Private Placement for a Private Ltd Company for Fundraising

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.

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 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.

Some key points about private placement

1. In one financial year, the private placement can not be made to more than 200 members.
2. The value of the securities allotted to one person shall not be less than Rs. Twenty thousand of the face value. Here you need to understand that issue price and face value are two different concepts. The issue price is a cost to the investor, whereas the face value of the securities is the amount at which the shares are recorded in the books of account.
3. The company must get the valuation done by the registered valuer. A registered valuer is a person who estimates the fair value of the securities.

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.

Also Read: Object Change Procedure in Case of Companies for Start-ups

Process of making Private Placement

1. Identify the persons to whom you want to make a private placement.
2. Draft the offer letter as per the form number PAS 4.
3. Take approval from the shareholders bypassing the special resolution.
4. The company has to make proper private placement records as perform number PAS 5. The company shall also file a return in form number PAS-3 to the registrar of companies.
5. The company can receive money only through cheque or DD. They can not accept hard cash.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.