Recent Amendments to the Private Placement Guidelines

Section 42 of the Companies Act, 2013 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 are substantive provisions for regulating private placements by Indian companies. These provisions are, of course, in addition to applicable regulations prescribed by the Securities and Exchange Board of India (“SEBI”) for listed companies. Recently, both Section 42 and Rule 14 have undergone amendments by way of the Companies (Amendment) Act, 2017 and the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018, respectively (the “Recent Amendments”).

While both Section 42 and Rule 14 have been replaced in their entirety by new provisions introduced by the Recent Amendments, on a closer look, there are only a few substantive changes and majority of the changes are clarificatory or cosmetic in nature. For instance, the Recent Amendments have provided clarity in relation to (i) group of persons who are proposed allottees in the preferential allotment must be “identified by the board of directors of the issuer”; (ii) any right of renunciation not being available under a private placement offer cum application form (renunciation is a legally recognized right only for rights issue and is hardly relevant for private placement, since allottees are specifically identified); (iii) disclosure and maintaining of records of bank accounts by the issuer is not required where consideration for the private placement is for consideration other than cash.

Some of the substantive changes are set out below:

  • Filing with the Registrar of Companies (“RoC”) as a condition precedent for subsequent corporate action: The Recent Amendments refrain issuers from utilising monies raised through private placement until such time as the allotment is made and the return of allotment is filed with the RoC. This would essentially mean that the RoC filing needs to be completed immediately after allotment for an issuer to be able to utilise proceeds from the private placement. Understandably, the period within which the return of allotment is to be filed has been reduced to 15 days from the erstwhile 30 day period. Additional penal provisions have been included for non-filing of the return of allotment within the stipulated time period and the promoters and directors of the issuer have been made liable to pay for each default Rs. 1,000 for each day during which each default continues which shall not, in any case, exceed Rs. 25 lakh.Further, the Recent Amendments also require that the private placement offer cum application letter shall be issued only after the filing of necessary forms for the board and shareholders’ resolution with the RoC. The purpose of these amendments appears to ensure that the RoC is made aware of the proposed private placement and is given an opportunity to raise issues in a timely manner instead of raising issues, if any after the entire process is completed.
  • No requirement to file Form PAS-4 and PAS-5 with the RoC and SEBI: Earlier, issuers were required to file private placement offer letters (Form PAS-4) and a record of persons to whom such offer is made (Form PAS-5) with the RoC and SEBI (in case of listed issuers). The Recent Amendments do away with this filing requirement.
  • Closure of preferential allotment before commencing another preferential allotment: While the restriction on commencement of another private placement until completion,  withdrawal or abandonment of an on-going preferential issue has been retained, an exception has been included. An issuer may, at any time, make more than one issue of securities to “such class of identified persons as may be prescribed” has been included as an exception to restriction on simultaneous issue of securities. The specification on what would constitute “such class of identified persons as may be prescribed” is awaited.
  • Issuance of a private placement offer along with application form: The Recent Amendments include the content of the application form: name of the allottee, father’s name, complete address, phone number, e-mail, PAN and bank account details. While the earlier Rule 14(1)(b) stipulated that the application form should accompany the private placement offer letter, it appears that the Recent Amendment requires that the application form should be a part of the private placement offer similar to debt issuances.
  • Details to be included in the explanatory statement in the notice to shareholders: The erstwhile Rule 13(2)(d) of the Companies (Share Capital and Debentures) Rules, 2014 (“Share Capital Rules”) provided for extensive details to be included in the explanatory statement for preferential allotments. However, the Recent Amendment provides streamlined disclosure requirements for explanatory statements and does away with disclosure such as details of persons to whom preferential allotment has been made during the year (though this has been retained as a disclosure requirement under Form PAS-4 and requires disclosure of price paid in such preferential allotment). They introduce flexibility for the issuer to determine and disclose “material terms of the preferential allotment” in the explanatory statement. There is also a relief from disclosing the post issue shareholding pattern (though this has been included as a disclosure requirement under Form PAS-4). However, it is to be noted that Rule 13 of the Share Capital Rules which lay down additional provisions applicable for private placement is yet to be amended and accordingly, extensive disclosure requirements in the explanatory statement provided under Rule 13 of the Share Capital Rules continue to remain applicable. We believe that the Ministry of Corporate Affairs (“MCA”) could have considered merging the disclosure requirements for explanatory statement provided under Rule 13 of the Share Capital Rules and amended Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules).
  • Relevant date for determining issue price: In line with the SEBI regulations for listed companies, unlisted companies have also been required to determine the relevant date (being 30 days prior to the shareholders meeting for determining the issue price for a preferential issue). This is a welcome change as it brings in a more definitive date for determining the floor for the issue price.
  • Dispensation with minimum ticket size requirement: The Recent Amendments have dispensed with the earlier requirement of the value of offer or invitation per person to be of an investment size of not less than Rs. 20,000 of the face value of the securities.
  • Relaxation in passing of shareholders’ resolution in case of private placement of non-convertible debentures (“NCDs”): Earlier, a shareholders’ resolution was required to be passed once a year for private placement of NCDs during that year. The Recent Amendments permit private placement of NCDs pursuant to board resolution, without obtaining shareholders’ resolution so long as the proposed amount to be raised does not exceed the borrowing limit specified under Section 180(1)(c) of the Companies Act, 2013. However, borrowing units are to be approved by the shareholders of the issuer company.
  • Changes in disclosure requirements under Form PAS-4: The Recent Amendments have provided elaborate disclosure requirements for private placement cum application such as

(a) default in annual filing under the Companies Act;
(b) intention of promoters, directors and key managerial personnel to subscribe to the offer (not applicable for NCD issuance) (redundant addition as proposed allottees would be required to be identified by the board and would be required to be disclosed in the explanatory statement);
(c) proposed time within which the allotment shall be completed;
(d) name of the proposed allottees and the percentage of post private placement capital that may be held by them (not applicable for NCD issuance);
(e) change in control in the issuer company, if any, that would occur consequent to the private placement;
(f) justification for the allotment proposed to be made for consideration other than cash together with the valuation report of the registered valuer;
(g) details of significant and material orders passed by the regulators, courts and tribunals impacting the going concern status of the company and its future operations (MCA could have considered a broader disclosure requirement of material regulatory action or any pending material matters);
(h) pre-issue and post-issue shareholding pattern of the issuer in the format prescribed which includes details such as number of shares and percentage of shareholding; and
(i) mode of payment for subscription.

After four years of the implementation of Section 42 of the Companies Act, 2013 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 and the issues faced by issuers, we believe that the Recent Amendments are an opportunity missed in overhauling law governing private placements. Similar to the recent amendments to the Companies Act and rules to remove overlapping and additional disclosure requirements for prospectuses to allow SEBI  to govern disclosure requirements for prospectuses, the MCA could have used the Recent Amendments to avoid repetitions and conflicts such as those existing between (i) Rule 13 of the Share Capital Rules and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules); and (ii) the SEBI regulations for preferential allotment by listed companies and the regulations for private placement prescribed under the Companies Act including making Form PAS-4 inapplicable for preferential issue by listed companies. The MCA could have also considered doing away with certain excessive disclosure requirements under Form PAS-4 such as regulatory or statutory action against promoters initiated in the past three years and investigations under the Companies Act for the last three years undertaken in the same period, and could have considered keeping this requirement to only pending legal action.