A company raising a bridge round collects application money from investors and, busy with the close, does not formally allot the shares for over two months. That delay on its own is a Section 42 breach. Allotment must happen within 60 days, and money neither allotted nor refunded in time becomes a deposit — which drags in an entirely separate compliance regime nobody planned for.
Private placement under Section 42 caps the offer at 200 identified persons per security type per financial year, requires allotment within 60 days of receiving the money, and PAS-3 within 15 days of allotment.
The bottom line
Cap: a maximum of 200 identified persons per financial year, counted separately for each kind of security. QIBs and ESOP employees are excluded from the count.
Process: special resolution, then a PAS-4 offer letter to named persons, money into a separate bank account, allotment within 60 days, PAS-3 within 15 days.
Miss it: the offer becomes a deemed public offer, with a penalty up to the amount raised or ₹2 crore, whichever is lower, plus refund with interest.
What counts as a private placement
An offer of securities — equity shares, preference shares, debentures, convertibles — to a select group of identified persons, recorded by name before the invitation goes out. It is not open to the public and it is not advertised.
Section 42 with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 governs it. When you issue equity or convertibles to specific investors, Section 62(1)(c) on preferential allotment applies alongside, and the procedure you follow is Section 42's.
The 200-person cap
Under Section 42(2), you may offer to a maximum of 200 persons in a financial year, per kind of security. So 200 for equity, a separate 200 for preference shares, a separate 200 for debentures. Explanation III excludes qualified institutional buyers and employees offered shares under an ESOP from the count.
Cross 200, or otherwise breach the section, and the offer is treated as a public offer. That triggers the full weight of the Companies Act, the SCRA and the SEBI regulations, regardless of whether the company is private or unlisted, and regardless of whether money was actually received.
This is the trap that converts a routine raise into a securities law problem, which is why the count is worth doing carefully rather than approximately.
The process
- Obtain a valuation report from a registered valuer, with a relevant date at least 30 days before the general meeting. Not needed for non-convertible debentures.
- Pass a special resolution, with the prescribed disclosures in the explanatory statement, and file MGT-14 within 30 days.
- Issue Form PAS-4, the private placement offer letter, only to the named identified persons — and only after MGT-14 is filed.
- Maintain the record of offers in Form PAS-5, which is kept rather than filed.
- Receive the money, allot within 60 days, and file the return of allotment in Form PAS-3 within 15 days of allotment. The funds cannot be used until PAS-3 is filed.
- Issue share certificates within 2 months.
Since the 2018 amendment, PAS-4 and PAS-5 are no longer filed with the Registrar, though they must still be issued and maintained. There is no right of renunciation in a private placement — the named person can accept or reject, and nothing else.
The money rules
Under Section 42(5) and 42(6), subscription money must arrive through banking channels, never in cash, into a separate bank account with a scheduled bank, and cannot be touched until PAS-3 is filed.
Allotment must happen within 60 days of receiving it. If you cannot allot, refund within 15 days of the expiry of that period. Fail that and you owe 12% interest a year from the expiry of the sixtieth day — and the money is treated as a deposit, which pulls in DPT-3 and the deposit rules on top of everything else.
What non-compliance costs
Under Section 42(10), where a company accepts money in contravention of the section, the company, its promoters and its directors are liable to a penalty up to the amount raised or ₹2 crore, whichever is lower — and the company must refund all monies with interest within 30 days of the penalty order.
A worked example
A company raises ₹3 crore of equity from 12 angel investors.
It obtains a registered valuer's report, passes a special resolution and files MGT-14, then issues serially numbered PAS-4 letters to those 12 named investors. Their money lands in a dedicated scheduled bank account. The company allots within 60 days, files PAS-3 within 15 days of allotment, pre-certified by a practising professional, and only then draws down the funds.
Twelve investors is comfortably under 200, and the money never sat past the deadline, so none of the tripwires fire. The whole difficulty of Section 42 is sequencing, not substance.
Common mistakes
- Letting application money sit past 60 days. Unallotted and unrefunded money becomes a deposit, which is a separate and serious regime.
- Miscounting the 200 cap. It is per security type per year, and sloppy counting risks a deemed public offer.
- Issuing PAS-4 before MGT-14. The offer letter goes out after the resolution is filed, and only to named persons.
- Using an operating or shared bank account. Subscription money needs a separate scheduled bank account, untouched until PAS-3.
- Skipping the valuation report, which is required except for non-convertible debentures and must sit inside the relevant date window.
A working routine
- Identify and name the specific investors before any offer goes out.
- Obtain a registered valuer's report with a relevant date at least 30 days before the general meeting.
- Pass the special resolution and file MGT-14 within 30 days.
- Issue serially numbered PAS-4 letters to the identified persons, and maintain PAS-5.
- Collect money through banking channels into a separate scheduled bank account.
- Allot within 60 days, file PAS-3 within 15 days, and issue certificates within 2 months.
Frequently asked questions
How many people can I offer shares to? A maximum of 200 in a financial year, counted separately for each kind of security, excluding QIBs and ESOP employees.
Do I still file PAS-4 and PAS-5 with the Registrar? No. Since 2018 they are not filed, though PAS-4 must still be issued to investors and PAS-5 maintained.
When must allotment happen? Within 60 days of receiving application money. Otherwise refund within 15 days, or pay 12% interest and treat the money as a deposit.
What is the deadline for PAS-3? Within 15 days of allotment for a private placement, and the funds cannot be used until it is filed.
What happens if I exceed 200 persons? The offer is deemed a public offer, bringing SEBI and securities law compliance with it, plus penalties under Section 42(10).
Would a rights issue be simpler? Often, yes. A proportionate rights issue needs no special resolution, no valuation report and no separate bank account — but it must go to all existing shareholders first.
Primary sources
- Section 42, including 42(2), (5), (6), (7), (8) and (10), Companies Act, 2013
- Rule 14, Companies (Prospectus and Allotment of Securities) Rules, 2014
- Section 62(1)(c) on preferential allotment, which applies alongside for shares and convertibles