Private Placement Under the Companies Act, 2013: A Complete Compliance Guide

What Is Private Placement?

Private placement is the process by which a company offers or invites subscriptions for securities — equity shares, preference shares, or debentures — to a select group of persons, other than through a public offer. It is the primary route through which privately held Indian companies raise institutional capital, issue convertible instruments in venture rounds, and bring in strategic investors without the costs and disclosures associated with a public issue.

The legal framework is set out in Section 42 of the Companies Act, 2013, read with the Companies (Prospectus and Allotment of Securities) Rules, 2014 (specifically Rule 14). The Ministry of Corporate Affairs has amended these rules periodically — most significantly in 2018, 2020, and 2023 — tightening compliance requirements and introducing stricter timelines.

Who Can Use Private Placement?

Any company incorporated under the Companies Act, 2013 — whether private or public, listed or unlisted — can raise capital through private placement. However, the practical application differs significantly:

Private Companies

A private company is by definition restricted from inviting the public to subscribe to its securities. All external capital raises — whether from angel investors, venture capital funds, or strategic investors — are therefore structured as private placements. This makes Section 42 compliance directly relevant to every startup funding round.

Public Unlisted Companies

Public unlisted companies may use private placement as an alternative to a public issue. However, they are subject to the additional disclosure requirements of SEBI's Issue of Capital and Disclosure Requirements (ICDR) regulations if they subsequently propose to list.

Listed Companies

Listed companies raising capital through private placement of shares or convertible securities must additionally comply with SEBI's LODR regulations and the preferential allotment provisions under ICDR. The Companies Act requirements run parallel and both sets of regulations must be satisfied simultaneously.

The 200-Person Limit: Understanding the Cap

Section 42(2) restricts a company from making or inviting subscriptions to more than 200 persons in aggregate in a financial year for each kind of security. This is the most frequently misunderstood aspect of private placement.

What Counts Toward the 200-Person Limit?

Each person to whom an offer is made — regardless of whether they ultimately subscribe — counts toward the limit. Offers made in one financial year cannot be carried forward or set off against subsequent years.

Excluded Persons

The following categories are explicitly excluded from the 200-person count:

• Qualified Institutional Buyers (QIBs) as defined under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
• Employees who are being issued securities under a scheme of Employee Stock Option (ESOP) in terms of the provisions of the Companies Act

Multiple Classes of Securities

The 200-person limit applies separately to each class of security. A company may therefore offer equity shares to up to 200 persons and simultaneously offer non-convertible debentures to a different (or overlapping) group of up to 200 persons in the same financial year.

Step-by-Step Compliance: The Private Placement Process

The process under Section 42 and Rule 14 has four distinct phases, each with mandatory steps and timelines.

Phase 1: Board and Shareholder Approvals

Board Resolution: The board of directors must pass a resolution approving the proposed offer of securities. The resolution must specify the total number of securities proposed to be issued, the price per security (or the basis for determining the price), and the intended use of proceeds.

Special Resolution: Section 42(2) requires a special resolution (75% majority) of shareholders in a general meeting prior to each offer or invitation. A single special resolution may cover all tranches of an offer made within 12 months of the date of passing of the resolution, provided the total number of securities to be allotted and the price are specified. For non-convertible debentures, a single special resolution per year may authorise all issuances during that year — this is the one significant relaxation available to frequent debt issuers.

Phase 2: Filing PAS-4 (Offer Letter) with ROC

Before making any offer, the company must file Form PAS-4 (the Private Placement Offer cum Application Letter) with the Registrar of Companies. This is a pre-condition — no offer can be made until PAS-4 has been filed.

PAS-4 must contain:

• Name, registered address, and CIN of the company
• Date of incorporation and nature of business
• Details of the promoters and directors
• Details of the proposed offer: type of securities, number, price, total amount to be raised
• Terms of issue including rights attached to the securities
• Financial statements for the past three years
• Risk factors
• Details of any pending litigation or default

Phase 3: Making the Offer and Receiving Applications

The offer may only be made after PAS-4 has been filed. Key requirements at this stage:

• The offer must be made only to the persons identified in the special resolution or the board resolution, as the case may be
• No new names can be added after the offer is made
• The application money must be paid by cheque, demand draft, or other banking channel — cash payments are prohibited
• Application money must be credited to a separate bank account opened specifically for this purpose — it cannot be commingled with the company's operating accounts
• The money cannot be utilised by the company until after allotment is completed and return of allotment is filed with the ROC

Phase 4: Allotment and Post-Allotment Filings

Allotment timeline: The company must complete allotment within 60 days of receipt of application money. If allotment is not made within 60 days, the money must be refunded within 15 days (i.e., by the 75th day from receipt). Failure to refund within this period makes the company liable to pay interest at 12% per annum from the 60th day until repayment.

PAS-3 (Return of Allotment): Within 15 days of allotment, the company must file Form PAS-3 with the ROC. This is a mandatory post-allotment filing and must be accompanied by the complete list of allottees, details of each allottee, and the board resolution authorising allotment.

Share certificates: Physical share certificates must be issued within 60 days of allotment in the case of equity shares.

Private Placement Register (PAS-5)

Every company making a private placement must maintain a record of each offer in Form PAS-5, which is a private placement register. This register must record:

• Date and number of the special resolution authorising the offer
• Number and price of securities offered
• Name and address of each person to whom the offer was made
• Date of offer and date of application
• Amount received and date of receipt
• Date of allotment

The register must be preserved at the registered office and produced on demand by any regulatory authority. It is a key document in due diligence for subsequent funding rounds — investors typically request it as part of the secretarial due diligence to verify that all prior capital raises were properly documented.

Pricing Requirements

Unlike a public issue (which is subject to SEBI's price band mechanisms), private placement does not have a statutory minimum pricing requirement under the Companies Act alone. However, several constraints effectively set a floor:

Companies with Foreign Investment

If any of the subscribers are non-resident or if the company has received or is receiving foreign investment, FEMA's pricing guidelines apply. Equity shares must be issued at or above the fair market value determined by a SEBI-registered Merchant Banker or a Chartered Accountant using a recognised valuation methodology (DCF, market comparables, etc.).

Companies Seeking RBI/SEBI Compliance

For tax purposes, if shares are issued at a price below fair market value, the differential can attract income tax liability in the hands of the company under Section 56(2)(viib) of the Income Tax Act — the so-called "angel tax" provision. A recent CBDT circular provides exemptions for specified investor categories, but this remains an active compliance consideration.

Penalties for Non-Compliance

Section 42(10) prescribes significant penalties for violation of private placement provisions:

Beyond statutory penalties, non-compliance with private placement provisions has practical consequences. In future funding rounds, a due diligence audit that reveals improper prior allotments can result in investors requiring the company to regularise past issuances (sometimes through compounding proceedings before the NCLT or ROC), delaying or derailing the transaction.

Convertible Instruments in Startup Funding

Most venture capital and angel funding rounds in India involve convertible instruments — Compulsorily Convertible Preference Shares (CCPS), Compulsorily Convertible Debentures (CCDs), or Optionally Convertible instruments. Each of these is treated as a separate class of security for the purpose of Section 42.

CCPS and CCD Rounds

CCPS and CCDs are the most common instruments in VC-backed funding rounds. They are treated as equity for FEMA purposes (as they are compulsorily convertible) and attract private placement compliance requirements in full. The special resolution, PAS-4, separate bank account, PAS-3, and register requirements all apply.

SAFE Notes

Simple Agreements for Future Equity (SAFEs) sit in a regulatory grey zone. As currently structured, they are typically classified as debt instruments under Indian law until conversion. They therefore need to comply with External Commercial Borrowing (ECB) norms if the investor is a foreign entity, and may separately trigger private placement requirements at the time of conversion. This is an evolving area and requires careful structuring at the time of issuance.

Common Mistakes and How to Avoid Them

In our experience advising startups through fundraising rounds, these are the most frequent private placement compliance gaps:

• Making the offer before filing PAS-4: Many companies enter into term sheets, share subscription agreements, and even receive funds before the PAS-4 is filed. This is a non-compliance from day one.
• Mixing application money with operating accounts: Application money must be held in a separate account. Crediting it to the main current account and using it for operations before allotment is a common and serious violation.
• Missing the 60-day allotment window: Delays in completing the allotment board meeting, updating the register of members, or preparing share certificates can push the allotment beyond 60 days.
• Late PAS-3 filing: The 15-day filing deadline for the return of allotment is strict. Additional fees apply for late filing, but more importantly, the ROC can question the validity of the allotment itself.
• No private placement register: Many companies — particularly in early rounds — do not maintain a PAS-5 register, creating gaps in the corporate records that become problematic in later-stage due diligence.
• One special resolution for multiple tranches across financial years: A resolution passed in one financial year cannot authorise offers in a subsequent financial year. Each year requires a fresh special resolution.

Recent Amendments: What Has Changed

The private placement framework has seen several significant amendments since the original Companies Act, 2013. Key changes to be aware of:

2018 Amendments: The Ministry of Corporate Affairs overhauled the Companies (Prospectus and Allotment of Securities) Rules in 2018, most notably requiring PAS-4 to be filed before (not simultaneously with) the offer, mandating a separate bank account for application money, and introducing stricter return of allotment requirements.

2020 Amendments: Companies were allowed to pass a single special resolution for all NCDs in a given year — a practical relief for companies that issue debentures frequently.

Angel Tax Amendments (2023): The Finance Act 2023 extended the angel tax provision (Section 56(2)(viib)) to non-resident investors, with the Finance Act 2024 subsequently providing carve-outs for specified funds and foreign venture capital investors registered with SEBI. Companies relying on these carve-outs should ensure the investor qualifies under the exemption before relying on it.