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Private Placement of Equity Shares: The Definitive Guide for Founders (Section 42 & 62)

If you are an Indian founder planning to raise capital from Angel investors, Venture Capital (VC) firms, or a select group of high-net-worth individuals, Private Placement is your primary legal gateway.

Unlike a “Public Issue” (IPO) which is open to everyone, or a “Rights Issue” which is limited to existing shareholders, a Private Placement allows you to bring in new, specific investors while keeping your financial strategies away from the public eye.

What is Private Placement?

Private Placement is the issuance of securities (like equity shares) to a select, pre-identified group of persons (called “identified persons”). It is governed by Section 42 and Section 62(1)(c) of the Companies Act, 2013.

When is it Used?

  • Raising Seed or Series A/B Funding: Most startup funding rounds are structured as private placements.

  • Bringing Strategic Partners: When you want to issue shares to a specific person who brings industry expertise.

  • Funding for Expansion: When you need a large capital injection from a small group of institutional investors.

Minimum Requirements to Use Private Placement

To legally qualify for this route, your company must follow these “hard” rules:

  • The 200-Person Limit: You cannot offer shares to more than 200 people in a single financial year.

    • Note: This count excludes Qualified Institutional Buyers (QIBs) and employees offered ESOPs.

  • Board Identification: The investors must be identified by the Board before the offer is sent.

  • No Public Advertisement: You are strictly forbidden from using any media, social media, or public marketing to find investors.

  • Registered Valuer Report: You must have a formal valuation report to justify the share price and premium.

Detailed Steps: The Execution Roadmap

At KRPR & Associates, we coordinate this entire workflow to ensure your round is compliant.

  1. Board Meeting (Planning): The Board approves the proposal, identifies the investors, and reviews the Registered Valuer’s report.

  2. General Meeting (Authorization): You must pass a Special Resolution (75% majority) from your shareholders.

  3. Filing Form MGT-14: Within 30 days of the shareholders’ meeting, you must file the resolution with the Registrar of Companies (ROC).

  4. The Offer (Form PAS-4): You issue a serialized Private Placement Offer Letter (PAS-4) specifically to the identified investors.

  5. Collecting Funds: Money must be received in a separate bank account and only through banking channels (no cash).

  6. Allotment: The Board meets to allot shares within 60 days of receiving the funds.

  7. Final Filing (Form PAS-3): Within 15 days of allotment, file the Return of Allotment with the ROC.

Documents Checklist

  • Valuation Report: From an IBBI Registered Valuer.

  • Offer Letter (PAS-4): The formal document containing all disclosures.

  • Record of Offers (PAS-5): A internal log of every person who received the offer.

  • Certified Resolutions: Both Board and Special Resolutions.

  • Share Certificates: Issued within 2 months of allotment.

Time Needed

  • Approval Phase: 15–20 days (including notice periods).

  • Funding Phase: 10–30 days (depending on the investor).

  • Filing Phase: 5–7 days.

  • Total Time: Usually 4 to 6 weeks.

Critical Mistakes to Avoid

  • The “Utilization” Error: You cannot use the money for business expenses until you have filed Form PAS-3 with the ROC.

  • Missing the 60-Day Deadline: If you don’t allot shares within 60 days, you must refund the money with 12% interest.

  • Cash Payments: If an investor sends money from a relative’s account or via cash, the entire issue can be declared void.

  • Deemed Public Offer: If you cross the 200-person limit or advertise, the government treats it as a public issue, triggering massive penalties (up to ₹2 Crore or the amount raised).

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