Acceptance of Deposits and Issue of Securities

Acceptance of Deposits
and
Issue of Securities
[Rights Issue/ Pvt. Placement]
(under the Companies Act, 2013)
ON: FRIDAY, JULY 22, 2016
AT : PHD CHAMBER OF COMMERCE AND INDUSTRY
Manoj Singh Bisht
Company Secretary

Section 2(31) read with Rule 2(1)(c):
 Deposit includes any receipt of money by way of deposit or loan or any other form, by a
company, but does not include such categories of amount as may be prescribed in
with RBI. – Prescribed in Rule 2(1)(c).
 Ejusdem Generis Rule – of the same kind, class, or nature.
 Deposit/loan – Specific
 any other form – General.
 "in any other form" has been used by the Legislature for two reasons :
(i) to cover any receipt of money which may not be a deposit or a loan but at the same
is refundable ;
(ii) to guard against any accidental omission by the Legislature as held by the Supreme
Court in Siddeshwari Cotton Milts (P.) ltd. v.Union of India,
MANU/SC/0359/19891989(39)ELT498(SC) , since it is not the category of refundable
receipts and to anticipate all possible situations which may arise at any point of time in
future
Deposits

Any amount received from Foreign or international
banks / multilateral financial institutions/Foreign
Government owned development financial institutions /
foreign export credit agencies / foreign collaborators/
foreign body corporate /foreign citizens / foreign
authorities / persons resident outside India subject to the
provisions of Foreign Exchange Management Act,1999.
IMP Exclusion No. 1 – FEMA

Any amount received from any other Company
IMP Exclusion No. 2 – Inter Corporate

Any amount received from a person who at the time of
receipt was a director of a Company or
Any amount received from a person who at the time of
receipt was a relative of the director of the private
company
provided the director of the Company or relative of Director
of the Private Company, furnishes a declaration that the
amount given is not out of borrowed funds and board to
disclose the details of money so accepted in Board’s
Report.
IMP Exclusion No. 3 – Money received from
Director(Co.) / Relatives(pvt. Co)

IMP Exclusion No. 3 – Money received from
Director(Co.) / Relatives(pvt. Co) Contd.
o Amount received from Director of both i.e. public as well as
private Company is exempted.
o Amount received from relative of director of PRIVATE CO. is
exempted deposit.
 Whether declaration is the basis for exclusion ?
 What will be the fate of loan given by a Director, if declaration
is not given by the Director ?
 Can we take declaration on plain paper/letterhead of the
Director / Relative, as the case may be?
 Can we take loan from person who is a Director &
Shareholder ?

IMP Exclusion No. 4 – Securities Application Money
any amount received and held pursuant to an offer made in accordance with
the provisions of the Act towards subscription to any securities, including share
application money or advance towards allotment of securities pending
allotment, so long as such amount is appropriated only against the amount due
on allotment of the securities applied for.
Without prejudice to any other liability or action, if the securities for which
application money or advance for such securities was received cannot be
allotted within 60 days from the date of receipt of the application money or
advance for such securities and such application money or advance is not
refunded to the subscribers within 15 days from the date of completion of 60
days, such amount shall be treated as a deposit under these rules:
Any adjustment of the amount for any other purpose, shall not be treated as
Refund.

IMP Exclusion No. 5 – Issue of
Bonds/Debentures
any amount raised by the issue of bonds or debentures secured by a first
charge or a charge ranking pari passu with the first charge on any assets
referred to in Schedule III of the Act excluding intangible assets of the
company or bonds or debentures compulsorily convertible into shares of
the company within 10 years – increased from 5 to 10 yrs. Vide
notification dated 29.06. 2016.
However, if such bonds or debentures are secured by the charge of any
assets referred to in Schedule III of the Act, excluding intangible assets, the
amount of such bonds or debentures shall not exceed the market value of
such assets as assessed by a registered valuer

IMP Exclusion No. 6 – Issue of Non-
Convertible Debentures
any amount raised by issue of non-convertible debenture not constituting
a charge on the assets of the company and listed on a recognised stock
exchange as per applicable regulations made by Securities and Exchange
Board of India.

IMP Exclusion No. 7 – Any amount received
from an employee
any amount received from an employee of the company not
exceeding his annual salary under a contract of employment with the
company in the nature of non-interest bearing security deposit
Director who is an employee ? No condition w.r.t. declaration !

IMP Exclusion No. 8 – Held in trust
 Any non-interest bearing amount received AND held in trust. (Amended
to replace the word “or” – 29.06.2016)

IMP Exclusion No. 9 – Advance/security
any amourt received in the course of, or for the purposes of, the business of
the company,-
(a) as an advance for the supply of goods or provision of services accounted
for in any manner whatsoever provided that such advance is appropriated
against supply of goods or provision of services within a period of 365
days from the date of acceptance of such advance. Provided that in case
of any advance which is subject matter of any legal proceedings before
any court of law, the said time limit of 365 days shall not apply
(b) as advance, accounted for in any manner whatsoever, received in
connection with2[consideration for an immovable property] under an
agreement or arrangement, provided that such advance is
adjusted 3[against such property] in accordance with the terms of
agreement or arrangement

IMP Exclusion No. 9 – Advance/security Contd.
(c) as security deposit for the performance of the contract for supply of goods or provision of services
(d) as advance received under long term projects for supply of capital goods except those covered under item (b)
above
(e) as an advance towards consideration for providing future services in the form of a warranty or maintenance
contract as per written agreement or arrangement, if the period for providing such services does not exceed the
period prevalent as per common business practice or five years, from the date of acceptance of such service
whichever is less
(f) as an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or
State Government
(g) as an advance for subscription towards publication, whether in print or in electronic to be adjusted against
receipt of such publications;
(e)/(f) and (g) above are inserted vide amendment dated 29-6-2016.
Provided that if the amount received under items (a), (b) and (d) above becomes refundable (with or without
interest) due to the reasons that the company accepting the money does not have necessary permission or
approval, wherever required, to deal in the goods or properties or services for which the money is taken, then the
amount received shall be deemed to be a deposit under these rules

IMP Exclusion No. 10 – Advance/security
Contd.
 Any amount brought in by the promoters themselves or their relatives by way
of unsecured loan in pursuance of a stipulation of any lending institution on the
promoters. Such exemption shall be available only till the loans of the Financial
Institutions are not repaid and not thereafter. (I call it a “ 5 STAR EXCLUSION”)
Section 2(69) defines Promoter as person:
 Named as such in prospectus or in AR filed u/s 92
 Who has Control over affairs of the Company – Direct/indirect, as
shareholder/director OR OTHERWISE. (Control defined u/s 2(27)
 In accordance with whose advice, directions, instructions, the BOD
of the Company is accustomed to act.

S73(1) – Prohibition cum permission
No company to invite, accept or renew deposits from public,
except as provided under Chapter V (only eligible Companies can
accept deposits from public)
Doesn’t apply to banking company, NBFC – registered with RBI
and other company as may be specified by CG in consultation
with RBI
ELIGIBLE COMPANY – Public Co. + net worth of Rs. 100 cr or turnover of Rs. 500
Cr. + obtained prior approval by Special Resolution+ files MGT 14 with ROC
before making invitation for acceptance of deposits.

• A company may, subject to the passing of a resolution in general meeting and subject to CAD
rules, accept deposits from its members on such terms and conditions, including the provision of
security, if any, or for the repayment of such deposits with interest, as may be agreed upon
between the company and its members, subject to the fulfilment of the following conditions,
namely:—
Conditions for acceptance of deposits are stipulated in:
 Under S73(2) and Under CAD Rules.
Exemption Notifcation dated 5th June 2015 - Clause (a) to (e) of Section 73(2) [i..e. except
provisions related to creation of security, if any] shall not apply to Private Company which
accepts from its members monies not exceeding 100% of the aggregate of paid up share cap +
free reserves, and such company company shall file the details to the ROC in such manner as
may be specified – No form specified. It is mere obligation. No Bar on acceptance.
Acceptance of Deposits from Members
[S73(2) – Applies to public deposit also

Conditions stipulated under S73 for Acceptance
of Deposits
Issuance of a circular to its members:
 statement showing the financial position of the company,
 credit rating obtained [ over and above this, the eligible companies must obtain
once in a year from a credit rating agency and file with ROC alongwith return of
deposits in Form DPT 3. The credit rating referred to in clause (a) shall not be below
the minimum investment grade rating or other specified credit rating for fixed
deposits, from any one of the approved credit rating agencies as specified for Non-
Banking Financial Companies in the Non-Banking Financial Companies Acceptance
of Public Deposits (Reserve Bank) Directions, 1998, issued by the Reserve Bank of
India, as amended from time to time. – amendment dated 29.06.2016]
 the total number of depositors and
 the amount due towards deposits in respect of any previous deposits accepted by
the company and
 other particulars prescribed in rules.

Conditions stipulated under S73 for
Acceptance of Deposits Contd.
filing a copy of the circular along with such statement with the
Registrar within 30 days before the date of issue of the circular
depositing such sum which shall not be less than 15% of the amount
of its deposits maturing during a FY and the FY next following :
 kept in a scheduled bank in a separate bank account to be called
as deposit repayment reserve account
certifying that the company has not committed any default in the
repayment of deposits accepted either before or after the
commencement of this Act or payment of interest on such deposits;

Conditions stipulated under S73 for Acceptance of
Deposits Contd.
providing such deposit insurance in such manner and to such extent as may be
prescribed.
 No Deposit Insurance facility available, as on date.
Extension under Rules - the companies may accept deposits without deposit
insurance contract till the 31st March, 2017 or till the availability of a deposit
insurance product, whichever is earlier
providing security, if any for the due repayment of the amount of deposit or the
interest thereon including the creation of such charge on the property or assets of the
company
 In case where a company does not secure the deposits or secures such
deposits partially, then, the deposits shall be termed as "unsecured deposits"
and shall be so quoted in every circular, form, advertisement or in any
document related to invitation or acceptance of deposits

Conditions under [R3(1)]
no company referred to under 73(2) and no eligible company shall
accept or renew any deposit from members, whether secured or
unsecured, which is:
 repayable on demand or
 upon receiving a notice, within a period of less than 6 months or more
than 36 months from the date of acceptance or renewal of such
deposit [ ranging from 6 months to 36 months]
Exception - For short term fund requirement – Deposit can be
accepted/ Renewed for 3 to 6 months.
 such deposits shall not exceed 10%, of the aggregate of the paid-up
share capital, free reserves and securities premium account] of the
company

where depositors so desire, deposits may be accepted in joint
names not exceeding three, with or without any of the clauses,
namely, "Jointly", "Either or Survivor", "First named or Survivor",
"Anyone or Survivor".
In case of deposit by members, Rule 3(2) must be read in strict
sense to mean that the deposits can be held jointly with any other
member(s) not exceeding three.

no company referred to in sub-section (2) of section 73 shall accept or renew any
deposit from its members, if the amount of such deposits together with the
amount of other deposits outstanding as on the date of acceptance or renewal
such deposits :
 exceeds 25%, of the aggregate of the paid-up share capital [Equity+ Pref] + free
reserves + securities premium account
 Provided that a private company may accept from its members monies not exceeding
exceeding 100% of aggregate of the paid up share capital, free reserves and securities
premium account and such company shall file the details of monies so accepted to
the Registrar in such manner as may be specified. – vide notification dated 29.06.
2016
 Exemption notification provided relief for pvt. Co. falling in paid up + free

Conditions under [R3(4)] – More stringent
for eligible companies
 No eligible Company shall accept or renew:
(a) any deposit from its members [10%] - if the amount of such
deposit + amount of deposits outstanding as on the date of
acceptance or renewal of such deposits from members exceeds
10% of the aggregate of the paid-up share capital [equity+ pref] +
free reserves + securities premium account of the company
(b) any other deposit [25%] - if the amount of such Deposit +
outstanding deposits as on the date of acceptance or renewal
other than the deposit referred to in clause (a), exceeds 25%, of
aggregate of the paid-up share capital [equity+pref] + free reserves
+ securities premium.

 No Government company eligible to accept deposits under section
76 [ basically, which is an eligible company] shall accept or renew
any deposit, if the amount of such deposits together with the
amount of other deposits outstanding as on the date of
acceptance or renewal exceeds 35%, of the aggregate of its paid-up
share capital + free reserves + securities premium.
 So concessional rate of 35% for Govt. Co. vs 25% for Non-Govt.
Co.

rate of interest on deposits or brokerage payable shall not
exceed the maximum rate of interest or brokerage prescribed by
the Reserve Bank of India for acceptance of deposits by NBFCs.
 person who is authorized, in writing, by a company to solicit
deposits on its behalf and through whom deposits are actually
procured shall only be entitled to the brokerage.
 payment of brokerage to any other person for procuring deposits
shall be deemed to be in violation of CAD Rules.
Restrictions on rate of interest and
brokerage [R3(6)]

• the company shall not reserve to itself either directly or
indirectly a right to alter, to the prejudice or disadvantage of
the depositor, any of the terms and conditions of the
deposit, deposit trust deed and deposit insurance contract
after circular or circular in the form of advertisement is issued
and deposits are accepted
No right to alter T&C - prejudice or disadvantage
[R3(7)]

Circular to members under 73(2) – shall be sent by Regd. Post AD
or speed post or by electronic mode in Form DPT 1
 Newspaper advertisement is optional . Legislature has used the
word “the circular may be published”.
Circular to public by an eligible company – shall be published in
form of an advertisement in Form DPT 1 in 1 English Newspaper (in
English Language‘) and in 1 Vernacular Newspaper (in vernacular
language), having wide circulation in the state in which the Regd.
Office of the company is situated.
And upload a copy of the circular on its website, if any.
Other Conditions

• Circular shall be valid until the expiry of 6 months from the
date of closure of the FY in which it is issued or until the
date on which the Financial statement is laid before the
AGM/ Due date of AGM, WHICHEVER IS EARLIER
• Fresh circular or circular in the form of advertisement, as the
case may be, shall be issued, in each succeeding FY, for
inviting deposits during that FY.
VALIDITY PERIOD OF THE DEPOSIT
CIRCULAR [R4(6)]

Appointment of trustee – 1 or more for creating security for the deposits.
Trust Deed to be executed in DPT 2 atleast 7 days before the issuance of circular or
advertisement
Meeting of depositors – request by 10% in value or event affecting interest of deposits.
Nomination for deposits.
Furnish deposit receipts within 21 days fro the date of receipt of money
Maintain liquid assets and create Deposit repayment reserve account – deposit 15% every fy
with any scheduled bank. The said amount shall not fall below 15% of the amount of deposits
maturing until the end of current FY and the next FY.
 The amount to be used only for repayment of deposits.
Register of Deposits
Premature repayment of deposits – reduce rate of interest by 1%, exemption for compliance
of Rule 3 and armed forces.
RETURN OF DEPOSITS IN DPT 3
Other compliances

PENAL PROVISIONS UNDER THE ACT
 For failure to repay deposits accepted before commencement of the act as per provisions,
company, in addition to repayment with interest, liable for fine which shall not be less than Rs.
1 crore but could extend upto Rs. 10 crore. Officer who is in default will be punishable with
imprisonment extending to seven years or fine extending to Rs 2 crore or both. [s74(3)]
 Damages for Fraud - In case deposits were accepted with fraudulent intent or purpose and
there is default in repayment, action under section 447 (non compoundable) and every officer
responsible for accepting deposits be personally responsible without limitation of liability. [S75]
 Punishment for contravention of Section 73 or Section 76 – refund is obvious, + fine not less
than 1 Crore but could extend to Rs. 10 crore. Officer who is in default will be punishable with
imprisonment extending to seven years or fine extending to Rs 2 crore or both. [s74(3)] and if
knowingly – 447 would also trigger. [S76A]
 For failure by a company to repay deposits or pay interest, any suit, proceedings or action may
be taken by any person, group of persons or any association of persons who had incurred
on that account – Class action suit.

OTHER PAINFUL MOMENTS
• SECTION 164 (2) (b) – No person who is or has been a director of a
company which- has failed to repay the deposits accepted by it or pay
interest thereon or to redeem any debentures on the due date or pay
interest due thereon or pay any dividend declared and such failure to
pay or redeem continues for 1 year or more, shall be eligible to be re-
appointed as a director of that company or appointed in other
company for a period of 5 years from the date on which the said
company fails to do so. Proviso relief – appeal., vacation of office u/s
167.
• Can not pay dividend on equity shares. dividend on pref. shares can
be paid.

Prohibition on issue of shares at a
Discount[S53]
A Company shall not issue shares at a discount except as
provided under S54
Any share issued by a Company at a discounted price shall
be void (Drafting error. Amendment proposed in CB2016)
 What is the legal position as on date ?

Issue of Sweat Equity Shares [S54]
Notwithstanding S53, a Company may issue Sweat Equity shares of a
class of shares already issued.
The issue must be authorized by a Special Resolution
Resolution must specify :
 the no. of shares,
 current market price,
 consideration, if any and
 the class or classes of directors or employees to whom such equity
shares are to be issued
 atleast 1 year has elapsed since the date on which the company had
commenced business

Few Important conditions stated in Rule 8
SR valid for 1 year
Sweat equity shares shall not be issued for more than 15% of the existing paid up EQUITY share
capital in a year or shares of the issue value of Rs. 5 crore, whichever is higher.
Issuance of Sweat equity shares shall not exceed 25% of the paid up equity capital of the Company,
at any time.
"Provided further that a startup company, as defined in notification number GSR 180(E) dated 17th
February, 2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce
and Industry, Government of India, may issue sweat equity shares not exceeding 50% of its paid up
capital upto five years from the date of its incorporation or registration". [Amendment dated 19th
July, 2016]
Locked-in/ Non-transferable for 3 years from the date of allotment [Mention in Share certificate]
Valuation of fair price giving justification for such valuation.
Valuation of IPR/Know How/ Value addition

Issue of preference shares [S55]
Irredeemable preference shares can not be issued under the 2013 Act.
If AOA permits, companies can issue of preference shares redeemable
within a period not exceeding 20 years from the date of their issue
subject to conditions prescribed in Rule 9.
If it is convertible, it is subject to compliance of Section 62(1)(c) as well
as Section 42.
If it is non-convertible, it is subject to compliance of Section 42 only.
Rule 9 stipulates requirement of SR, non subsisting default in
redemption of pref. shares or payment of dividend due on any pref.
shares, and other disclosure requirements etc.

Issue of preference shares [S55]
 Where dividend payable on Preference Shares (cumulative or
non-cumulative) is in arrears for a period of two years or more,
such class of preference shareholders shall have a right to vote on
all resolutions placed before a meeting of the company
 Premium payable on redemption of preference shares issued
w.e.f. 01.04.2014 will be provided only out of profits of the
company

Issue of Debentures [S71 read with Rule 18]
A company may issue debentures – fully convertible, Partly convertible or non-convertible
Issue of debentures convertible into shares requires compliance of Section 62(1)(c).
Debenture Trustee to be appointed before issuing a prospectus or making an offer to
company’s members exceeding 500 persons
Company issuing debentures to execute debenture trust deed not later than 60 days after
the allotment of debentures
No secured debentures can be issued with a redemption period beyond ten years from the
date of the issue;
However, companies engaged in setting up infrastructure projects, Infrastructure Finance
Companies, Infrastructure Debt Fund Non-Banking Financial Companies and Companies
permitted by a Ministry or department of the Central Govt. or RBI etc. to issued debentures
for a period exceeding 10 yrs. BUT NOT EXCEEDING 30 yrs.

Issue of Debentures[S71 read with Rule 18]
A company (including manufacturing / infrastructure) issuing NCDs to create DRR equivalent to
atleast 25% of the amount raised by the debenture issue before the debenture redemption
commences
No DRR by All India Financial Institutions and Banking Companies for debentures issued;
NBFCs registered under RBI Act to create DRR of 25% for debentures issued through public
issue; No DRR in case of privately placed debentures by them.
The company shall on or before 30th April each year invest or deposit a sum which is not less
than 15% of the amount of its debentures maturing during the year ending on 31st day of March
of the next year – Deposit with any scheduled bank (free from any charge or lien) / in
unencumbered securities of Central Govt./State Govt. etc.
In case of Partly convertible debentures, DRR shall be created in respect of Non-Convertible
portion of debentures.

Issue of Debentures[S71 read with Rule 18]
Rule 18 doesn’t apply to any amount received by a Company against
issue of commercial paper or any other similar instrument issued in
accordance with the guidelines or regulations or notification issued by
the RBI. [Amendment dated March 18, 2015]
 Unless the scheme framed by RBI specifies so, the Offer of foreign
currency convertible bonds or foreign currency bonds issued in
accourdance with Scheme framed by RBI shall not require compliance
of Rule 18. [Amendment dated March 18, 2015]

Rights Issue
Section 62(1)(a)(ii) :
unless the articles of the company otherwise provide, the offer
aforesaid shall be deemed to include a right exercisable by the
concerned to renounce the shares offered to him or any of them in
favour of any other person; and the notice referred to in clause (i)
contain a statement of this right
 Deemed to include a right to renounce – statutory right.
 Renunciation leading to allotment to more than 200 persons – is it
deemed public issue ?

Rights Issue
Section 62(1)(a)(ii) :
after the expiry of the time specified in the notice aforesaid, or on
receipt of earlier intimation from the person to whom such notice is
given that he declines to accept the shares offered, the Board of
Directors may dispose of them in such manner which is not dis-
advantageous to the shareholders and the company

What is Preferential Offer
‘Preferential Offer’ means
 an issue of shares or other securities, by a company to any select person
or group of persons on a preferential basis and
 does not include shares or other securities offered through a public issue,
rights issue, employee stock option scheme, employee stock purchase
scheme or an issue of sweat equity shares or bonus shares or depository
receipts issued in a country outside India or foreign securities;
“shares or other securities” means equity shares, fully convertible
debentures, partly convertible debentures or any other securities, which
would be convertible into or exchanged with equity shares at a later date.

Issue on Preferential Basis under 62(1)(c)
to any persons, if it is authorised by a special resolution,
whether or not those persons include the persons referred to in
clause (a) or clause (b) of 62(1),
either for cash or for consideration other than cash,
VALUATION REPORT
PLUS + subject to conditions prescribed in Rule 13
Compliance with sec 42 and rules made thereunder is
mandatory.

Issue on Preferential Basis under 62(1)(c)
FULLY PAID UP -the securities allotted by way of preferential offer shall be made
fully paid up at the time of their allotment.
The company shall make disclosures in the explanatory statement to be annexed
to the notice of the general meeting pursuant to section 102 of the Act (object of
issue, basis for price etc)
Allotment on preferential basis to be made within 12 months from the date of
passing of SR
NEW SR after 12 months - if the allotment of securities is not completed within 12
months from the date of passing of the special resolution, another special
resolution shall be passed for the company to complete such allotment
PRICING FOR CONVERTIBLE SECURITIES – Decide at the outset – (i) either
upfront or (ii) not earlier than 30 days to the date the holder of convertible
security becomes entitled to apply for shares, based on valuation report given
earlier than 60 days of the date of entitlement . – Disclosure in the explanatory
statement of the Notice of GM. – Recent amendment dated 19th July, 2016

Conversion [62(3)]
Nothing in this section shall apply to the increase of the subscribed capital
of a company caused by the exercise of an option as a term attached to the
debentures issued or loan raised by the company to convert such
debentures or loans into shares in the company:
Provided that the terms of issue of such debentures or loan containing such
an option have been approved before the issue of such debentures or the
raising of loan by a special resolution passed by the company in general
meeting.
 PRIOR APPROVAL OFTHE SHAREHOLDERS
 Only Debentures and Loan.
 Conversion of Loan into equity in absence of prior approval – discussion
on SRM Energy Limited 2011 SAT Judgment.

Conversion of debentures/Loan - Govt. Co.
[S62(4)]
Notwithstanding anything contained in sub-section (3), where any debentures have
been issued, or loan has been obtained from any Government by a company, and if that
that Government considers it necessary in the public interest so to do, it may, by order,
direct that such debentures or loans or any part thereof shall be converted into shares in
the company on such terms and conditions as appear to the Government to be
reasonable in the circumstances of the case even if terms of the issue of such debentures
or the raising of such loans do not include a term for providing for an option for such
conversion
o Public interest
Provided that where the terms and conditions of such conversion are not acceptable to
the company, it may, within sixty days from the date of communication of such order,
appeal to the Tribunal which shall after hearing the company and the Government pass
such order as it deems fit
o Law of contract…. Protected to an extent !

Govt. to consider financial position etc. [S62(5)]
In determining the terms and conditions of conversion under sub-
section (4), the Government shall have due regard to the financial
position of the company, the terms of issue of debentures or loans,
as the case may be, the rate of interest payable on such debentures
or loans and such other matters as it may consider necessary.

Resultant increase in authorized capital
[ S62(6)]
 Where the Government has, by an order made under sub-section (4),
directed that any debenture or loan or any part thereof shall be converted
into shares in a company and where no appeal has been preferred to the
Tribunal under sub-section (4) or where such appeal has been dismissed,
the memorandum of such company shall, where such order has the effect
of increasing the authorised share capital of the company, stand altered
and the authorised share capital of such company shall stand increased by
an amount equal to the amount of the value of shares which such
debentures or loans or part thereof has been converted into.
 In my view, liability for payment of stamp duty would be on the company.
No exemption.

Clause (i) of Explanation II to sub-section (2) of Section 42 defines Private
Placement :
"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“
Exhaustive definition
Offer of securities or invitation to subscribe securities
Select group of person – More than 1.
Securities and not only shares.
Private Placement [S42]

 Offer of securities or Invitation to subscribe to securities
No. of persons to whom offer can be made [Twin Conditions] :
 Not exceeding 50 persons per offer/invitation (excluding QIBs
and Employee stock options).
 Not exceeding 200 persons in aggregate, in a financial
year(excluding QIBs and Employee stock options).
These limits are for each kind of security i.e. equity, preference,
debenture.
Private Placement [S42]

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 (200), 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 I to sub-section (2) of Section 42:

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.
Does this apply to all kinds of securities or securities of the same class/ type ?
Legislature has used the words “ unless the allotment with respect to any offer or
invitation made earlier” (Even explanation (ii) to Rule 14(2)(B) clarifies this position)
Explanation to Rule 2(b) clarifies two things. Firstly, that the 200 persons criteria is for
each kind of security i.e. equity, preference and debentures and secondly, that the
requirement of 42(3) shall apply in respect of each kind of security. Indicates, allotment
pursuant to offer made under 42 only.
Section 42(3)

PAS 4 – Offer letter [ Names to be pre-decided, offer
letter must be received by in his name]
PAS 3 – File Return of allotment in FORM PAS 3, including the
complete list of all security-holders, with their full names,
addresses, number of securities allotted etc.
PAS 5 – Complete record of such offers to be
maintained
GNL 2 within 30 days - ROC
Key Documents - Snapshot

Conditions stipulated in Rule 14
Prior approval of shareholders – Special Resolution for each of the offers or invitations. Explanatory
statement – basis/ justification for price (including premium, if any) . For non convertible debentures –
Previous SR only once in a year for all the offers or invitation for such debentures + relaxation
PAS 4 shall be accompanied by an application form, serially numbered and addressed specifically to the
person to whom the offer is made
Shall be sent to him either in writing or in electronic mode within 30 days of recording the names of such
persons in accordance with sec 42(7)
Mode of Delivery – “IN WRITING or IN ELECTRONIC MODE” – Regd. Post, speed post, courier, hand
delivery, fax, email etc.
No person other than the person so addressed in the application form shall be allowed to apply. In case of
of non compliance - it would be treated as an Invalid application.
Investment size per person – Not less than Rs. 20000/- of face value of the securities (Not applicable on
NBFCs registed with RBI under RBI Act, 1934 and Housing finance companies registered with NHB under
NHB Act, 1987, if they comply with relevant regulations in respect of offer or invitation to be issued on
private placement basis. (however, shall comply, if no regulations specified by RBI/ NHB)

Deemed Public offer[S42(4)] / Separate Bank Account
[S42(5)]
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.
o Draconian provision !
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.
Cheque or demand draft or NEFT/RTGS etc. but not by Cash. {Rule 14(2)(d) states
that the payment must be received from the bank account of the person subscribing
to such securities. And in case of joint holding – bank account of the person whose
name appears first in the application}
Not by conversion of Loan ?

Refund [S42(6)]
A company making an offer or invitation under this section shall allot its securities
within 60 days from the date of receipt of the application money and
 If not able to allot the securities within that period – repay the application
money to the subscribers within 15 days from the date of completion of sixty
days.
 If fails to repay as above – liable to repay alongwith interest at the rate of 12
percent p.a. from the expiry of 60th day.
keep Application monies in separate bank account in a scheduled bank.
 New account to be opened for every new case falling under sec 42 ?
 Legislature has used the words - “ separate bank account” and not the words
“open a bank account and deposit cheques/demand drafts in such bank
account”.
Such monies 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.

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
 such persons shall receive the offer by name, and that a complete
record of such offers shall be kept by the company in Form PAS
and
 complete information about such offer shall be filed with the
Registrar {in Form GNL 2} within a period of thirty days of
circulation of relevant private placement offer letter.
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.
PAS5 and GNL 3 [S42(7)] and
Public Advertisement [S42(8)]

Return of Allotment :file with the Registrar a return of allotment in
FORM PAS 3, including the complete list of all security-holders, with
their full names, addresses, number of securities allotted etc.
Penal Provision : 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 Rs. 2 Crore, whichever is higher, and
 the company shall also refund all monies to subscribers within a
period of 30 days of the order imposing the penalty.
Return of Allotment[S42(9)] / Penal Provision [S42(10)]

See you soon !
Manoj Singh Bisht
Company Secretary
csmanojsbisht@gmail.com /
8527790322

Acceptance of Deposits and Issue of Securities

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