Sections 41 and 42 of the Companies Act, 2013: Global Depository Receipts and Private Placement
Sections 41 and 42 of the Companies Act, 2013 regulate two different methods of raising capital: issue of depository receipts outside India and private placement of securities to an identified group of persons. This article explains the statutory provisions, key definitions, procedure, timelines and consequences of non-compliance.
Section 41 - Global Depository Receipts
Section 41 permits a company, after passing a special resolution in general meeting, to issue depository receipts in a foreign country in the prescribed manner and subject to prescribed conditions.
A depository receipt is a negotiable instrument representing an interest in securities of an Indian company and is used to facilitate access to investors outside India. The detailed framework under the Companies Act is contained in the Companies (Issue of Global Depository Receipts) Rules, 2014, in addition to other applicable securities, foreign exchange and listing requirements.
Section 42 - Private Placement of Securities
Section 42 allows a company to make a private placement of securities subject to the conditions laid down in the section and the applicable rules. The provision was substantially substituted by the Companies (Amendment) Act, 2017 with effect from 7 August 2018.
Private placement means an offer or invitation to subscribe to, or an issue of, securities to a select group of persons by a company, other than by way of a public offer, through a private placement offer-cum-application that satisfies Section 42.
Identified persons are persons selected by the Board for the private placement. Section 42 excludes qualified institutional buyers and employees receiving securities under an employee stock option scheme under Section 62(1)(b) when applying the prescribed numerical limit.
Qualified institutional buyer (QIB) is defined by reference to SEBI's capital-issue regulations. The present capital-issue framework is the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as amended.
Key Requirements for Private Placement
| Requirement | Section 42 / Rule 14 position |
|---|---|
| Identified persons | The offer must be made only to persons identified by the Board and within the prescribed limit. Rule 14 generally limits offers to not more than 200 persons in aggregate in a financial year for each kind of security, subject to statutory exclusions and applicable exceptions. |
| Shareholder approval | Rule 14 generally requires prior approval by special resolution for each offer or invitation, subject to specified relaxations, including provisions applicable to non-convertible debentures and QIB offers. |
| Offer document | The private placement offer-cum-application is issued in the prescribed form, commonly Form PAS-4, to identified persons. It carries no right of renunciation. |
| Subscription money | Payment must be made through banking channels and not in cash. The subscriber must apply through the offer and application issued to that person. |
| Use of funds | Private placement money cannot be utilised unless allotment has been made and the return of allotment has been filed with the Registrar in accordance with Section 42(8). |
| Allotment | Securities must be allotted within 60 days from receipt of application money. |
| Refund | If allotment is not made within 60 days, the application money must be repaid within the next 15 days. Delay attracts interest at 12% per annum from expiry of the 60th day. |
| Separate bank account | Application money must be kept in a separate account in a scheduled bank and used only for adjustment against allotment or repayment where allotment cannot be made. |
| No public advertising | The company must not use public advertisements, media, marketing or distribution channels or agents to inform the public at large about the issue. |
| Return of allotment | A return of allotment must be filed with the Registrar within 15 days of allotment in the prescribed manner, using Form PAS-3 as applicable. |
No fresh offer until earlier offer is completed
No fresh offer or invitation under Section 42 may be made unless allotments relating to an earlier offer have been completed or that earlier offer has been withdrawn or abandoned. Subject to the maximum number of identified persons, more than one issue may be made to a prescribed class of identified persons.
Penalties and Deemed Public Offer
If the return of allotment is not filed within the period under Section 42(8), the company, its promoters and directors are liable to a penalty of Rs. 1,000 for each day of continuing default, subject to a maximum of Rs. 25 lakh.
If a company makes an offer or accepts money in contravention of Section 42, the company, its promoters and directors may face a penalty up to the amount raised through the private placement or Rs. 2 crore, whichever is lower. The company must also refund the subscription money with the interest specified in Section 42(6) within 30 days of the order imposing the penalty.
A private placement issue that does not comply with Section 42(2) is deemed to be a public offer. The applicable provisions of the Companies Act, 2013, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 then apply.
Official Legal Resources
For authoritative and updated material, refer to the Companies Act, 2013 - Ministry of Corporate Affairs, the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018, and the SEBI Regulations portal.
Legal provisions and subordinate legislation may be amended. For a transaction or filing, verify the current Act, rules, forms, notifications and applicable SEBI or foreign-exchange requirements.