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.