Traditionally, funds raised in the company were considered to go to the public offer (IPO) and other public offers (FPO). Both these processes are costly and time-consuming.
These methods were famous in the pre-1990 era when SEBI has not been constituted even by the capital market regulators. But now, there are so many other methods to raise capital. The private placement is one of those tools which can be used by both private limited companies and public limited companies.
When a company issue shares to a small group of investor, whether individual or body corporate, it is called the issue of shares by private placement.
It is one of the best routes to raise finance for growing companies or startups.
Under the earlier companies act, 1956, there were no stringent provisions to get the money by this route, but now, it is not so easy under the new companies act, 2013. The relaxation under the new Act is the increased number of investors because now the companies can issue shares through private placement to 200 members instead of 50 members as given under the companies act, 1956.
One crucial aspect you must understand is that securities issued to Qualified Institution buyers (QIBs) and company employees shall not be counted while calculating the limit of 200 members.