Private Placement and Global Depository Receipts

The permitted group: section 42(1), (2) and (3)

Section 42(1). A company may, subject to the provisions of this section, make a private placement of securities.

Section 42(2): the number. A private placement shall be made only to a select group of persons who have been identified by the Board, called identified persons, whose number shall not exceed fifty or such higher number as may be prescribed, excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of section 62(1)(b), in a financial year, subject to such conditions as may be prescribed.

Four things to hold on to. The persons must be identified by the Board, so the company cannot advertise for takers. The number is fifty or such higher number as prescribed. Qualified institutional buyers and ESOP employees are excluded from the count, which is why a company can place with several institutions without eating into its allowance. And the count is per financial year, not per issue.

Section 42(3): the document. A company making a private placement shall issue a private placement offer and application in the prescribed form and manner to identified persons whose names and addresses are recorded by the company in the prescribed manner.

The proviso is the anti-avoidance rule: the private placement offer and application shall not carry any right of renunciation.

Explanation I defines it: private placement means any 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.

Explanation II defines a qualified institutional buyer by reference to SEBI's Issue of Capital and Disclosure Requirements Regulations 2009, as amended.

Explanation III is the deeming rule and it is drafted very widely. 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 has been received or not, and whether the company intends to list or not, in or outside India, the same shall be deemed to be an offer to the public and shall be governed by Part I of this Chapter, that is, the prospectus rules.

Read the three "whethers". They close every escape route a clever adviser might look for.

The money: section 42(4), (5) and (6)

Section 42(4): how it is paid. Every identified person willing to subscribe shall apply in the private placement and application issued to him, with the subscription money paid by cheque or demand draft or other banking channel and not by cash.

The proviso: a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar under sub-section (8). So the money is frozen until the paperwork is done.

Section 42(5): one offer at a time. 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.

The proviso softens it: subject to the maximum number of identified persons in sub-section (2), a company may at any time make more than one issue of securities to such class of identified persons as may be prescribed.

Section 42(6): sixty days, then fifteen, then interest. A company making an offer under this section shall allot its securities within sixty days from the date of receipt of the application money. If it cannot, it shall repay the application money within fifteen days from the expiry of the sixty days. If it fails to repay within that period, it is liable to repay the money with interest at twelve per cent per annum from the expiry of the sixtieth day.

The proviso requires the monies received on application to be kept in a separate bank account in a scheduled bank, usable only (a) for adjustment against allotment, or (b) for repayment where the company is unable to allot. That mirrors section 40(3) for public offers.

No advertising: section 42(7)

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

Four prohibited routes, and the last one matters: agents. A company cannot keep its own hands clean by hiring somebody to spread the word.

Filing and penalties: section 42(8), (9), (10) and (11)

Section 42(8): the return of allotment. A company making any allotment under this section shall file with the Registrar a return of allotment within fifteen days from the date of the allotment, in the prescribed manner, 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.

Section 42(9): late return. On default in filing within the prescribed period, the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day the default continues, not exceeding twenty-five lakh rupees.

Section 42(10): offer or acceptance in contravention. Subject to sub-section (11), if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable to a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-section (6) to subscribers within thirty days of the order imposing the penalty.

Section 42(11): the deeming provision. Notwithstanding sub-sections (9) and (10), any private placement issue not made in compliance with sub-section (2) shall be deemed to be a public offer, and all the provisions of this Act, the Securities Contracts (Regulation) Act 1956 and the SEBI Act 1992 shall be applicable.

That is the real sanction. Breaking the numerical limit does not merely cost a penalty. It converts the transaction into a public offer retrospectively, so the company is treated as having made a public offer without a prospectus, without listing permission under section 40, and without any of the protections Part I requires, with the criminal and civil consequences that follow.

A worked example

Ratnagiri Marine Foods Private Limited wants eighteen crore rupees.

Route. As a private company it cannot make a public offer, so under section 23(2)(b) its choices are a rights issue or a private placement under section 42.

The list. The Board identifies thirty two investors by name and records their names and addresses. It also approaches two mutual funds, which are qualified institutional buyers, and offers shares to eleven employees under an employees stock option scheme under section 62(1)(b). Neither the funds nor the employees count towards the fifty, by the express exclusion in section 42(2), so the company has used thirty two of its allowance for that financial year.

The document. A private placement offer and application goes to each identified person. It carries no right of renunciation, by the proviso to section 42(3). No advertisement is placed, no agent is engaged, and no marketing channel is used, because section 42(7) forbids all of it.

The money. Subscriptions come in by cheque and bank transfer, not cash, into a separate account in a scheduled bank. The company cannot touch the money until allotment is made and the return of allotment is filed, by the proviso to section 42(4).

The clock. Application money is received on 1 November 2026. Allotment must be made within sixty days, by 31 December 2026. If it is not, the money must be repaid within fifteen days of that, by 15 January 2027. If the company still fails, it must repay with interest at twelve per cent per annum from 31 December 2026.

The filing. Allotment is made on 20 December 2026, so the return of allotment, with the full names, addresses and number of securities of every allottee, must be filed by 4 January 2027. A late filing costs the company, its promoters and its directors one thousand rupees a day, capped at twenty-five lakh rupees.

Now change one fact. Suppose the company had offered to sixty three identified persons in the same financial year, ignoring the limit. Section 42(11) applies notwithstanding the penalties: the issue is deemed to be a public offer, and the whole of this Act, the Securities Contracts (Regulation) Act 1956 and the SEBI Act 1992 apply to it. The company, a private company, is then in the position of having made a public offer it was never permitted to make, in breach of section 23(2) and of its own articles under section 2(68), with no prospectus, no section 40 listing application and no separate account compliance.

And under section 42(10) the company, its promoters and its directors face a penalty of up to the amount raised or two crore rupees, whichever is lower, and the company must refund all monies with interest within thirty days of the order.

Distinctions that carry marks

What this does NOT mean

It does not mean fifty is the number of investors. Qualified institutional buyers and employees offered securities under an ESOP are excluded from the count.

It does not mean the limit is per issue. It is per financial year.

It does not mean the company may spend the money on allotment. The proviso to section 42(4) also requires the return of allotment to be filed before the monies may be utilised.

It does not mean a breach is just a fine. Section 42(11) converts a non compliant placement into a public offer, which is a far larger problem than the penalty in section 42(10).

Quick revision

• Section 41: depository receipts in any foreign country, after a special resolution, in the prescribed manner and on prescribed conditions.
• 42(2): identified by the Board; not more than fifty or as prescribed; excluding QIBs and ESOP employees; per financial year.
• 42(3): private placement offer and application to identified persons whose names and addresses are recorded; no right of renunciation. Explanation III: exceeding the number, whether or not paid, whether or not listing is intended, is deemed an offer to the public.
• 42(4): payment by cheque, demand draft or banking channel, not cash; monies not to be used until allotment is made and the return filed.
• 42(5): no fresh offer until earlier allotments are complete, or the offer is withdrawn or abandoned.
• 42(6): allot within sixty days; else repay within fifteen days; else twelve per cent per annum from the sixtieth day. Separate account in a scheduled bank.
• 42(7): no public advertisement, media, marketing or distribution channels or agents.
• 42(8): return of allotment within fifteen days, with a complete list of allottees.
• 42(9): late return, one thousand rupees a day, cap twenty-five lakh rupees, on the company, promoters and directors.
• 42(10): offer or acceptance in contravention, penalty up to the amount raised or two crore rupees, whichever is lower, plus refund with interest within thirty days of the order.
• 42(11): non compliance with sub-section (2) means the issue is deemed a public offer, and this Act, the SCRA 1956 and the SEBI Act 1992 all apply.

Test yourself

1. To how many persons may a private placement be made? A select group of persons identified by the Board, not exceeding fifty or such higher number as may be prescribed, in a financial year, excluding qualified institutional buyers and employees offered securities under an employees stock option scheme under section 62(1)(b): section 42(2).

2. May the offer be renounced in favour of somebody else? No. The proviso to section 42(3) provides that the private placement offer and application shall not carry any right of renunciation.

3. When may the company use the money it raises? Only after allotment is made and the return of allotment is filed with the Registrar under section 42(8): proviso to section 42(4). Until then the monies stay in a separate account in a scheduled bank.

4. What is the timetable for allotment and refund? Allotment within sixty days of receipt of the application money; failing that, repayment within fifteen days of the expiry of the sixty; failing that, repayment with interest at twelve per cent per annum from the expiry of the sixtieth day: section 42(6).

5. What happens if a company places securities with more than the permitted number of persons? Section 42(11) applies notwithstanding the penalty provisions: the issue is deemed to be a public offer, and all the provisions of this Act, the Securities Contracts (Regulation) Act 1956 and the SEBI Act 1992 become applicable.

6. What is required before a company may issue global depository receipts? A special resolution passed in general meeting; the issue is then made in any foreign country in such manner and subject to such conditions as may be prescribed: section 41.