Traditionally funds raising in the company was considered to be going to the public offer (IPO) and further public offer (FPO). Both these process are very expensive and time-consuming process.
These methods were famous in pre-1990 era, when even the capital market regulators, SEBI has not been constituted. But now there are so many other methods to raise the capital. Private Placement is one of those tools which can be used by both private limited companies or public limited companies.
What is Private Placement
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.
Private Placement Mechanism
Under the earlier companies act, 1956 there were not stringent provision 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 investor because now the companies can issue shares through private placement to 200 members instead of 50 members as given under the companies act, 1956.
Some key points about private placement
- The private placement can not be made to more than 200 members in one financial year.
- The value of the securities allotted to one person shall not be less than Rs. 20,000 of the face value. Here you just need to understand that issue price and face value are two different concepts. Issue price is basically cost to the investor whereas face value of the securities is that amount at which the shares are recorded in the books of account.
- The company must get the valuation done by the registered valuer. Registered valuer means the person who estimates the fair value of the securities.
One important aspect, which you must understand that securities issued to Qualified Institution buyers (QIBs) and employees of the company shall not be counted while calculating the limit of 200 members.
Process of making Private Placement
- Indentify the persons to whom you want to make private placement.
- Draft the offer letter as per the form number PAS 4.
- Take approval from the shareholders by passing the special resolution.
- Company have to make proper records of private placement as per the form number PAS 5. Company shall also file a return in form number PAS-3 to the registrar of companies.
- Money can be received only through cheque or DD. No hard cash can be accepted by the company.