Section 42 Of The Companies Act 2013

The Companies Laws Committees (“Committee“) noted in its report dated 1st February, 2016 that the provisions relating to issue of securities in the form of private placement are in need of several changes in terms of procedure thereof. Accordingly, Section 42 of Companies Act, 2013 (“2013 Act“) underwent various amendments, which amendments are in effect from 7th August, 2018. Further, following required amendments to the Companies Act (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 (“PAS Rules“) were also notified on same date. Apart from the change in the heading and thereby restricting its interpretation for issue of shares as against the erstwhile heading, which referred to ‘offer or invitation of securities on private placement basis’, the amendment also sought the following key changes:

  1. Special Resolution – NCDs – The Companies Law Committee acknowledged that the issue of non-convertible debentures (“NCDs“) had no impact on the equity capital of the issuer company and were simply in the nature of debt raised. Appropriately, the PAS Rules now provide that in case of issuance of NCDs on a private placement basis by the issuer company, the approval of shareholders in the form of special resolution shall no longer be required, so as long as the debt proposed to be raised in within the borrowing limits approved under Section 180 (1) (c).
  2. Lock on Funds – All monies received by the issuer company through private placement must be held by it in a separate bank account and the issuer company is not permitted to utilize the same until the allotment is complete and return in respect thereof is filed with the Registrar of Companies.
  3. Reduction in Time for Filing of Return of Allotment – Prior to the amendment, the issuer company was required to filed the return of allotment within a period thirty (30) days. However, the amendment makes stringent provisions in that respect. The issuer company is now required to file the return of allotment within a period of fifteen (15) days.
  4. Minimum Investment Amount – One of the conditions for a company to make a private placement of its securities was that the value of such offer or invitation per person should not be less than Rs.20,000/-. This requirement is no longer stipulated under the PAS Rules.
  5. No Right of Renunciation – The Committee also noticed that the right of renunciation in offer letters was being used to bypass the provisions of private placement. Accordingly, the amendment specifically prohibits the use of right of renunciation by persons to whom the private placement offer is made.
  6. Record of Private Placement Allotment –The issuer company is now no longer required to file its record of private placement allotments with the Registrar of Companies, but must merely maintain a complete copy thereof with itself.
  7. Filing of Resolution – In order to ensure that the issuer company is transparent during the private placement offer, the amendment mandates the company to file the special resolution approving the issue or resolution of the board, as the case may be, with the Registrar of Companies prior to issuance of the private placement cum application letter.
  8. Penalty – Previously, in case a company makes an offer or invitation of securities in contravention of erstwhile Section 42, the punishment would be in the form of penalty of the amount involved in the offer or invitation of securities or Rs.2,00,00,000/-, whichever is higher. However, the amendment now puts a cap on the penalty by providing that the penalty in case of contravention shall be the amount involved in the offer or invitation of securities or Rs.2,00,00,000/-, whichever is lower.

As is enumerated hereinabove, it is evident that the amendment is in line with the letter and spirit of the 2013 Act. It seeks to ensure that the company is reasonably accountable in case of private placement and further seeks to reduce post – issue compliance by mandating the conditions to be fulfilled prior to the issue itself.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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