Private Placement of Shares

Private placement of shares is one of the most critical and legally recognised practices for companies to raise capital without going through a public issue. It is governed by the primary act, i.e., the Companies Act, 2013, and relevant rules. Private placement allows a company to issue securities to a particular group of investors, such as private equity funds, angel investors, institutional investors, and other partners. Businesses and investors can both gain from a private placement. Compared to initial public offerings (IPOs) or other public offerings, private sales of securities are a straightforward investment option, but they are subject to legal constraints. When a company sells its shares in a private placement, the share price remains unchanged since the shares are not publicly traded. For this reason, start-ups now frequently rely on private placements to raise capital. Our private placement of shares services is designed to provide end-to-end legal, secretarial, and compliance support to companies intending to raise funds through private placement in India.

What is Private Placement of Shares?

Private placement of shares involves selling stock directly to chosen investors and institutions rather than the open market. Any offer of securities or invitation to subscribe securities to a select group of people by a company through the issuance of a private placement offer letter that satisfies the conditions specified in this section, including the requirement that the offer or invitation is made to no more than 50 or any higher number of persons as may be prescribed in a financial year, is described in Section 42 of the Companies Act, 2013. 

Key highlights-

• Without rigorous rule and regulations or an initial public offering (IPO) requirement, private placements allow companies to raise capital quickly, making them particularly attractive for start-ups.
• Involvement of pre-selected and accredited investors indicates that access to these investments is generally limited to individuals or institutions with sufficient financial resources.
• The primary objective of private placements is to provide companies with a quicker, less regulated fundraising option. They often require offering investors higher returns, compounding risks for both issuers and buyers.

Who Can Participate in Private Placement

Below are some investors who typically participate in private placement, which are as follows-

• Institutional Investors include venture capital firms, private equity funds, and qualified institutional buyers.
• High Net Worth Individuals are accredited or identified individuals who meet investment criteria.
• Strategic corporates include other companies or partners that are strategically aligned.
• Existing Shareholders may also be included within legal limits.

Regulation of private placement can only be sold to accredited investors with sufficient net worth, with a limited number of non-accredited investors. Below is the explanation of the kinds of private placement-

• Preferential Allotment: It is one of the most important types of private placement, selling securities to a particular group, often at a set price, to raise cash fast or bring in key partners.
• QIP: It stands for Qualified Institutional Placement. It is a technique used by listed companies to raise capital by selling shares or securities on a large scale to recognised investors, such as mutual funds, banks, or insurance companies. This type is also known as one of the fastest forms of private placement, as it is a more efficient way to raise capital without going through the lengthy process of a public offering.
• PIPE: It is described as a Private Investment in Public Equity, where a public company can raise funds by selling its shares to private investors at a significantly discounted price. It is one of the quicker ways for the company to get capital while offering investors an attractive deal.

For companies operating in India, private placement is governed mainly by:

• Companies Act, 2013

Section 42 of the Companies Act defines private placement and prescribes the conditions for making offers or invitations to purchase securities. 

Private placement involves any securities, not just shares, including debentures, bonds, and other instruments, broadening its applicability. 

• Companies (Prospectus and Allotment of Securities) Rules, 2014

Rule 14 lays down detailed procedures for private placement offer-cum-application letters (Form PAS-4) and record maintenance (Form PAS-5).

Some of the key advantages related to the private placement of shares are given below-

• Regulatory Requirements: Companies conducting private placements must submit less documentation and disclose less information than companies conducting public offerings. The process of private placement of shares is significantly faster than public issues, enabling companies to meet urgent funding needs.
• Affordability of Cost: Private placements are the most affordable and least time-consuming compared to public offerings. There is no need for securities registration, as it involves fewer legal fees. Companies can negotiate valuation, pricing, rights, and terms directly with investors. Also, it involves fewer regulatory requirements than IPOs or public offers.
• Confidentiality: To maintain confidentiality, private placements are offered to a select group of investors, meaning companies must keep all information confidential. Sensitive business and financial information is shared only with selected investors and must be maintained in confidence.
• Remain a Private Company: One of the key advantages of private placement is that it allows a company to maintain its status as a private entity. Private placements utilise a private placement memorandum and association, which can be advertised on a broader scale. It also helps to attract investors who bring not just capital but also industry expertise, mentorship, and networks.

Numerous disadvantages related to the private placement of shares, which are described as

• Limited Investor Base: One of the disadvantages for companies that need to raise a particular amount of capital. The amount of money that can be raised may be limited because private placement shares are only available to a small number of investors. 
• Lower Liquidity: Shares issued through private placement are not freely tradable, making it difficult for investors to exit their investments quickly. This can be a disadvantage for investors who require liquidity.
• Regulatory and Compliance Burden: Private placement requires strict compliance with the Companies Act, 2013, and SEBI regulations, which are simpler than those for public issues. This can be a disadvantage for companies unfamiliar with these rules and regulations, as it may require additional resources.
• High Interest Rates: The final major drawback of private placement of shares is that, since privately placed bonds are not given credit ratings, bond issuers will often have to pay higher interest rates to attract investors.

Below are the guidelines for how private placement is usually executed:

• Step 1: Approval of Board and Shareholders - It holds board meetings and drafts a special resolution authorising the private placement. Pass the resolution and file the required forms, such as MGT-14, with the regulatory authority.
• Step 2: Prepare Private Placement Offer: Prepare a detailed PPOAL (Private Placement Offer-cum), which includes terms, valuation basis, rights attached, and disclosures. Get the valuation report if required by the regulation.
• Step 3: Record Investors - Maintain a formal list of identified investors that complies with regulatory caps.
• Step 4: Issue Offer Letters: Valid legal offer letters have been issued to each identified investor, with serially numbered offer letters (i.e., Form PAS-4).
• Step 5: Receipt of Funds - Collect subscription payments only through approved banking channels into a separate bank account dedicated to the issue.
• Step 6: Allotment return - After receipt of funds, complete the allotment within 60 days. File the return of allotment (Form PAS-3) and update share records.
• Step 7: Compliance Filings - Check the form and submit all statutory filings with the registrar and, where applicable, with securities regulators.

Corpseed is a trusted choice for private placement of shares due to its strong expertise in Indian corporate laws and its ability to manage the entire process efficiently and compliantly. It ensures strict adherence to the Companies Act, 2013, and applicable SEBI guidelines, thereby minimising legal and regulatory risk for companies. Corpseed is a preferred partner for private placement of shares because it combines legal expertise, regulatory precision, and end-to-end execution under one roof. Corpseed can be valuable because-

• Expert regulatory guidance: We help companies to understand complex steps related to private placement of shares by ensuring that every step is handled accurately, reducing the risk of penalties or invalid allotments.
• End-to-End Support: We offer support from structuring the private placement to the final allotment of shares.
• Customised Advisory Approach: We tailor the private placement strategy to align with business objectives.
• Speed, Transparency, and accountability: We follow a well-defined process with regular updates, ensuring deadlines are met without last-minute compliance issues.