Private placement under section 42 of the Companies Act, 2013 is a controlled way to offer securities to a selected group of identified persons. It is not simply a private company taking money from a few known investors. The law controls who may receive the offer, how the application is issued, where the money comes from, how long the company has to allot the securities, when PAS-3 must be filed and when the money can actually be used.
This guide focuses on the section 42 process itself. The instrument being issued may bring additional requirements under other provisions of the Companies Act, the applicable rules or securities law. For example, an equity issue, preference-share issue and debenture issue can require different instrument-specific checks even though the private-placement process runs through section 42.
First decide whether section 42 is really the route
A private placement is an offer or invitation to subscribe to securities made to a select group rather than to the public. Under section 42 of the Companies Act, 2013, the Board identifies the persons to whom the offer will be made. The private placement offer and application cannot carry a right of renunciation, so the recipient cannot simply pass the offer to someone else.
The numerical limit is one of the most important filters. Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, as substituted in 2018, limits a private-placement offer or invitation to not more than 200 persons in aggregate in a financial year. Qualified institutional buyers and employees receiving securities under an employee stock option scheme under section 62(1)(b) are excluded from that count. The rule also says that the limit is reckoned separately for each kind of security: equity shares, preference shares and debentures.
That distinction matters in practice. A company should not maintain one casual investor list and assume that every proposed offer is within the limit. The working paper should identify the security type, financial year, persons already approached for that security type and the statutory exclusions. Section 42 also provides that an offer exceeding the prescribed number can be treated as a public offer, which changes the legal consequences significantly.
Build the identified-person list before sending PAS-4
The private-placement process starts with identified persons, not with money arriving in the bank. Rule 14 requires the private placement offer-cum-application letter to be in Form PAS-4, serially numbered and specifically addressed to the person to whom the offer is made. It must be sent in writing or electronically within 30 days of recording that person's name. An application from someone other than the person to whom PAS-4 is addressed is not compliant with that condition.
The company must also maintain a complete record of private-placement offers in Form PAS-5. In other words, PAS-4 is the individual offer-cum-application document, while PAS-5 is the company's record of the offers made.
Before the offer goes out, the company should also confirm that the proposed securities fit within its existing share-capital structure and the relevant issue route. Section 42 does not remove other approvals that may apply to the particular security being issued. Rule 14 generally requires prior shareholder approval by special resolution for the private-placement offer, subject to the specific provisos applicable to certain instruments and situations.
A useful sequencing control is built into Rule 14 itself: the private placement offer-cum-application letter is to be issued only after the relevant special resolution or Board resolution has been filed in the Registry, as applicable. This makes the approval-and-filing stage part of the pre-offer process rather than something to regularise after investors have already subscribed.
The subscription trail must match the identified applicant
For a cash subscription, section 42 requires payment through cheque, demand draft or another banking channel, and not in cash. Rule 14 goes further by requiring the payment to come from the bank account of the person subscribing to the securities. Where securities are to be held jointly, the subscription money is to come from the bank account of the person whose name appears first in the application. The rule contains a separate carve-out for an issue of shares for consideration other than cash.
This is why the finance team should reconcile three things before allotment: the name on PAS-4, the applicant named in the subscription records and the bank account from which the money was received. A mismatch is not merely an accounting inconvenience; it can undermine the statutory private-placement trail.
Section 42 also requires application money to be kept in a separate bank account with a scheduled bank. That account may be used only for adjustment against allotment of securities or for repayment where the company is unable to allot. In addition, the company cannot utilise the money raised through private placement unless the allotment has been made and the return of allotment has been filed with the Registrar.
The 60-day allotment clock runs from receipt of application money
The key allotment deadline is tied to receipt of the application money. Section 42 requires the company to allot the securities within 60 days from the date it receives the application money. This is different from using the date of the Board meeting, PAS-4 circulation or shareholder approval as the starting point.
If the company cannot complete the allotment within those 60 days, it must repay the application money within the next 15 days. If repayment is not made within that additional period, the statute requires interest at 12% per annum from the expiry of the sixtieth day.
A practical control is therefore to record the actual receipt date for each subscription as soon as money reaches the separate bank account and calculate the statutory allotment deadline from that date. Where different subscribers pay on different dates, the company should not assume that one common internal target date automatically protects every receipt.
PAS-3 is part of the closing sequence, not a later housekeeping form
After allotment, section 42 requires a return of allotment to be filed with the Registrar within 15 days from the date of allotment. Rule 14 prescribes Form PAS-3 for this return and requires a complete list of allottees with prescribed particulars. For equity allotments, the current MCA instruction kit for PAS-3 also applies the 15-day filing validation where private placement is selected.
The filing deadline matters for more than late fees. Section 42 expressly says that money raised through private placement cannot be utilised unless the allotment has been made and the return of allotment has been filed. A finance team that treats PAS-3 as something that can wait while the newly raised funds are already being spent can therefore break the statutory sequence even if the allotment itself was completed on time.
The Act also attaches a specific penalty to delay in the section 42 return of allotment: the company, its promoters and directors can be liable to ₹1,000 for each day of continuing default, subject to a maximum of ₹25 lakh. This is separate from the broader consequences that can arise from making an offer or accepting money in contravention of section 42.
Do not start the next offer while the earlier one is still open
Section 42 prohibits a fresh offer or invitation under the section until allotments under the earlier offer have been completed or that earlier offer has been withdrawn or abandoned. This rule is easy to miss when a company is raising funds in several tranches.
The safer approach is to treat each private-placement round as a controlled file with a clear closing status. Before launching another offer, confirm that the earlier round is no longer pending. A new PAS-4 set should not be circulated simply because management has identified another investor while the first round remains incomplete.
Private placement cannot be marketed like a public fund-raise
Section 42 bars a company from releasing public advertisements or using media, marketing or distribution channels or agents to inform the public at large about the issue. The commercial objective may be to raise capital, but the legal route is built around identified persons rather than open solicitation.
This also explains why the 200-person test, specifically addressed PAS-4 forms and the restriction on public advertising should be reviewed together. They are not separate paperwork requirements; they are different safeguards designed to keep the offer genuinely private.
A closing checklist for the section 42 file
- Confirm the route: identify the security being issued and check the additional provisions that apply to that instrument.
- Check the person limit: maintain a financial-year count for the relevant kind of security, applying the statutory exclusions correctly.
- Identify recipients before circulation: record the persons approved for the offer and do not allow a different person to use their PAS-4.
- Complete approvals and required pre-offer filings: ensure the relevant resolution has been passed and filed before PAS-4 is issued where Rule 14 requires it.
- Maintain PAS-5: preserve a complete record of the private-placement offers.
- Trace the money: for cash subscriptions, match the applicant to the originating bank account and do not accept cash.
- Keep funds segregated: hold application money in the separate scheduled-bank account and respect the statutory restrictions on its use.
- Track 60 days from receipt: allot within the statutory period or trigger the repayment process within the following 15 days.
- File PAS-3 promptly: the section 42 return of allotment is due within 15 days of allotment.
- Close the round before opening another: do not make a fresh section 42 offer while an earlier offer remains incomplete unless the earlier offer has been withdrawn or abandoned.
A well-run private placement therefore depends less on one form than on the order of events. The identified-person record, PAS-4, bank trail, allotment deadline and PAS-3 filing should all tell the same story. When the sequence is planned before money is accepted, the company is much less likely to discover a section 42 problem after the funds have already been committed.
