Issue of Securities on Private Placement Basis - Per the latest Amendment to Section 42 of the Companies Act, 2013


A company shall require more capital for the growth apart from the founders or promoters’ contribution. In order to raise sufficient capital, the company may make a private offer to a select group of persons to subscribe to the securities of the company. The board of directors of the company shall identify such persons (‘identified persons’) to whom a private offer shall be made to participate in the share capital of the company and such an offer shall be made to a maximum of 50 people per each offer.

What is the maximum number of persons to whom the private offer shall be made?

The maximum number of persons to whom offer be made under private placement in a financial year is 200. Additionally, the restriction of 200 persons would be reckoned individually for each kind of security that is ‘equity shares’, ‘preference shares’ or ‘debentures’.

Note: In addition to the private placement offer being made to the identified persons, the private offer may also be made to a qualified institution buyer, or to the employees of the company pursuant to an ESOP scheme. The upper limit of making a private placement offer (i.e., 50 for a particular private placement offer and 200 in a financial year) shall be calculated excluding the qualified institution buyer or employees of the company.

What is private placement?

The term private placement is explained under the Companies Act, 2013 as “means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified as per section 42 of the Companies Act, 2013”.

Who selects the identified persons for issue of shares on a private placement basis?

As per Section 179(3) of the Companies Act, 2013, the board of directors shall hold a meeting for issue of securities. Board of Directors may decide the list of identified persons to whom the securities shall be offered by passing of resolution in a board meeting.

Is the consent of shareholders necessary for issue of securities to identified persons?

The board of directors shall decide the list of identified persons to whom the securities shall be offered under a private placement offer. However, the board has to take consent of the shareholders of the company and pass a special resolution which states that the shareholders have given their consent to offer securities to the identified persons. The Companies (Prospectus and Allotment of Securities) Rules, 2014 mandates the filling of special resolution stated above with the RoC within 30 days from the date of passing the special resolution.

Note 1: The special resolution stated above shall be filed in Form MGT-14 with the RoC before offering shares to the identified persons or before giving the private placement offer-cum-application. This implies that the board cannot offer securities to any person without taking shareholders consent.

Note 2: The special resolution shall be substituted with a board resolution in case of issue of non-convertible debentures which are issued within the threshold limit (monetary threshold) prescribed under Section 180 of the Companies Act, 2013. The requirement of shareholders’ resolution under Section 42 of the Companies Act, 2013 is only applicable, in case the issuance of non-convertible debentures, when the threshold limit prescribed under Section 180(1)© of the Act is exceeded.

Note 3: In case a board resolution is passed as per Note 2, the board resolution shall be filed with the RoC on similar lines with the Special resolution.


Section 42 states that only the identified persons shall have the right to subscribe to the securities offered by the company. This means that the Identified persons shall not have the right to renounce their right to subscribe in favour of another person. The aforesaid restriction was not provided in the erstwhile Section 42 of the Companies Act, 2013, but has been amended as such now with the amendments effective from 7th August 2018.

Is there any restriction on utilisation of the share application money?

Pursuant to issue of private placement offer cum application in Form PAS-4, the identified persons shall send the offer letter and the subscription money to the company. The subscription money shall be paid vide a cheque, demand draft or any other banking channel but not by cash.

The company shall not utilise the subscription amount/application amount unless the shares are allotted in the name of identified persons and a “Return of Allotment” in Form PAS-3 is filed with the RoC within 15 days from the date of allotment of shares. Additionally, the Companies Act, 2013 mandates for the company to allot the shares within 60 days from the date of receipt of application money and failure to allot the shares within the 60 days’ timeline shall result in a penalty to the company.

What is the minimum investment size for each individual in case of private placement of securities?

There is no minimum investment size in case of private placement of securities as per Section 42 of the Companies Act, 2013. Pursuant to an amendment by Ministry of Corporate Affairs, which shall be effective from 7 August 2018, there shall be no minimum investment size per person for issue of securities under private placement. Prior to the aforesaid amendment, there existed a restriction on the value of offer per person which was a minimum investment size of INR 20, 000 of face value of securities.

Section 185 of the Companies Act, 2013 - Loans to Directors


Can a company give loan to a person who is a director of the company?

A company shall advance loan to its director, directly or indirectly, subject to approval by a special resolution of the shareholders. The compliance restriction of shareholder’s approval shall be applicable even in case the loan is given to the director in the course of business of the company. However, Section 185 does not explicitly specify whether the special resolution should be prior to advancing the loan, although a prior approval stands as a good corporate practice.

With respect to the Special Resolution, a notice shall first be sent to the shareholders of the company calling for a general meeting for the purpose of taking shareholder’s approval on advancement of loan. Further, an explanatory statement shall be attached to the notice which shall specify in detail the following:

1. Particulars of the loan advanced or to be advanced;

2. Purpose of the taking the loan by the director.

Can a company give loan to any other person apart from the director of the company?

Per Section 185 of the Companies Act, 2013, a company can advance loan to:

1. directors of the company, or

2. directors of its holding company; or

3. any partner of a firm in which such director is a partner; or

4. relative of such director;

5. any private company of which any such director is a director or member;

6. any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together;

7. any body corporate, the board of directors or managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the board of directors, or of any director or directors, of the lending company.

Note: The term such director refers to a director(s) of the company specified in point 1.

What are the circumstances where a company can give loan and not be covered under Section 185 of the Companies Act, 2013?

A. A company may give a loan to its managing director or a whole-time director pursuant to a scheme approved by shareholders of the company by a special resolution or as a part of the conditions of service extended by the company to all its employees.

B. A company whose ordinary course of business is to provide loans shall be exempted from the compliances of section 185 provided the company charges an interest on such loan and at such a rate which is not less than the rate of prevailing yield of one year, three years, five years or ten years Government security closest to the tenor of the loan.

C. A loan given by a holding company to its subsidiary company (provided the subsidiary utilizes the loan advanced to it for its principal business activities).

What is the purpose of Section 185 of the Companies Act, 2013?

Section 185 of the Companies Act, 2013 curbs or restricts the misuse of powers by directors. Section 185 ensures that the directors are not enriched at the expense of the funds of the company.

Representations and Warranties in M&A and PE transactions, an Indian Context


The exchange of relevant business information between parties plays a crucial role for the success or failure of any Mergers and Acquisition (“M&A”) or Private Equity (“PE”) deal. Both parties, especially the buyer, rely on the authenticity of such information for closing the deal. In this context, the role of representations and warranties is critical for determining the rights and liabilities of the parties to a transaction.

For instance, the buyer may later find out that one of the seller’s warranties i.e. “grant of a large contract in favour of the target company” or “certain ongoing regulatory investigations will not have any significant impact on business” is untrue, and therefore the value of the business has diminished as of today, from what was represented to him at an earlier point of time during negotiations. That’s where the representations and warranties (“Reps and Warranties”) come into play.

There have been notable cases in India where breach of Reps and Warranties have played a significant role. As recent as in March 2018, Reliance Infrastructure issued a legal notice to Pipapvav Defence and Engineering for a claim of breach of warranties amounting to a significant amount of INR 5440.38/- crores [approximately US$75 million]. It is evident that in commercial contracts, Reps and Warranties have huge implications for businesses.

It is well established that, generally used, (a) representations are factual statements of past or existing facts, and (b) warranties are contractual statements that existing or future facts or events are or will be true. This understanding is supported by the provisions of Section 17–19 of the Indian Contract Act, 1872 (“ICA”) and Section 12 of the Sale of Goods Act.

Despite the above, most modern drafting practices tend to club “Reps and Warranties” together as a single clause. However, considering the difference in the remedies available for breach of representations or breach of warranties, both parties need to understand the implications of entering into such a contract. Here is a guide to the same: –

1) Scope of Reps and Warranties in M&A and PE

Reps and Warranties in a typical M&A and PE deal act as “inducements” by the seller to the buyer to enter into the contract. This requirement of stating often “routine” requirements as Reps and Warranties are important, as “Caveat Emptor” applies in the ICA to a limited extent and silence about a particular fact is not necessarily fraud in Indian law.

Hence, in M&A and PE deals, a representation by the seller will state the past or existing state of affairs of the concerned business, whereas a warranty may go a step further and assert the current and future affairs of the business, including events that may take place post-execution of the contract.

2) Effect of breach of Reps & Warranties

3) “Represents and warranties” — A case for clarity?

As the implications of breach of representations and warranties itself are different, especially from a seller’s perspective, it will be better to differentiate between Reps and Warranties. If this is not done through separate clauses due to the prevalence of a “clubbed clause” in commercial contracts as of today, then, through precise drafting to communicate the intent of both parties. This will help to minimize uncertainty in the scope, interpretation and application of Reps and Warranties before courts.

On the other hand, from a buyer’s perspective, their conduct during the due diligence, subject to the facts and contractual provisions drafted in the particular case, may lead to a dilution of the Reps and Warranties [Infinite land Ltd. v. Artisan Contracting Ltd (2005 EWCA Civ 791)]. Therefore, a differentiation of the Reps and Warranties will help to seek the protection of Representations/ Warranties that are outside the scope of the disclosure letter. However, this needs to be balanced with the advantages a buyer may get from the ambiguous usage of “Seller represents and warrants that…”, which may allow the buyer to pursue a wider set of reliefs before the courts.

Hence, the apportionment and usage of Reps and Warranties in M&A and PE transactions needs to be carefully inserted in each transaction, depending on the interests, objectives and certainty that parties wish to impart into a contract.

Finally, the parties can opt for an “M&A / PE Rep and Warranty insurance contract”, so that the buyer can mitigate and outsource (certain) risk(s) of breach thereof to a third party (Insurance Company), as well as keeping a well-drafted “Entire Agreement” clause to ensure courts will seek for interpretation tools within the contract itself.

A follow-up on some crucial interpretation clauses that can be inserted in future M&A / PE contract, in light of recent Indian judgments, will be taken up in a future post.

Goods and Service Tax, India - An Introduction


The Goods and Service Tax (“GST”) is the new indirect tax regime of India. The GST came into effect on July 01, 2017, through the implementation of the 101st Amendment to the Constitution of India and it replaced the multiple indirect taxes levied on the goods and services by the Central and State Governments of India.

GST is a uniform, indirect, destination-based tax, which is levied on every value addition that is made at each stage, on good and services, from the manufacturer to the consumer. GST is based on an input tax credit model, wherein all input taxes paid at each stage of value addition made on the products and services is refunded by the Government upon submission of relevant documents. Therefore, the final consumer is the only person in this supply chain that pays the GST levied by the last dealer.

As per the Ministry of Finance, Government of India, “GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.”

One of the greatest advantages of GST is that it completely mitigates cascading effect of the multiple indirect taxes on the goods sold in India. In the pre-GST era, taxes were levied on taxes (in addition to the value of goods) and as a result the price of goods kept increasing at every stage. However, under GST, dealers at every stage of the supply chain can claim input tax credit for the taxes it had paid to the dealer preceding him in the supply chain. Therefore, the burden of indirect tax on the final consumer is reduced and price of goods under GST is lesser when compared to earlier indirect tax regime.

Under the GST Regime, there are two types of GST, Central Goods and Service Tax (“CGST”) and State Goods and Service Tax (“SGST”), which are levied simultaneously on every transaction of supply of goods and services (except on certain exempted goods and services, which are outside the purview of GST).

In case of inter-state transactions, the Central Government levies and collects the Integrated Goods and Services Tax (“IGST”) on all inter-State supplies of goods and services.

Let us examine the flow of taxes by reviewing an IGST-based transaction:

In these inter-state transactions, the exporting dealer charges IGST to the importing dealer (which will be a combined rate of CGST and SGST).

The exporting dealer thereafter deposits the IGST received from the importing dealer to the exporting State (and claims input tax credit of CGST and SGST paid by it when it had purchased the goods within the exporting State).

The exporting State thereafter transfers the IGST deposited by the exporting dealer to the Central Government (clearly specifying the SGST component).

The importing dealer then claims input tax credit from the importing State for the IGST paid to the exporting dealer (again clearly specifying the SGST and CGST component). The importing State pays the input tax credit for the SGST component of the IGST to the importing dealer.

Finally, the Central Government thereafter transfers the SGST component of the IGST deposited by the exporting State to the importing State.

Anti-Dilution Rights - How to Work Around the FEMA (TISPRO) Regulations, 2017 for Non-Residents [Part 5 of the five-part series]


In order to avoid the ‘Pricing Guidelines’ [discussed previously in Part 4 of this story], the additional shares to be allotted to the original investor of the Indian startup company to comply with the Anti-Dilution Rights must be issued under the ‘rights issue’ mechanism under Section 62 (1) (a) of the Companies Act, 2013 instead of ‘preferential allotment’ mechanism under Section 62 (1) (c) of the Companies Act, 2013.

The FEMA (TISPRO) Regulation, 2017, under Regulation 6, clearly lays down the provisions governing the ‘acquisition of shares through a rights issue or a bonus issue’ to a ‘person resident outside India’. Regulation 6 (5), clearly lays down that, “In case of an unlisted Indian company, the rights issue to persons resident outside India shall not be at a price less than the price offered to persons resident in India.” This means that, under ‘rights issue’, the shares can be issued at any price (including price per share lower than the fair market value), provided the Indian company offers the shares under ‘rights issue’ to the other shareholders at the same price.

Generally, all investment agreements, which have Anti-Dilution Rights, have elements of shareholders agreements and are accordingly executed by all shareholders of the investee company (new shareholders of the investee company are inducted into such ‘investment agreement’ therein through addendum). Therefore, contractually, if one can bind the other shareholders of the investee company to reject such shares offered under ‘rights issue’, then the non-resident investor can exercise its ‘rights issue’ and subscribe to such number of shares that is required to comply with the Anti-Dilution provisions.

Anti-Dilution Rights – Exception for Non-Residents [Part 4 of the five-part series]


Contravention of FEMA (TISPRO) Regulations, 2017

It is clear from the ‘Introduction’ [Part 1 of this story] that, if the Anti-Dilution Rights gets triggered, a startup company must issue additional shares to the investor exercising such Anti-Dilution Rights at no price or at a price lower than the value at which the fresh subscription has been made by the new investor.

This actually directly violates the ‘Pricing Guidelines’ under Regulation 11 of FEMA (TISPRO) Regulations, 2017, in the event the original investor is a ‘person resident outside India’ under FEMA (TISPRO) Regulations, 2017. As per the said Pricing Guidelines, no Indian unlisted company can issue shares to a ‘person resident outside India’, at a price lower than the fair market value, determined by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant.

Under the Companies Act, 2013, any fresh issue of securities to a new investor can be made only under Section 62 (1) ©of the Companies Act, 2013, and accordingly the Company within 30 days of such allotment must file a Return of Allotment under Form PAS-3 of the Company (Prospectus and Allotment of Securities) Rules, 2014. One of the mandatory conditions under Rule 12 (7) of the Company (Prospectus and Allotment of Securities) Rules, 2014 is that any shares issued under Section 62 (1) ©of the Companies Act, 2013, must attach a valuation report of a registered valuer (an independent SEBI Registered Merchant Banker or Chartered Accountant in practice having a minimum 10 years of experience) along with the Form PAS-3 filed for this.

Thus, any sale of additional shares by the Indian unlisted company, at no price or a cost below the fair market value determined by a registered valuer under Rule 12 (7) of the Company (Prospectus and Allotment of Securities) Rules, 2014, for the purpose of compliance with the Anti-Dilution Rights will contravene the ‘Pricing Guidelines’ under the FEMA (TISPRO). In the next part of this story, we shall discuss the work-around to this problem.

Anti-Dilution Rights — Weighted Average Method [Part 3 of the five-part series]


In Part 1 of the Anti-Dilution Rights story, we discussed the Anti-Dilution Rights in general, and identified that there are two mechanisms for Anti-Dilution Rights protection: i. Full Ratchet Method; and ii. Weighted Average Method.

In this Part 3, we will dig deeper into the Weighted Average Method.

The Weighted Average Method of calculation is used more extensively as this method gives importance to the proportionate relevance of the investments, made in both the rounds.

· Under this method, it is first assumed that all shares of the start-up company issued before the 1st round of investment were subscribed at the price per share similar to the price per share of the 1st round of investment (this is done to take into account the increase in valuation of the start-up company since incorporation to the time of 1st round of investment).

· Thereafter, the price per share at 1st investment is multiplied with the total shares in the start-up company after 1st investment (including the shares issued to the 1st investor).

· The result is then added with the 2nd round investment amount to arrive at the actual investment in the start-up company after the 2nd round investment.

· This is then divided with the total number of shares in the start-up company after the 2nd round investment.

· The result will be the weighted average price per share.

· Thereafter, the 1st round investment amount shall be divided by the weighted average price per share.

· The result will be the number of shares that the 1st investor would have received if the weighted average price per share was the price at which the 1st investment was made.

· This, when deducted by the shares actually received by the 1st investor, will determine the additional shares to be issued to the 1st investor under the Weighted Average Method.

As an example,

Total shares of start-up company before 1st round of investment = 800 shares (Shares before 1st investment)


{100 * (800 + 100)} + 5000} / (800+100+100) = 95

10000/95 = 105.2 shares (105 shares -rounded down)

105–100 = 05 (Additional Shares to be provided to 1st Investor under the Weighted Average Method)