Q.What is private placement? Distinguish it from raising capital through a prospectus.

A company does not always need to approach the general public to raise capital - it can instead offer securities directly to a chosen, limited set of investors.

Section 42 of the Companies Act, 2013 governs private placement - the offer or invitation to subscribe for securities made by a company to a selected, identified group of persons, rather than to the public at large. It is the standard route by which a private company, which is barred from inviting the public at all, raises fresh capital, and it is also frequently used by public companies that wish to raise funds quickly from a known set of investors without the cost, delay, and disclosure burden of a full public issue.

The key conditions under Section 42 are:

• the offer can be made to not more than 200 persons in a financial year (excluding qualified institutional buyers and employees allotted securities under an employee stock option scheme);
• it is made only through a private placement offer letter (Form PAS-4), addressed personally to the identified offerees - never through public advertisement, and never through media, marketing agents or distributors used to reach the general public;
• subscription money must be paid only from the subscriber's own bank account, and the company must maintain a complete record of every person to whom the offer is made;
• a return of allotment must be filed with the Registrar of Companies once the securities are allotted.

This stands in direct contrast to raising capital through a prospectus. A prospectus-based public issue is, by definition, an invitation to the public or a section of it (Section 2(70)); it must comply with the extensive contents requirements of Section 26, be registered with the Registrar before issue, and, if the securities are to be listed, comply with SEBI regulations as well. Because the general public is invited and relies on the prospectus, the Act attaches the full weight of civil liability under Section 35 and criminal liability under Section 34 to any untrue statement in it. …

A common mistake is describing private placement as simply 'a smaller public issue' - it is not a public issue at all; the offer is made to identified persons only, through a private offer letter, and it does no …