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Dr.

Shakuntala Misra
National Rehabilitation University,
Lucknow
ASSIGNMENT
PRIVATE PLACEMENT

SUBMITTED BY: SUBMITTED TO:


PRAWARTIKA SINGH PROF. SHAIL SHAKYA

B.COM.L.L.B [H]

5th SEMESTER
Acknowledgement:

I PRAWARTIKA SINGH WOULD LIKE TO express my deep gratitude to Prof Shail Shakya ,
for giving us valuable input on the topic Which had made me competent enough to prepare my
project. I would also thank Prof Shefalii Yadav Dean department of Law Dr shakuntala misra
National rehabilitation University Lucknow for giving us the opportunity to make this project.
Introduction -
Every company at some point needs to increase its share capital. When it decides to increase its
capital, speed and fewer procedural requirements are two factors which are always of concern.
This becomes even more crucial when foreign shareholders are involved and time has to be
factored for potentially securing “internal” approvals at various levels for those investments by
such foreign shareholders. In addition, wire transfers too can sometime take longer than 48
hours. For Indian shareholders or other persons who wish to subscribe to the shares of a
company, these constraints may not necessarily exist. While there are many methods to increase
the paid-up capital as discussed below, companies often take recourse to private placement for
allotting shares and increasing their capital. Private placements can be made by both private and
unlisted public companies in accordance with the provisions of the Companies Act, 2013 (“2013
Act”). With the new law under the 2013 Act, the procedure for private placement has become
comparatively more structured, time oriented and transparent.
This newsletter discusses the concept and the procedure, timelines, pricing etc. prescribed under
the 2013 Act for private placement by private and unlisted public companies. Apart from the
2013 Act, a listed issuer, has to adhere with the SEBI (Disclosure of Investor Protection)
Guidelines, 2003. Since these guidelines refer to the 1956 Act and are yet to be updated, the
scope of this newsletter is confined to private placements by private and unlisted public
companies only and briefly throws light on the loopholes of the private placement provisions
under the Companies Act, 1956 (“1956 Act”), which the new law curbs.

LITERATURE REVIEW-

The Act, 1956 did not define the term 'private placement' rather certain offers of shares or
debentures/invitation to subscribe for shares or debentures to any section of the public were not
regarded as public issues under section 67(3) the Act, 1956 i.e where shares or debentures are
available for subscription or purchase only to those receiving the offer/invitation and
offer/invitation is a domestic concern of the issuer and those receiving the offer/invitation, were
termed as private placement. However, as per the proviso to section 67(3) of the Act, 1956, when
a company made an offer or invitation to subscribe for shares or debentures to 50 or more
persons, such offers was treated as made to public. Under the Act, 1956 the conditions relating to
private placement were applicable only to public companies. on the contrary Act, 2013 provides
various conditions for private placement of shares and debentures which apply to both private
companies and public companies. A private Company limited by shares is prohibited by the Act
and the Articles from inviting the public for subscription of shares or debentures. As per Section
42(4), an offer or invention shall be deemed to be invention to public, if itcannot be considered
as private placement under sub-section (2) of section 42. Explanation 1 to section 42(2) along
with the rules framed thereunder provide that if a company, listed or unlisted, makes an offer to
allot or invites subscriptioin , or allots, or enters in to an agreement to allot, securities to more
than 200 persons in a financial year, whether the payment for the securities has been received or
not or where the company intends to list securities or not on anybrecognised stock exachange in
or outside india , the same shall be deemed to an offer to the public . thus , we may say that if
any company invities subscription or allotsany securities to 200 or more persons in a financial
year, it will be said to have made a public It was urged by the Sahara Group that OFCDs were
issued in the nature of "hybrid instruments" as defined u/s 2(19A) the Act, 1956 and SEBI did
not have jurisdiction to administer those securities since Hybrid securities were not included in
the definition of 'securities' under the Securities and Exchange Board of India Act, 1992 ("SEBI
Act"), or the Securities Contract Regulation Act, 1956 ("SCRA"), but would be governed by the
Central Government under section 55A(c) of the Act, 1956. The Supreme Court held that
OFCDs issued by Sahara Group were public issue of debentures, hence securities and once the
number 49 is crossed, the proviso to Section 67(3) becomes effective and it is an issue to the
public, which attracts Section 73(1) of Act, 1956 and application for listing becomes mandatory
which falls under the administration of SEBI u/s 55A(1) (b) of the Act, 1956. The Court upheld
the proceedings of the SEBI and Sahara Group was ordered to refund the amount to investors
along with interest.Since the requirements for raising the funds by way of private placement have
been made more stringent, it will significantly increase the compliance burden on private
companies looking to raise funds through private placement. It is also to be noted that as no
specific exemption has been provided for private companies or small companies, it will lead to
reduce flexibility available to private companies and the companies operated by closely held
people for the raising funds. However, the better governance of all companies is expected which
will lead to the transparency in the affairs of the Company and accountability of the directors.

Sahara India Real Estate Corporation Limited & Others Vs. SEBI.
A landmark judgment was passed on 31st August 2012 by the Supreme Court of India, in Sahara
India Real Estate Corporation Ltd. and others v. Securities and Exchange Board of India and
another [2012] 174 Comp Cas 154 (SC) wherein the two companies of the Sahara Group, Sahara
India Real Estate Corporation Limited (SIRECL) and Sahara Housing Investment Corporation
Limited (SHICL), were directed to refund around Rs 17,400 crores to their investors within three
months from the date of the order with an interest of 15% per annum. Sahara India Real Estate
Corporation Limited (SIRECL) and Sahara Housing Investment Corporation Limited (SHICL),
appellants are Companies controlled by the Sahara Group. The two appellant companies raised
from investors by issuance of Optionally Fully Convertible Debentures (OFCDs) and collected
between April 2008 and April 2011 over Rs. 17,656 crores, from about three crore investors.
This was done pursuant to special resolutions passed under section 81(1A) approving the issue of
OFCDs. For inviting investors to subscribe to the OFCDs, an Information Memorandum (IM)
was circulated after it was filed with the Registrar of Companies, purportedly under section 60B
of the Companies Act, 1956. But the IM described the issue as 'Private Placement Issue' and
hence did not comply with the requirements applicable to the 'public issue' of securities. On
investigation, a Whole-time Member of SEBI passed an order on 23 June 2011 directing the two
companies to refund the money so collected to the investors and also restrained the promoters of
the two companies from accessing the securities market till further orders. In the appeal that
Sahara preferred before the Securities Appellate Tribunal (SAT) against the order of the Whole-
time Member, the SAT confirmed and maintained the order of the Whole-time Member by an
order dated 18th October, 2011. Sahara’s contentions in the detailed reply dated 30.5.2011 were
as under:
TABLE OF CONTENT-

1 ACKNOWLEDGEMENT
2 INTERODUCTION
3 PRIVATE PLACEMENT
4 PROCEDURE FOR PRIVATE PLACE MENT
5 CONDITION FOR PRIVATE PLACEMENT
6 CONCLUSION
7 BIBLIOGRAPHY
Bibliography-
Secondary source-

Kapoor .G.K “Company Law”19th Edition:2013

http://www.mondaq.com/india/x/305626/Securities/PRIVATE+PLACEMENT+UNDER+C
OMPANIES+ACT+2013

http://corporatelawreporter.com/2016/01/18/the-concept-of-private-placement-under-the-
companies-act-2013/

https://www.linkedin.com/pulse/private-placement-companies-under-act-2013-draconian-
procedures-s

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