Issuance Of Shares On Private Placement Basis

About the client:

Private Placement means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application.

R&A Associates advised and assisted one of its clients for the issuance of Equity Shares on Private Placement. The company had received funds from an overseas investor by way of Foreign Direct Investment (FDI) and so we had to advise and undertake the compliances under the Companies Act, 2013 and Foreign Exchange Management Act Regulations.  The client is primarily engaged in the business of research and development in the pharma sector and is also involved in developing drugs & formulations.

Our Association and work– We have been associated with this client since its incorporation in 2014. The process of issuing equity shares on Private Placement basis involves series of activities based on a complete understanding of the applicable sections of the Companies Act and also involves timely reporting under FEMA. The broad steps undertaken are mentioned below:

  1. As a first step, the minimum price at which the shares could be issued had to be arrived at for which a valuation report was to be obtained from a registered valuer in accordance with 42 and 62 (1)(c) of the Companies Act, 2013.

In the present case, shares were to be issued to a Foreign National, therefore valuation report from a Chartered Accountant or Merchant Banker registered with SEBI had to be obtained in terms of FEMA (Non-Debt Instruments) Rules, 2019.

  1. Necessary approvals from the Board & from Members by way of a Special Resolution were to be taken, for making the Private Placement offer. As we were aware that we would have to undertake the reporting of FDI, we also included the resolutions for registration of entity master and business user on FIRMS portal of RBI in the same Board meeting.
  1. An important part of the process would be to file Form MGT-14 for the special resolution passed with the concerned Registrar of Companies (ROC) only after which the issuance of Private Placement offer letter which is a detailed document in Form PAS-4 could be sent to the Investors. Record of Private Placement offers in Form PAS-5 was also to be maintained. 
  1. We advised the investors that all monies payable towards subscription of securities be paid specifically through their bank account by way of cheque or demand draft or other banking channels but not by cash.
  1. It was mandatory for the company to open a separate bank account in a scheduled bank for keeping the subscription money and it was not to be utilized for any purpose. We ensured that the allotment of securities was completed within 60 days from the date of receipt of the application money and the Return of Allotment of securities in Form PAS-3 was filed within 15 days of allotment.
  1. The Company was advised to utilize the money raised through Private Placement only after allotment was done and the return of allotment (PAS-3) was filed.
  1. The entire process was completed seamlessly and the Issuance of share certificates was done within two months of receipt of payment towards Private Placement offer and all the statutory records of the company as in the Minutes’ book and Registers were updated accordingly. 
  1. As a part of the FEMA reporting, we undertook Filing of Form Foreign Currency- Gross Provisional Return (FC-GPR) with RBI towards subscription of shares by Foreign National within 30 days from the date of allotment.
  1. The Reserve Bank of India then issued a letter stating that they had taken note of the foreign investments made in the company with which the entire process of Issuance & allotment of shares on Private Placement basis was completed.

Our association with the client continues as we provide ongoing compliance support to them under Companies Act & FEMA. We are happy to see the way the Client has grown immensely in size and complexity over these years so has our involvement with them. Due to our in-depth knowledge on the subject, extensive experience, and methodical approach, our clients ensure that they seek our advice prior to any funding that they propose to receive so that it is properly structured and the compliance formalities are duly completed.

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