Private placement | Why private placement?

Definition of Private Placement (PP)

A private placement is an offer or invitation to an offer for a subscription of securities (i.e., shares or debentures) to selected groups of persons identified by the Board of Directors through a Private Placement offer letter. These selected group of persons include high net worth investors, mutual funds, insurance companies, and pension funds.

It is an alternative to Initial Public Offering (IPO) for a company seeking to raise capital.

A Company makes a private placement of securities under the provisions of Section 42. Companies either listed or unlisted can raise funds through the private placement of securities.

Conditions

1. The company shall offer/ invite to a maximum of 200 persons in a FY and per security, excluding Qualified Institutional Buyers (QIB) and employees of the company being offered securities under ESOP.
2. Every selected person willing to subscribe to the PP issue shall pay the subscription amount either by demand draft or cheque or other banking channels and not by cash.
3. Application money received shall be kept in a separate bank account in a scheduled commercial bank and not be utilized for any purpose other than- for adjustment against allotment of securities or for the repayment of money where the company is unable to allot securities.
4. The company shall not release any public advertisements or use any media, marketing, or distribution channels to inform the public about the issue.

Allotment

1. A company must allot its securities to the subscribers within 60 days after receiving the application money. If the company does not allot the securities within 60 days, it shall refund the money in the next 15 days from the expiry of 60 days. If the company does not refund the application money, it shall be liable to pay that money with interest @ 12% per annum from the 61^st day.
2. Return of allotment shall be filed with ROC within 15 days from the date of allotment, including a complete list of allottees, with their full names, addresses, number of securities allotted, etc.
3. No further offer or invitation shall be made if any previous offer is pending or that the company has withdrawn or abandoned it.

Penalty for contravention

1. If a company violates any laws relating to the PP, it shall be liable to pay Rs 2 crore or the amount raised through the PP, whichever is lower.
2. The company shall also refund the money with interest within 30 days of the order imposing the penalty.

Benefits of Private Placement over IPO

1. The private placement process is much faster than the IPO, so it is helpful for companies to raise money quickly through private placement.
2. The expenses and rules & regulations are less as compared to IPOs.

Hence, private placement suits small companies and startups. Startups generally raise funds through private placement in which angel investors and venture capitalists participate. And as the company grows, startups bring their IPOs to provide exit routes to these venture capitalists and angel investors.

Also See: Difference between IPO, OFS, and FPO