Private Placement Compliance — PAS-3 & Section 42 (Post-Allotment)

Section 42(1) of the Companies Act, 2013: companies may make private placement of securities to identified persons. Section 42(1A): special resolution required authorising the private placement (valid for 1 year). Section 42(2): identified persons not to exceed 200 in a financial year (excluding QIBs and ESOP holders). Section 42(6): application money to be kept in a separate bank account until allotment. Section 42(7): allotment must be made within 60 days of receipt of application money. Section 42(9): Return of Allotment in Form PAS-3 to be filed with ROC within 15 days of allotment. Section 42(10): penalty for default — company and each officer in default liable for penalty of Rs. 1,000 per day for the period of default, subject to a maximum of Rs. 25 lakh. Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014: Form PAS-4 (Private Placement Offer and Application Letter) with prescribed disclosures. Rule 76 of the Companies (Registered Valuers and Valuation) Rules, 2017: valuation by Registered Valuer for non-promoter issuances. FEMA (Non-debt Instruments) Rules, 2019: Form FC-GPR within 30 days for allotment to non-residents.

Private placement is the process by which a company raises capital by issuing securities to a select group of identified investors, as opposed to a public offering. For companies (other than listed companies regulated by SEBI), private placements are governed by Section 42 of the Companies Act, 2013, read with the Companies (Prospectus and Allotment of Securities) Rules, 2014. This route is widely used by startups and private companies for seed rounds, angel rounds, Series A/B/C funding from venture capital firms and high-net-worth individuals, and ESOP tranches. The Section 42 compliance framework is mandatory regardless of whether the funding is from a domestic investor or a foreign investor (the latter additionally requires FEMA reporting via FC-GPR).

The compliance cycle for a private placement begins at the time of offer and concludes with post-allotment filings. The company must first obtain a special resolution from shareholders under Section 42(1A) authorising the private placement — this resolution is valid for one year. After the resolution, the company issues a Private Placement Offer and Application Letter in Form PAS-4 to identified persons, who must not exceed 200 in a financial year (excluding Qualified Institutional Buyers and employees under an ESOP). The application money must be kept in a separate bank account and cannot be utilised until the allotment is made and the return is filed. The board must then pass an allotment resolution within 60 days of receipt of application money. Post-allotment, the most critical compliance is the filing of Form PAS-3 — the Return of Allotment — with the Registrar of Companies within 15 days of the allotment date, as mandated by Section 42(9). A breach of this 15-day deadline triggers daily penalties under Section 42(10).

Critically, any private placement for which the allotment price involves the issuance of shares to non-promoters or new investors requires a valuation report from a Registered Valuer under Rule 76 of the Companies (Registered Valuers and Valuation) Rules, 2017, or a CA/Merchant Banker valuation report depending on the nature of the securities and whether FEMA reporting is also required. Our service covers the complete private placement compliance cycle from shareholder resolution drafting to PAS-3 filing, coordination with the company's Registered Valuer for the valuation report, and FEMA FC-GPR filing for foreign investors.