[Opinion] RoC penalizes company & its directors for advertising Private Placement via Media

[2023] 148 taxmann.com 195 (Article)

1. Private placement

Private placement of securities can be made only to select persons or identified persons (as identified by the board of directors of a company). A company making a private placement cannot offer its securities through any public advertisements or utilise any marketing, media, or distribution agents or channels to inform the public about such an offer. If the offer is advertised or marketed, it will be considered a public offer and not a private placement by the company.

2. Framework of Companies Act on private placement

Section 42 of the Companies Act, 2013 provides that a company can make a private placement to a select group of persons, other than by way of a public issue through a private placement offer letter. Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 provides the regulations relating to the private placement by companies. The companies making a private placement are prohibited in releasing any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue. The Rules state that the company should offer or invite to subscribe its securities through a private placement offer letter in Form PAS-4.

3. Relevant provisions of Companies Act 2013

The relevant provision on the matter of issue of shares on private placement basis is spelled out in section 42 of the Companies Act 2013. Sections 42 (7) of the Companies Act 2013 relating to this case reads that no company issuing securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an issue.

4. Penal provisions for default committed (if any) by the company

The penal provisions are also spelled out in the same section 42. sub-section (10) of section 42 of the Companies Act 2013, which says that subject to sub-section (11) if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing the penalty.

5. Consequences of any default

To understand the impact of non-compliance/default committed, if any, by a company, while making the private placement, the regulator would initiate penal proceedings which would result in a heavy penalties on the company and its promoters and directors. To understand the impact, better we go through a decided case law on this matter on 1st March 2023 by the Registrar of Companies of NCT of Delhi & Haryana.

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