PART II.—Private placement
1. Without prejudice to the provisions of section 26, a company may, subject to the provisions of this section, make private placement through issue of a private placement offer letter.
2. Subject to sub-section (1 ), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, [excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b ) of sub-section (1 ) of section 62], in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.
Explanation.- I.—If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter.
Explanation.- II.— For the purposes of this section, the expression—
i. "qualified institutional buyer" means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirments) Regulations, 2009 as amended from time to time.
ii. " private placement" means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section.
3. No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.
4. Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with.
5. All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash.
6. A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day:
Provided that: monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than:—
a. for adjustment against allotment of securities; or
b. for the repayment of monies where the company is unable to allot securities.
7. All offers covered under this section shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and that such persons shall receive the offer by name, and that a complete record of such offers shall be kept by the company in such manner as may be prescribed and complete information about such offer shall be filed with the Registrar within a period of thirty days of circulation of relevant private placement offer letter.
8. No company offering securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.
9. Whenever a company makes any allotment of securities under this section, it shall file with the Registrar a return of allotment in such manner as may be prescribed, including the complete list of all security-holders, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.
10. If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.
Legal Commentary & Landmark Judgments: Section 42
Section 42 governs the legal framework for private placement of securities, enacting strict caps on offerees, mandatory bank payment channels, allotment timelines, and statutory refund obligations with interest.
If the company fails to allot securities within sixty days, it must repay the application money within fifteen days, failing which it is liable to repay with twelve percent annual interest from the sixtieth day.
Section 42 is one of the most rigorously enforced corporate finance provisions in India. Any utilization of subscription monies before allotment and filing of Form PAS-3 with the ROC is an explicit statutory violation. Failure to adhere to Section 42 treats the issue as a deemed public issue, rendering the company and its controlling officers subject to astronomical penalties up to the amount involved or two crore rupees, whichever is higher.