Past, Present and Future of Private Placement
A lot has changed since the amendments made in the Companies Act and with the introduction of the new Companies Act 2013. Companies Act 2013 engraved some basic fundamental changes and placed restrictions for investor protection. Challenges are increasing day by day for every company including Startups.
WAYS TO RAISE MONEY IN A PRIVATE LIMITED COMPANY
- Debt – Loan, Convertible Debentures, Letter of Credit, Bank Guarantees
- Equity – Equity Shares, Preference Shares
RIGHT ISSUE VS PRIVATE PLACEMENT
While for most start-up’s, Debt option in very difficult to get access to because they don’t have a proven record in terms of financial history. Leaving with them to raise funds using Equity mode. Primarily raising equity can be done through two routes as provided in Companies Act 2013 i.e. Right Issue and Private Placement.
While Right issue aims at offering shares to shareholders who are already on the boat in the proportion of their current shareholding. This is the easiest way to raise equity in the company as there is no requirement of a valuation certificate. But for a start-up, this right issue route is not feasible.
Why do you need private placement ?
PRIVATE PLACEMENT – INITIATION
The most common and widely used route is Private Placement. When a start-up’s pitch their products in front of the prospective investors they offer a certain valuation which they seem is correct for the company. When the new investors understand the business or see a viability and a good return on investment opportunity on their money, they bring in the money at the valuation fixed in the terms of Private Placement. A private placement is an offer which is made to less than 200 persons or institutions.
While making a Private Placement Offer one needs to comply with section 42(2) of the Companies Act, 2013. Private Placement is the most correct route through which a new investor should be given shares at the agreed valuation. But since the process of Private Placement is cumbersome, many start-ups tend to resort to different methods which they assume are less cumbersome as compared to Private Placement. They end up violating the provisions mentioned in the Companies Act 2013.
Usually first round consists of Discussions followed by signing of term sheets. Then finally the offer is made and noted. There are several forms as prescribed by ministry of corporate affairs such as PAS-3, PAS-4 and PAS-5 which needs to filed along with Valuation Report by prescribed valuers and list of allottees within 30 days.
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The main aim of the provisions for Private Placement was to protect small investors and prohibiting the companies to accept money in small tranches to bypass deposit acceptance rules.
We know their formalities are a very burdensome task. But you need not worry as we got you covered, you just need to focus on your presentation which you need to give to prospective investors and leave the rest of the work to us as we have experts who are trained and are experts in handling the complex formalities and paper works.