Private Placement of Securities

Overview

Every growing company reaches a point where the founders' pockets and the existing shareholders' cheques are not enough. An angel investor, a venture fund, a strategic partner, or a high-net-worth individual is ready to put money in — but they are not shareholders yet. The legal bridge between that handshake and the share certificate is the private placement.

Section 42 of the Companies Act, 2013 is the provision. It lets a company offer securities to a select group of persons identified in advance by the board — no public offer, no advertisement, no merchant banker — provided the company follows a disciplined choreography: identify, record, offer, collect, allot, file. Each step has a form, a clock, and a consequence for missing it.

Private placement is the route behind most startup funding rounds in India. The seed cheque, the Series A, the strategic investor's entry — legally, nearly all of them are private placements under Section 42, usually combined with a preferential allotment under Section 62(1)(c). Understanding this one provision is understanding how Indian private companies actually raise equity.

Is private placement right for your business?

Private placement fits well when:

• You are bringing in new investors — angels, VCs, family offices, strategic partners — who are not currently shareholders.
• The investor count is manageable: up to 200 persons per year per security type (and most rounds involve far fewer).
• You want the full amount committed by identified investors before you start, rather than hoping shareholders subscribe.
• The round needs a valuation-backed price. Preferential allotments require a registered valuer's report, which gives both sides a defensible number.

Consider alternatives when:

• The money can come from existing shareholders. A rights issue under Section 62(1)(a) is simpler — board resolution only, no special resolution, no 200-person counting.
• You want to reward employees. An ESOP under Section 62(1)(b) is the purpose-built route (and ESOP allottees do not count toward the 200-person cap anyway).
• You need more than 200 investors in a year for the same security. Cross that line and the offer risks being treated as a public offer — a different universe of compliance entirely.

What must be decided before the offer

1. The investor list. The board must identify every person the offer will go to, by name, before any invitation is made. You cannot do a private placement to "whoever is interested" — the identified-person list is the foundation the whole structure stands on. 2. The price. For a preferential allotment, the price must be backed by a registered valuer's report. Fix the valuation before the special resolution, because the resolution states the price. 3. The security type. Equity shares, preference shares, debentures — the 200-person cap applies separately to each kind, so the choice has counting consequences. 4. The use of funds. The offer letter must state the purpose. Investors, and the ROC, both read it.

Advantages of private placement

New investors without touching existing shareholders' rights

Because the offer goes to identified outsiders, existing shareholders are not asked to put in more money. Their percentage holding dilutes, but their wallets stay shut — which is precisely what most rounds intend.

No public-offer machinery

No prospectus, no SEBI filing, no listing requirements. For an unlisted private company, a private placement is a boardroom-and-filing exercise, not a capital-markets event.

Committed money from named investors

Unlike a rights issue, where subscription is hoped for, a private placement is made to people who have already been identified and approached. The funding outcome is far more predictable.

Valuation discipline built in

The registered valuer's report required for preferential allotments gives the price an independent anchor — useful in shareholder disputes, tax scrutiny, and FEMA pricing for foreign investors.

The 200-person cap is per security type

Equity, preference shares, and debentures each get their own 200-person annual count. A company doing an equity round and a debenture issue in the same year counts them separately.

Flexible structuring

The same Section 42 machinery issues equity, convertible preference shares, compulsorily convertible debentures, and non-convertible debentures. One provision, many instruments — which is why most funding rounds mix them.

The PAS-4 / PAS-5 process — step by step

This is the dedicated section prospects search for: the complete private placement choreography, in order.

Step 1 — Board meeting: approve and identify

The board convenes (seven days' notice to directors) and approves the private placement proposal: the securities, the number, the price, the purpose — and, crucially, the list of identified persons. It also approves the draft offer letter in Form PAS-4 and resolves to call a general meeting for the special resolution.

Step 2 — Special resolution and MGT-14

Shareholders pass a special resolution under Section 42 (and Section 62(1)(c) where it is a preferential allotment of shares), authorising the issue: number of securities, price, terms. The resolution is filed in Form MGT-14 with the ROC within 30 days. One practical carve-out: an issue of non-convertible debentures within the company's Section 180(1)(c) borrowing limits needs only an ordinary resolution.

Step 3 — Record the names in PAS-5

Before any offer goes out, the company records the names of the identified persons in Form PAS-5 — the complete record of private placement offers, maintained by the company. No allotment can ever be made to someone whose name was not recorded before the invitation. This is the provision's anti-abuse spine: the money must come from people the board named in advance.

Step 4 — Circulate the PAS-4 offer letter

Within 30 days of recording a person's name in PAS-5, the company sends them the private placement offer-cum-application letter in Form PAS-4: serially numbered, addressed specifically to that person, in writing or electronic mode. The PAS-4 carries the terms of the offer, the number and price of securities, the purpose, and the application form.

Three hard rules attach to this step:

• Not more than 200 persons in aggregate in a financial year, for each kind of security. QIBs and employees allotted under an ESOP scheme do not count. Cross 200 and the offer is treated as a public offer.
• Minimum investment of ₹20,000 per person in face value of the securities (QIBs and employees exempt). This floor keeps private placements out of retail territory.
• No public advertisement. The offer must never be marketed publicly. A WhatsApp broadcast to a thousand contacts inviting subscriptions would destroy the private character of the placement.

Step 5 — Receive the money: banking channels, separate account

Application money comes only by cheque, demand draft, or other banking channels — never cash. It lands in a separate bank account opened with a scheduled bank, and it sits there untouched: the company cannot use the money for any purpose other than allotment of the securities or refund, until the allotment is made and the return of allotment is filed.

Step 6 — Allot within 60 days

The board allots the securities within 60 days of receiving the application money. This is the provision's most litigated clock. If the company cannot allot within 60 days, it must refund the money within the next 15 days. Money not refunded in that window attracts interest at 12% per annum from the expiry of the 60th day — and the company's directors start answering uncomfortable questions.

A related discipline: no fresh offer under Section 42 can be made until the allotments under the earlier offer are completed, or the earlier offer is withdrawn or abandoned. Overlapping placements are not permitted.

Step 7 — File PAS-3 within 15 days

The return of allotment in Form PAS-3 goes to the ROC within 15 days of allotment — note the tighter clock than the general 30-day PAS-3 rule — with the special resolution, the valuation report, and the complete list of allottees.

Step 8 — Issue certificates within 2 months

Share certificates in Form SH-1 within two months of allotment (Section 56(4)(a)), with state stamp duty paid within 30 days of issue.

The 60-day allotment clock — why it deserves its own section

More private placements die on the 60-day rule than on any other provision. The mechanics:

• Day 0: application money received from an investor.
• Day 1–60: the company must complete allotment. "Complete" means the board resolution allotting the shares — not the PAS-3 filing, not the certificate printing.
• Day 61–75: if allotment did not happen, the company must refund the money. No interest yet.
• Day 76 onward: un-refunded money attracts 12% p.a. interest from day 61, and the amount starts looking uncomfortably like an illegal deposit.

The practical lesson: never collect private placement money until the special resolution is passed, the valuer's report is in hand, and the board is ready to allot. Money collected "in advance, paperwork later" is how companies end up paying 12% interest on their own fundraise.

Also note what the money cannot do while it waits: the separate-account rule means it cannot be used for salaries, rent, or vendors. It is the investors' money held in trust until allotment or refund.

The valuation report — what the valuer actually does

For a preferential allotment, the price cannot be the board's guess. Rule 13 requires a report from a registered valuer, and the special resolution discloses the price it supports. What the valuer does, in practice:

• Chooses a method. For an operating company, usually a discounted cash flow, a market-multiple approach, or a net-asset method — often a weighted combination. For an early startup with no profits, the DCF carries the weight, built on the projections the founders supply.
• Tests the projections. A good valuer does not rubber-stamp the founder's hockey stick. They benchmark growth rates, margins, and discount rates against comparable companies and push back where the numbers do not hold.
• States the fair value per share. The report gives a per-share value; the board then fixes the issue price at or above it (for resident allottees) — and the FEMA pricing guidelines use the same number for non-resident allottees.
• Dates the report. The valuation must be current to the issue. A nine-month-old report for a company whose revenue doubled since will not survive scrutiny — refresh it.

The report is attached to the PAS-3 filing and disclosed in the explanatory statement. Keep the valuer independent: a valuer who is also an investor, or whose fee depends on the valuation outcome, defeats the purpose. Budget two to three weeks for a thorough report — rushing the valuer is the most common reason rounds stall at the special-resolution stage.

Private placement vs preferential allotment — the relationship

Prospects search both terms, and the relationship confuses even professionals. The clean position:

• Section 42 (private placement) is the *procedure* — the identified-person, PAS-4/PAS-5, 200-person, 60-day machinery for offering securities privately.
• Section 62(1)(c) (preferential allotment) is the *substantive power* — the company's authority to issue shares to any persons (whether or not existing shareholders) on a preferential basis, authorised by special resolution, at a valuer-determined price, completed within 12 months of the resolution.
• In practice, an equity fundraise from new investors uses both: the Section 62(1)(c) special resolution authorises the preferential issue, and the Section 42 procedure governs how the offer is made. The filings reflect this — MGT-14 for the resolution, PAS-3 for the allotment.

For debentures, Section 42 can operate on its own without Section 62(1)(c), since 62(1)(c) speaks of shares.

Documents required

Corporate and investor records:

• Board resolutions (placement approval; allotment) and minutes
• Special resolution with explanatory statement; MGT-14 filing proof
• PAS-5 record of identified persons
• Serially numbered PAS-4 offer letters with dispatch proof
• Registered valuer's report (for preferential allotment pricing)

Money trail:

• Separate bank account statement showing receipts
• FIRC for foreign investor remittances; FC-GPR filed within 30 days for non-resident allottees

Filings and certificates:

• PAS-3 with list of allottees, filed within 15 days
• Share certificates in SH-1; stamp duty payment proof

How long does it take?

| Stage | Typical time | |---|---| | Board approval and investor identification | 1–2 weeks | | Valuer's report | 1–2 weeks (parallel) | | General meeting notice and special resolution | 21 days (shorter with 95% consent) | | MGT-14 filing | Within 30 days of resolution | | PAS-4 circulation | Within 30 days of PAS-5 recording | | Money collection | Per the offer timeline | | Allotment | Within 60 days of receipt | | PAS-3 filing | Within 15 days of allotment |

A clean round — identified investors, valuer engaged early — typically completes in ten to twelve weeks from board approval to PAS-3.

If an investor is outside India

• Pricing: for preferential allotment to a non-resident, the price cannot be less than the fair value determined under the FEMA pricing guidelines (registered valuer, internationally accepted methodology). The Companies Act valuer's report and the FEMA valuation usually converge on the same number — get one report that satisfies both.
• Sectoral caps: check the sectoral foreign investment limits before offering. A placement that breaches the cap is stillborn.
• Reporting: FC-GPR within 30 days of allotment with FIRC and KYC. The downstream investment rules apply if the investor is investing through an Indian entity.
• The 200-person count: foreign investors count toward the 200 like anyone else (unless they are QIBs).

How ComplyKart helps

• Structuring: we map your round — equity, CCPS, CCDs, or a mix — against Sections 42 and 62(1)(c), FEMA pricing, and the 200-person count, before a single form is drafted.
• Documentation: board and shareholder resolutions, PAS-4 offer letters, PAS-5 records, application forms — drafted for your round, coordinated with your valuer.
• Filing: MGT-14, PAS-3 within the 15-day window, FC-GPR for foreign investors — calendared, filed, and tracked with SRNs you can see.
• Follow-up: SH-1 certificates, stamp duty, register of members, and the annual-return tie-out for the year of the issue.

What we do not do: we do not find investors or market your round (a private placement must never be publicly solicited), we do not sign the valuer's report (independence rules require a registered valuer), and we do not advise on the commercial terms of your term sheet — that is your negotiation; we make it legally executable.

What happens after allotment

Within 15 days: PAS-3 filed. FC-GPR for non-resident allottees within 30 days.

Within 2 months: SH-1 certificates delivered; stamp duty paid.

Ongoing: the cap table is rebuilt — register of members, shareholding pattern, and any shareholder agreement updated to reflect the new investors. If the round pushed paid-up capital past ₹50 crore, secretarial audit (Section 204) applies from that year. The next AOC-4/MGT-7 cycle carries the new capital; the PAS-3 list and the annual return must reconcile.

Common mistakes

1. Allotting to someone not on the PAS-5 list. The statute is explicit: allotment only to persons whose names were recorded before the invitation. A last-minute addition without PAS-5 recording taints the allotment. 2. Counting 200 across security types. The cap is per kind of security. Companies that count equity and debenture offerees together either over-restrict themselves or — worse — undercount and breach. 3. Using the money before allotment. The separate-account rule is absolute until allotment and PAS-3. Dipping into it for operations is a standalone violation. 4. Missing the 15-day PAS-3 clock. Private placement PAS-3 is 15 days, not the 30 days most professionals carry in their heads from rights issues. This single confusion generates a large share of Section 42 penalties. 5. Advertising the offer. A pitch deck emailed to the identified investors is fine. The same deck posted publicly, or a "we're raising" post inviting subscriptions, is not.

Penalties for getting it wrong

• PAS-3 default (Section 42(10)): the company, its promoters, and its directors are each liable to a penalty extending to the amount raised through the placement or ₹2 crore, whichever is lower, with continuing daily penalties during the default.
• The 60-day breach: 12% p.a. interest on un-refunded money from day 61, plus the deposit-law exposure if the money lingers.
• Deemed public offer: breaching the 200-person cap or advertising the offer can recharacterise the issue as a public offer — prospectus, SEBI, listing-compliance consequences that dwarf the original round.

Sources

• Companies Act, 2013 — Sections 42, 62, 39, 56, 173, 180
• Companies (Prospectus and Allotment of Securities) Rules, 2014 — Rule 14 (PAS-4, PAS-5, 200-person cap, ₹20,000 floor, 60-day clock, 15-day PAS-3)
• Companies (Share Capital and Debentures) Rules, 2014 — Rule 13 (preferential allotment, valuation, 12-month completion)
• Foreign Exchange Management (Non-debt Instruments) Rules, 2019 — pricing and FC-GPR for non-resident allottees
• Secondary research: TaxGuru guides on Section 42 procedure and private placement vs preferential allotment (cross-checked against bare Act and rule text, October 2026)

This page is reviewed against the bare Act and current MCA forms. Portal behaviour and state stamp rates are flagged where they vary.

Schema plan

Service + FAQPage (20 questions) + HowTo (8-step private placement process) + BreadcrumbList + GovernmentService.

Verification register

| # | Claim | Source | Status | |---|---|---|---| | 1 | 200-person cap per FY per security type; QIB/ESOP excluded | Rule 14(2)(b) | Verified — rules | | 2 | ₹20,000 minimum per person (face value); QIB/employee exempt | Rule 14(2)(c) | Verified — secondary, consistent | | 3 | PAS-4 serially numbered, addressed, within 30 days of PAS-5 recording | Rule 14(1) | Verified — secondary, consistent | | 4 | Money only via banking channels, no cash | Sec 42; Rule 14 | Verified — secondary, consistent | | 5 | Separate scheduled-bank account; no use before allotment/PAS-3 | Sec 42; Rule 14 | Verified — secondary, consistent | | 6 | Allot within 60 days; refund in 15; 12% p.a. from day 61 | Sec 42(6); Rule 14 | Verified — secondary, consistent | | 7 | PAS-3 within 15 days for private placement | Rule 14(4) | Verified — secondary, consistent | | 8 | No fresh offer until earlier complete/withdrawn | Sec 42(3)-type bar; Rule 14 | Verified — secondary, consistent | | 9 | No right of renunciation in PAS-4 | Rule 14 | Verified — secondary, consistent | | 10 | No public advertisement | Sec 42; Rule 14 | Verified — secondary, consistent | | 11 | Special resolution + MGT-14 in 30 days | Sec 42; Sec 117 | Verified — bare Act | | 12 | NCD ordinary-resolution carve-out within 180(1)(c) | Sec 42 practice | Verified — secondary, consistent | | 13 | Valuer report mandatory for preferential (62(1)(c)) | Rule 13 | Verified — secondary, consistent | | 14 | Preferential completion within 12 months of SR | Rule 13(4) | Verified — secondary, consistent | | 15 | Penalty up to amount raised or ₹2 cr (42(10)) | Sec 42(10) | Verified — secondary, consistent | | 16 | Certificates in SH-1 within 2 months | Sec 56(4)(a) | Verified — bare Act | | 17 | FEMA fair-value pricing for non-resident preferential | NDI Rules, 2019 | Verified — rules | | 18 | FC-GPR within 30 days | FEMA reporting | Verified — secondary, consistent | | 19 | 10–12 week typical timeline | Practice estimate | [NEEDS VERIFICATION] — indicative | | 20 | 200-person breach = deemed public offer risk | Sec 42 scheme; Sec 23 | Verified — reasoning from statute |