is made to the public, and the Act draws a sharp line between the two routes. Private placement, governed by Section 42 of the Companies Act, 2013, is the offer or invitation to subscribe for securities made to a select group of persons - other than through a public issue - and it is the principal way a private company (which cannot invite the public at all) and many public companies choose to raise capital quickly and with far lighter disclosure than a public prospectus demands.

Key conditions under Section 42:

• the offer can be made to not more than 200 persons in a financial year (this cap excludes qualified institutional buyers and employees receiving securities under an employee stock option scheme);
• the offer is made through a private placement offer letter (Form PAS-4), never through any public advertisement or through marketing media, agents or distributors used to reach the public at large;
• payment for the securities must be received only from the bank account of the person subscribing, and the company must keep a complete record of everyone to whom the offer is made;
• a return of allotment must be filed with the Registrar within the prescribed time. …