Private Placement

It is a sale of stocks to pre-selected investors or institutions in lieu of open market. It is considered as an alternative to initial public offering (IPO). It is an issue of stock either to an individual or a corporate entity.

Private placement offerings are securities released for sale only to accredited investors. Companies using private placements seek a smaller amount of capital from a limited number of investors. Private placements can be done quicker than IPOs.

Compared to sales of securities on the open market private placements are relatively unregulated. Buyers of private placements demand higher returns compared to the open markets.

The investors invited for this privately-held sale are wealthy individuals and entities, mutual fund providers, insurance companies, and banking and financial institutions.

The privately sold assets offered to accredited investors fulfill the required eligibility criteria and meet a certain threshold of financial net worth. They have more experience in making investments and prudent financial decisions. The companies invite only those investors for such schemes who could afford to take risks and bear losses that may arise from such an investment.

The meaning of private placement could be better understood by exploring the types of such distributions found in the market. Preferential allotment and qualified institutional placement are the two significant types of it.

Preferential allotment allows the distribution of stocks and bonds to a preferred group of investors. These accredited individuals and entities include mutual fund companies, financial institutions, etc. On the contrary, qualified institutional placement includes institutional investors that meet the eligibility criteria as per market regulations.

Condition for Private Placement under the Companies Act, 2013

Maximum Number of Persons: An offer for private placement can be made to not more than 200 people in a financial year. Minimum amount of offer for an individual: The value of the Offer per person shall not be less than INR 20,000 of ‘face value’ of securities.

Persons to whom an offer can be made: All offers shall be made only to those persons whose names are recorded by the company prior to the invitation to subscribe and allotments can be made only to such persons who have been addressed and the offer is made along with the Offer letter.

Mode of Payment: All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash.

No advertisement of offer: No company offering securities under private placement shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.

Bank Account: The application money received from the private placement offer shall be deposited in a separate bank account in a scheduled bank. Minimum gap between two offers: A company can come with a new offer after completion of the earlier offer. However, no fresh offer or invitation shall be made unless the allotments with respect to any previous offer or invitation have been completed or been withdrawn or abandoned by the company.

Allotment: Securities are to be allotted within 60 days from the date of receipt of the application money and if the company fails to allot securities, has to repay the application money to the subscribers within 15 days from the date of completion of 60 days and in case the company fails to repay the application money within the aforesaid period, the company is liable to repay application money along with interest at the rate of 12% p.a. from the expiry of the 60th day.

Every unlisted public company making any offer for issue of any securities, before making such offer has dematerialized of its securities held by its promoters, directors, key managerial personnel in accordance with provisions of the Depositories Act, 1996.