What Is Private Placement and Form PAS-4?
Private placement is the route under Indian company law for a company to offer shares, debentures, or other securities to a hand-picked group of investors, rather than to the public at large. It is the mechanism nearly every foreign-funded Indian subsidiary uses to issue equity to its parent company or a new investor, because it is faster and less document-heavy than a public issue. Form PAS-4 is the private placement offer letter the company must address to each named investor before it accepts a single rupee — the paper trail that keeps the placement lawful and outside the stricter rules that apply to a public offer.
The route sits on one statutory foundation: a company can only use private placement if it follows the conditions in Section 42 of the Companies Act, 2013, in the sequence the section sets out. Offer to more people than the section allows and the "private" placement is deemed a public offer, with the full weight of prospectus law and SEBI regulation attached. Miss the other steps — accepting money before PAS-4 goes out, or blowing the allotment deadline — and the consequence is a penalty and a compulsory refund with interest instead.
Legal Basis
Private placement is governed by Section 42 of the Companies Act, 2013 (Part II of Chapter III), read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. Section 42 in its present form was substituted by the Companies (Amendment) Act, 2017 with effect from 7 August 2018, and the sub-section numbering changed with it — material, because a good deal of older guidance still cites the pre-2018 numbers. Section 42(1) frames the route directly: "A company may, subject to the provisions of this section, make a private placement of securities." Rule 14(1) adds a threshold condition: the members must approve the proposed offer by special resolution before it is made. Section 42(3) then requires the company to issue a private placement offer and application to the identified persons, and Rule 14(3) prescribes that document as Form PAS-4.
Who Can Be Offered Securities
Section 42(2) caps the audience: a private placement "shall be made only to a select group of persons who have been identified by the Board (herein referred to as 'identified persons'), whose number shall not exceed fifty or such higher number as may be prescribed [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year." Rule 14(2) prescribes the higher number: an offer or invitation under private placement "shall not be made to persons more than two hundred in the aggregate in a financial year," with qualified institutional buyers (QIBs) and ESOP allottees left out of that count. The Explanation to Rule 14(2) adds a detail that is easy to miss: the two-hundred limit is reckoned individually for each kind of security, so equity shares, preference shares and debentures each carry their own count.
Explanation III to section 42 is the safety-net that makes the cap real: if a company, listed or unlisted, offers to allot, invites subscription, allots, or agrees to allot securities to more than the prescribed number of persons — whether or not payment has been received and whether or not the company intends to list — the offer is deemed a public offer, governed by the prospectus provisions in Part I instead. Section 42(11) reinforces it: a private placement issue not made in compliance with section 42(2) is deemed a public offer to which the Companies Act, the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992 all apply. There is no partial exemption; cross the line and the whole offer is recharacterised.
The Offer Letter and the Thirty-Day Despatch Rule
Section 42(3) requires the offer and application to go only to identified persons "whose names and addresses are recorded by the company," and it carries no right of renunciation — the person named is the only person who may apply, and any application not conforming to that condition is invalid. Rule 14(3) sets the timing: Form PAS-4 must be "serially numbered and addressed specifically to the person to whom the offer is made" and sent to that person, in writing or in electronic mode, "within thirty days of recording the name of such person." Rule 14(4) separately requires the company to maintain a complete record of private placement offers in Form PAS-5. One trap for anyone working from older material: the requirement to file the offer letter itself with the Registrar within thirty days of circulation was dropped when section 42 was substituted in 2018. The only filing the Registrar now receives is the return of allotment.
Money In: Banking Channel and the Separate Account
Section 42(4) requires every identified person to apply with subscription money paid "either by cheque or demand draft or other banking channel and not by cash," and its proviso bars the company from using the money at all until allotment is made and the return of allotment is filed. Rule 14(5) adds that the payment must come from the subscriber's own bank account. Section 42(6) then adds a dedicated-account rule: money received on application under this section must be kept "in a separate bank account in a scheduled bank" and used only to adjust against allotment or to repay the applicant — it cannot be spent on anything else while it sits unallotted.
The 60-Day Allotment Clock
The same sub-section, 42(6), sets the timeline every foreign investor should know before wiring money: the company "shall allot its securities within sixty days from the date of receipt of the application money." If it cannot allot within that window, it must repay the application money within fifteen days of the sixtieth day. Miss that repayment too, and the company owes the money back with interest at twelve per cent per annum, running from the expiry of the sixtieth day. There is no discretion in the section to extend this on request.
Section 42(5) adds a sequencing rule: no fresh offer under section 42 can be made until the allotments under any earlier offer are completed, or that earlier offer is withdrawn or abandoned.
Filing After Allotment: Form PAS-3
Once securities are actually allotted, section 42(8) requires the company to file a return of allotment with the Registrar "within fifteen days from the date of the allotment," including a complete list of all allottees with their full names, addresses and number of securities allotted. Rule 14(6) repeats the fifteen-day deadline and names the form: Form PAS-3. The Ministry of Corporate Affairs' instruction kit for the form makes the contrast with an ordinary allotment explicit — the date of allotment must fall "within 15 days of the filing date in case 'Private Placement' is selected," against "within 30 days of the filing date" for every other type of allotment. A private placement allotment therefore gets half the time allowed for a rights issue or bonus issue. Section 42(9) backs the deadline with its own penalty for late filing: ₹1,000 for each day of default on the company, its promoters and its directors, capped at ₹25 lakh.
No Advertising, and the Penalty for Getting It Wrong
Section 42(7) bars the company from releasing any public advertisement or using any media, marketing, or distribution channel or agent to tell the public at large about the offer. Section 42(10) sets the penalty for making an offer or accepting money in contravention of the section: the company, its promoters and its directors are "liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower," and the company must also refund all money, with the interest specified in section 42(6), to subscribers within thirty days of the order imposing the penalty. Note the direction of that cap — it is the lower of the two figures, not the higher, since the Companies (Amendment) Act, 2020 recast the provision.
The FEMA Overlay When the Investor Is Foreign
None of the deadlines above change when the subscriber is a non-resident, but two more compliance layers stack on top of them under the Foreign Exchange Management Act (FEMA).
Pricing Guidelines
Under Rule 21 of the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, an unlisted Indian company issuing equity instruments to a person resident outside India cannot price the issue below fair value. RBI's Master Direction on Foreign Investment in India puts the standard at paragraph 8.1.1: the price must not be less than "the valuation of equity instruments done as per any internationally accepted pricing methodology for valuation on an arm's length basis duly certified by a Chartered Accountant or a SEBI registered Merchant Banker or a practicing Cost Accountant, in case of an unlisted Indian Company." A price below this floor is a separate FEMA contravention. Where the instrument is convertible, such as CCPS, paragraph 8.1.2 requires the price or conversion formula to be fixed upfront at the time of issue, and the price on conversion may not fall below the fair value worked out at that time.
Form FC-GPR
A private placement to a foreign investor also has to be reported to the RBI on Form FC-GPR, filed on the RBI's FIRMS portal through the company's authorised dealer bank. RBI's Master Direction on Reporting under FEMA is explicit on the deadline: an Indian company issuing equity instruments to a person resident outside India, where the issue is reckoned as foreign direct investment under the NDI Rules, "shall report such issue in Form FC-GPR in the Single Master Form not later than thirty days from the date of issue of the equity instruments." This runs alongside, not instead of, the 15-day PAS-3 filing — a foreign-funded private placement carries three deadlines from one allotment date: the pricing certificate before allotment, PAS-3 within 15 days, and FC-GPR within 30 days.
Why This Matters for a Foreign Company or Investor
Private placement is how most foreign parents fund their Indian subsidiary after the first round: it allots fresh equity shares, or instruments such as Compulsorily Convertible Preference Shares, to an existing or new investor without the disclosure burden of a public issue. Because a private placement round is usually documented in a shareholder agreement and changes the company's paid-up capital, getting the section 42 mechanics wrong can cloud the cap table and the investor's own rights, not just risk a penalty.
Worked Example
A US investor agrees to subscribe to CCPS in an Indian subsidiary for $500,000. The members approve the offer by special resolution, the board identifies the investor, and the company issues Form PAS-4 to the investor by name within thirty days of recording that name, keeping the record of the offer in Form PAS-5. The investor remits the funds into a separate scheduled-bank account, which cannot be touched for any other purpose. A Chartered Accountant certifies the issue price using an internationally accepted valuation methodology, so the price is not below the FEMA floor, and the board allots the CCPS within 60 days of receiving the money. The company then files Form PAS-3 within 15 days of that allotment and Form FC-GPR on the RBI's FIRMS portal within 30 days of the same date. Missing the 60-day allotment would mean refunding the $500,000 within 15 more days, with 12% annual interest if that deadline is missed too.
Common Mistakes
- Treating the offeree list as flexible. Section 42(2) counts every person offered securities in a financial year, not just those who ultimately invest — going over the prescribed number of two hundred (excluding QIBs and ESOP allottees, and counted separately for each kind of security) turns the whole offer into a deemed public offer under Explanation III.
- Accepting money before the offer letter goes out. Section 42(3) requires offerees to be identified by the board and their names and addresses recorded before the offer is issued — money collected outside that sequence is not a valid private placement.
- Missing the 60-day allotment window, or mixing the money into the general account. Section 42(6) requires a separate scheduled-bank account for the money and a hard 60-day allotment deadline, followed by a 15-day refund window and 12% annual interest if that is missed too.
- Filing PAS-3 on the general 30-day schedule. Private placement allotments must be returned to the Registrar within 15 days, not the 30 days that applies to other allotments — a common error for teams used to routine share issues.
- Forgetting Form FC-GPR for a foreign allottee. PAS-3 satisfies the Companies Act; it does not satisfy FEMA. A foreign investor's allotment still needs FC-GPR filed with the RBI within 30 days, backed by a compliant pricing certificate.
Frequently Asked Questions
How many investors can one private placement offer cover?
Section 42(2) of the Companies Act, 2013 caps the offer at fifty identified persons, or a higher number the Rules prescribe, in a financial year, and Rule 14(2) of the Prospectus and Allotment of Securities Rules sets that higher number at two hundred in the aggregate. QIBs and employees receiving securities under an ESOP scheme are excluded from the count, and the count runs separately for each kind of security. Exceeding the prescribed number turns the entire offer into a deemed public offer under Explanation III to section 42, regardless of whether every offeree actually subscribed.
What exactly is Form PAS-4, and who receives it?
Form PAS-4 is the private placement offer and application a company must issue to each named, pre-identified offeree before it can accept any subscription money from them. Section 42(3) requires the offer to go only to persons whose names and addresses the company has recorded in advance, and Rule 14(3) requires PAS-4 to be serially numbered, addressed to that person specifically, and sent within thirty days of recording the name. It carries no right of renunciation, and an application from anyone else is invalid. Since the 2018 substitution of section 42, the offer letter itself is no longer filed with the Registrar.
What happens if a company cannot allot shares within 60 days?
Section 42(6) requires the company to repay the application money within 15 days of the 60-day allotment deadline expiring. If the company also misses that repayment, it must return the money with interest at 12% per annum, calculated from the expiry of the sixtieth day, and the money must sit in a separate scheduled-bank account throughout.
Does a foreign investor's private placement need any RBI filing beyond the company law filings?
Yes. A private placement to a person resident outside India still needs Form FC-GPR filed with the RBI on the FIRMS portal within 30 days of allotment, alongside Form PAS-3 filed with the Registrar within 15 days. The issue price must also meet FEMA's pricing guidelines under Rule 21 of the Non-Debt Instruments Rules, 2019, certified by a Chartered Accountant, Merchant Banker, or Cost Accountant.
What is the penalty for a private placement that does not comply with Section 42?
Under section 42(10), an offer made, or money accepted, in contravention of the section makes the company, its promoters, and its directors liable to a penalty extending to the amount raised through the private placement or two crore rupees, whichever is lower. The company must also refund all money, with interest, to the subscribers within 30 days of the order imposing that penalty. A separate penalty under section 42(9) covers late filing of the return of allotment: ₹1,000 for each day of default, capped at ₹25 lakh.
Key Takeaways
- Private placement lets a company offer securities to a capped, named group of investors under Section 42 and Rule 14 of the Prospectus and Allotment of Securities Rules, 2014 — exceeding the cap deems the offer public
- Form PAS-4 is the offer-cum-application issued to each named offeree within thirty days of recording their name; it carries no right of renunciation and is not itself filed with the Registrar
- Money must sit in a separate scheduled-bank account, and allotment must happen within 60 days of receipt, with a 15-day refund window and 12% annual interest after that if missed
- Form PAS-3 (return of allotment) is due within 15 days of allotment for a private placement — half the 30-day window for other allotments
- A foreign investor's allotment also needs Form FC-GPR filed with the RBI within 30 days, and a FEMA-compliant pricing certificate before allotment
- Non-compliance carries a penalty of the amount raised or two crore rupees, whichever is lower, plus a mandatory refund to subscribers with interest
See also: Shareholder Agreement, Compulsorily Convertible Preference Shares (CCPS), and Paid-Up Capital.
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