Private Placement of Shares in Pre IPO

Private placement is a means of fund raise through sale of shares or bonds to pre- selected investors and institutions other than raising funds on a public exchange. It includes pre IPO placement before the companies go public. Pre IPO is generally considered by growing companies to expand, strengthen their financials and ultimately go for IPO.  

A pre IPO company might get eventually listed on NSE Emerge, BSE SME or mainboard platform of the stock exchanges by fulfilling the NSE/BSE eligibility criteria. Best Merchant Bankers in India have the role and responsibility for launching IPO. 

To make a private placement/PRE IPO investing company needs to pass a special resolution. It requires the approval from the shareholders of the company. 

A company can make a private placement to a selected group of persons according to section 42 of the Companies Act, 2013, 

Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 provides the regulations relating to the private placement by companies. As per the rules, the company should offer or invite to subscribe its securities through a private placement offer letter in Form PAS 4 (Prospectus and Allotment of Shares). 

What is the maximum limit of investors for the Private Placement offer? 

According to Rule 14 (2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014, An offer or invitation to subscribe securities under private placement shall not be made to more than 200 investors in a financial year (excluding QIBs and employees under ESOPs). This limit applies separately to each type of security. This provision of maximum investors does not apply to NBFCs and Housing Finance companies. 

What is the process for making Private Placement? 

Process for Passing Special Resolution for Private Placement: 

1. First step is to conduct a board meeting and pass the board resolution to approve list of identified persons for fund raise, and draft resolution to be circulated to the directors. The resolution shall contain details like type and number of securities, price, mode of payment, use of funds and other details.  

2. Board of directors must pass the resolution by majority vote. Resolution passed to be recorded in the minutes of the meeting.  

3. An EGM must be called to obtain the approval of the shareholders. The notice of the EGM must be sent to all shareholders, along with the resolution. 

4. The shareholders must approve the resolution by a special resolution, which requires a vote in favor by at least 75% of the shareholders present and voting at the meeting. 

5. Filing of MGT 14 by the company with the list of potential investors. 

What is the process of allotment of securities/private placement? 

1. Offer Letter- Offer letter is issued to selected group of investors with details like type and quantity of securities being offered, the price of the securities, and the terms and conditions of the offering. 

2. Offer letter Acceptance- The investors submit the necessary documentation and payments for securities after reviewing the offer letter. 

3. Allotment- After receiving the subscription money call a board meeting again and pass a board resolution for allotment of securities to selected group of persons.  

4. A company must allot its securities within 60 days of receiving the application money. In case of non-allotment within 60 days, the company must refund the application money to the subscribers within 15 days after the end of 60 days. Failure to refund would attract interest payments at a rate of 12% per annum other than application money from the end of the 60 days. 

5. PAS 3- File PAS 3 Return of Allotment with ROC within 15 days from the date of allotment. The return of allotment must be signed by a director or the company secretary of the company and must be filed with the ROC electronically in the prescribed format along with the prescribed fee. 

6. Share Certificates- Issue share certificates in FORM SH-1 within 2 months from the date of allotment. 

 

Role of IPO Advisors in Pre IPO Investing- IPO Advisors play a major role in private placements through Pre IPO of shares. Lots of processes and formalities are required to be done for pre IPO; IPO advisors offer a pool of professionals who can sail this process. Valuations determine the price of securities offered so merchant bankers in India along with IPO advisors assist in valuation process and valuation reports for pre iPod private placement

Link to top 5 merchant bankers 

 

What is Form PAS 4? (Link to PAS4 Form Format)

PAS-4 stands for Private Placement Offer Letter. It's one of the crucial forms that companies use to offer or invite people to subscribe to their securities through a private placement.  

Form PAS-4 is a document required by the Securities and Exchange Board of India (SEBI) for the offering and allotment of securities. It includes important details about the securities being offered, such as their type, the number available, the price, and the terms and conditions of the offering. 

Additionally, the form provides information about the Issuer, including its name, registered address, and financial statements. 

Company shall record all the private placement offers in Form PAS 5. 

Why is PAS 4 used? 

• It is used in India for private placements of securities by a company. It is required under the Companies (Prospectus and Allotment of Securities) Rules, 2014, and provides important details about the private placement to investors. PAS 4 is a crucial document used for pre IPO fund raise also. 

• PAS-4 is a mandatory requirement by the SEBI for the prospectus and allotment of securities in India. 

• It contains standard and important information related to the private placement, such as the terms and conditions of the offer, details about the securities being offered, their price, and other relevant information. 

• This form must be filed with the Registrar of Companies along with the offer letter or information memorandum.  

• Failure to comply with this requirement can lead to penalties and legal consequences for the company and its officers. 

 

What is the purpose of form PAS 4? 

• Facilitates decision making with accurate and complete information to investors about the securities being offered.  

• To monitor securities Issuance and ensure that Issuers comply with relevant laws and regulations by SEBI. 

• The Issuer needs to provide all required information and documentation, including financial statements, a prospectus, and other relevant details.  

• The form is required to be submitted to ROC within 30 days from circulating the offer letter. 

What is the penal provision for non-compliance of provision for private placement? 

If a company, its directors and promoters, make any contravention of the act or rule while accepting money or making an offer, then they will be liable for penalty up to the amount involved in the invitation or offer, or ₹2 crore, whichever is higher.  

Additionally, the company must refund all money to the subscribers within thirty days of the penalty order. 

 

What is the information to be provided by company (seeking to raise funds through pre IPO) while filling form PAS 4? 

PAS 4 is a private placement offer letter which shall contain 

General information regarding companies, its promoters, its directors and Key managerial personnel (including names, address, email Id, CIN of company, DIN of directors etc.) 

1. Details of Compliance Officer of the company for private placement, 

2. Details of Registrar of Issue and Auditors, 

3. Details of the Particulars of the Offer including; 

• Overview of the company’s financial position for the last three financial years.   

• Date when the Board Resolution was passed.   

• Date when the general meeting approved the offer of securities.   

• Specify if the offer is for shares or debentures, including the total number to be issued (e.g., equity).   

• Price per security, including any premium, along with justification for this price.   

• Name and address of the valuer who assessed the securities and the basis for the price, along with the valuer's report.   

• The date used to determine the offering price.   

• Classes of people to whom the securities will be offered.   

• Details of promoters, directors, or key managerial personnel plan to subscribe to the offer.   

• Proposed timeframe for completing the allotment, along with the names of potential allottees and their expected share of post-private placement capital. 

• Any change in control of the company due to the private placement.   

• Number of individuals who received allotments on a preferential basis, through private placement, or rights issues this year, including the number of securities and price.   

• Justification for the proposed allotment for non-cash consideration, along with the valuation report from the registered valuer.   

• Total amount the company aims to raise through the proposed securities offer.   

• Terms for raising securities, including duration, dividend or interest rate, payment method, and repayment details. 

• Proposed time period during which the private placement offer and application letter are valid.   

• Purposes and objectives of the offer.   

• Contributions made by promoters or directors as part of the offer or separately to support these objectives.   

• Key terms of any assets charged as security, if applicable.   

• Details of any significant orders from regulators, courts, or tribunals affecting the company's ongoing operations and future.   

• Shareholding pattern of the company before and after the issue. 

 

4. Mode of payment for subscription: Demand Draft, Cheque and other banking channels. 

5. Disclosures regarding Interest of the directors, litigation etc. 

6. Full disclosure of the capital structure of the company. 

What is the information to be provided by applicant (Investor to whom securities are offered) while filling form PAS 4? 

• General Information 

1. Name   

2. Father's name   

3. Complete address including flat/house number, street, locality, and pin code   

4. Phone number, if any   

5. Email ID, if any   

6. PAN Number   

7. Bank account details   

8. Check which of the following is applicable:

              a) The applicant is not required to obtain Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to subscription of shares.  

               b) The applicant is required to obtain Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to subscription of shares, and the same has been obtained and is enclosed herewith.   

• Directors Declaration for compliance  

It should include a declaration with the compliance with provisions of prospectus and allotment of securities rules and utilization of funds raised as stated in the objects of offer. 

What are the documents required to be attached with PAS 4?

• Annexure A: Financial Summary as per audited financial statements for Last 3 Financial Years 

• Annexure B: Valuation report 

• Annexure C: Identified investors to whom private placement is to be made 

• Annexure D- The number of persons to whom allotment on preferential basis / private placement / rights issue/ Bonus Issue has already been made during the year, in terms of number of securities as well as price 

• Annexure E: Terms and conditions of raising securities (Investment agreement) 

• Annexure F: The pre-issue and post-issue shareholding of the company 

• Annexure G: Related party transactions 

• Annexure H: Certified true copy board resolution dated 26th September, 2024 along with all the supporting documents  

• Annexure I: Certified true copy Extra-Ordinary General Meeting dated 1st October, 2024 along with all supporting documents 

• Annexure J: Copy of e-form MGT-14 and its Paid challan 

• Optional attachments if any 

 

Conclusion:

Private placement provides a significant advantage for growing companies aiming to bolster their financial foundation before going public. It enables a focused investment approach by securing funds from select investors, allowing better valuation and strategic planning. With stringent SEBI regulations and steps like filing PAS-4, private placement also ensures compliance and transparency. Ultimately, it is a structured pathway toward a successful IPO listing, paving the way for long-term growth and financial stability.