The Ministry of Corporate Affairs (MCA) notified the commencement of section 10 of the Companies (Amendment) Act, 2017, on 7 August 2018. Section 10 amends and replaces the former section 42 of the Companies Act, 2013 (CA), which governs the issue and allotment of securities on a private placement basis. The MCA simultaneously notified the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018, amending the principal rules corresponding to section 42 of the CA.
The significant amendments made to the private placement procedure are as follows:
- The restriction of making a minimum offer of securities whose aggregate face value was at least ₹20,000 (US$280), to each person, has been dispensed with;
- Where there is an issue of non-convertible debentures and the aggregate of the borrowings of the company do not exceed the aggregate of its paid-up share capital and free reserves, a special resolution authorizing the issue will not be required;
- The private placement offer letter in Form PAS-4 has been replaced with a new private placement offer cum application letter. The new PAS-4 has adopted the concept of “relevant date” with reference to which the price of the securities has been determined. The relevant date must be at least 30 days prior to the date of the general meeting when the shareholders’ approval was sought. While the language seems to be erroneous, the intent is to introduce a timeline such that the relevant date for valuation is recent and therefore more accurate;
- The company making a private placement offer must maintain a complete record of the private
placement, in Form PAS-5, and a copy of the offer letter cum application letter must be in the new Form PAS-4. The MCA has eliminated the requirement to file both these forms with the Registrar of Companies (ROC). However, the requirement to file Form PAS-5 as an attachment to Form PAS-3 with the ROC remains in place. In addition, the private placement offer cum application letter may now only be issued after the relevant special resolution or board resolution approving the offer is filed with the ROC;
- The law now mandates that the company must not utilize the monies raised through private placement, even after allotment, until the return of allotment of securities in Form PAS-3 has been filed with the ROC. This delays the use of funds raised by the company, as filings typically take place a few days after allotment. The timeline for filing Form PAS-3 has been reduced from 30 days to 15 days, from the date of allotment, and a penalty of `1,000 for each day of default has been introduced;
- The CA now has an enabling provision for a company to make multiple issues of securities as part of one offer;
- The explanatory statement (issued along with the notice for shareholders’ approval) now requires additional disclosures including the type and price of securities being offered, objects of the offer, promoter interest, etc.
The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.