1. Introduction : A public company as to g thr6iih the process of issuing prospectus to collect share capital from public. It involves the risk of noLreiving the amount of Minimum Subscription. Thus, to prevent company from this risk it has to make underwriting contract with underwriter broker and pay underwriting commission on it. Sometimes this becomes complicated and burdensome to the promoters. Even all this procedure involves more expenditure of issuing prospectus, commission charges, experts service charges. Legal charges etc. To avoid all such lengthy procedure and expenditure the company Act has provided the provision of private placement for filling up its subscription.
2. Meaning of Private Placement : Public company invites public at large to purchase its securities by publishing prospectus. But instead of inviting public for purchasing securities through prospectus, such company may make private placement for the Guarantee.
Meaning : As per Companies Act private placement means company makes an offer to allot securities to definite group of person to purchase securities.
Maximum 50 persons or such member of persons as fixed by the SEBI can be invited for the Minimum Subscription over and above institutional purchasers and employees qualified under the Employees stock option scheme.
3. Provisions of the Companies Act for Private Placement:
(1) Amount can be paid through bank transactions : The amount regarding private placement can be paid through a cheque or draft or by Bank transactions. Payment can not be done in cash.
(2) Time limit for allotment of Subscription : The allotment of such subscription should be made within 60 days.
(3) Refund of amount: If the directors do not make such allotment within 60 days the applicants should be refunded the amount within 15 days after the expiry of 60 days.
(4) Payment of interest: On failure to make payment within 15 days after expiry of 60 days, the interest of 12% per annum is to be paid by the company from the date of expiry of 60 days till the date of refund.
(5) Deposite in the Account of Schedule Bank : The amount received in such type should be kept in a separate account of a Schedule Bank.
(6) Regarding name of Intimation : Only such persons will be given the intimation for the private placement whose names are registered by the company before giving invitation for subscription. Such persons will be intimated for Subscription by name.
(7) Registering with the company registrar : The records regarding such information will be maintained as decided and after passing resolution regarding concerned private placement. The complete detail about it shall be presented before the Registrar within 30 days.
(8) Regarding no advertisement : The companies resolving to have private placement in such a manner shall not be entitled to make any advertisement for providing information to public about such resolution.
(9) Presenting information before the company registrar : When company allots subscription in this manner the name, addresses, number of--allotted subscription and all other information about the indemnity holders are required to be presented before the Registrar of Companies.
4. Conclusion: Private placements offer small businesses a number of-advantages over IPOs since private placement do not require the assistance of brokers or under writers. They are considerably less expensive and time consuming. In addition, private placements may be the only source of capital available to risky ventures or start-u5 firms.