[Opinion] ROC’s Vigilance on Private Placement Provisions | Imposing Penalties on Non-compliant Companies

[2023] 151 taxmann.com 167 (Article)

I. Introduction

There are multiple ways of raising funds: One amongst those is Private Placement.

Whenever a company acquires finance from a specified group of persons against issuance of securities of the company, this corporate action is called private placement. The conditions and compliances relating to the private placement are discussed in section 42 of the Companies Act, 2013 read with rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

II. Key provisions relating to Private Placement

Section 42 and the above-referred Rules prescribe that private placement offers for each kind of security shall not be made to more than 200 persons in the aggregate, in one financial year. Also, the procedures like keeping subscription money in separate bank accounts till allotment and utilisation of subscription money only after filing a return of allotment in form PAS-3 are prescribed in section 42 and its Rules.

Section 42(6) states a timeline of 60 days for making allotment after receipt of money. The subsection further states that if allotment of securities is not done within the prescribed time, the money must be returned to the applicant within 15 days from the end of 60 days and if the money is not so returned, then interest must be paid on such money. Further after completion of these 15 days, the application money received will be considered as deposits accepted by the Company,

Since section 42 deals with a very crucial corporate action, the consequences of non-compliance with this section are also serious. Subsections 9 & 10 of section 42 prescribe penalties for non-compliance with any provisions of section 42 and subsection 11 states that private placement issues not made in contravention of section 42(2), i.e., if made to more than 200 persons in the aggregate, in one financial year, it shall be considered as a public issue of securities and SEBI regulations shall become applicable to such issue.

Subsection 10 of section 42 prescribes that, if the company accepts money in contravention of section 42, then the company and its directors shall be liable to a penalty that may extend a maximum of up to RS. 2 Crores and the company is required to refund all the money received against the allotment of securities.

III. Precedents

Companies doing private placement and not complying with all the applicable provisions of private placement have been facing flak from ROC. ROCs have been adjudicating this matter for a while now. Recently, a company had to face harsh consequences due to non-compliance with section 42 was seen in the latest adjudication order passed by ROC Mumbai on 1st May 2023. In this order, ROC imposed a heavy penalty on the company and ordered a refund of allotment money along with interest.

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