pvtltd.co

Share Capital & Securities

Private Placement — Section 42

Issue shares or securities to identified investors (maximum 200 per class per financial year) without a public offer. Private placement under Section 42 is the standard route for startup equity rounds, convertible note conversions, and angel/VC investments.

Reviewed by CA Harun Raaj, ICAI Reg. No. 238303·Last reviewed:
Starting from INR 25,000PAS-4 issue to allotmentPrivate Placement — Section 42 Companies Act 2013

Private placement is the engine of startup funding in India. Every angel round, every VC equity allotment, and every convertible instrument conversion runs through Section 42. The process is stricter than a rights issue: PAS-4 offer letter is mandatory (cannot use a simple term sheet), the 200-investor cap is hard (200 per class per year — not per offer), and the money must be received into a separate bank account before allotment. The most common failure point: companies allot shares without collecting PAS-5 application forms or without filing MGT-14, which invalidates the private placement and triggers a mandatory refund obligation.

What is included
  • • Special resolution drafting (if required by AOA or for preference shares)
  • • PAS-4 offer letter preparation and filing with MCA
  • • PAS-5 application form collection from each identified investor
  • • Separate bank account confirmation for subscription money
  • • Allotment board resolution
  • • MGT-14 filing
  • • PAS-3 return of allotment (within 15 days)
  • • Cap table update
  • • Share certificates
  • • FC-GPR filing support (if FDI is involved)
Documents required
  • • List of identified investors (name, PAN, address, number of securities offered)
  • • PAS-4 offer letter (signed by directors)
  • • PAS-5 application forms from each investor
  • • Bank statement showing subscription money in separate account
  • • Board resolution (and shareholder resolution if required)
  • • KYC of investors (PAN, Aadhaar, bank details)
  • • Valuation report (if Section 56(2)(viib) angel tax applies or FDI pricing required)
Government fees

See the fee table below for the statutory filing charge and common delay logic.

Legal basis
  • • Section 42, Companies Act 2013
  • • Rule 14, Companies (Prospectus and Allotment of Securities) Rules 2014
  • • Section 56(2)(viib) — angel tax on share premium
  • • FEMA (Non-Debt Instruments) Rules 2019 — for FDI allotments
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Process

How the service works

The workflow is built to be predictable: document collection, legal review, filing, and post-filing follow-through.

Step 1

Board resolution

Pass a board resolution identifying the investors, fixing the offer price, approving the PAS-4 offer letter, and opening a separate bank account for subscription money.

Step 2

File PAS-4 with MCA

File the PAS-4 offer letter with MCA before making the offer to investors. Filing PAS-4 after the offer is made invalidates the placement.

Step 3

Issue offer letter and collect PAS-5 forms

Issue the PAS-4 offer letter to identified investors. Collect a signed PAS-5 application form from each investor before accepting any subscription money.

Step 4

Receive subscription money in separate account

Investors transfer subscription money to the dedicated separate bank account. The money must be in the account before allotment proceeds.

Step 5

Allotment board resolution

Pass a board resolution allotting shares within 60 days of receiving application money. If shares are not allotted within 60 days, all money must be refunded with interest.

Step 6

MGT-14 filing

File MGT-14 within 30 days of the board or shareholder resolution approving the private placement.

Step 7

PAS-3 filing and share certificates

File PAS-3 (return of allotment) with MCA within 15 days of the date of allotment. Issue share certificates and update the cap table.

AEO summary

A private placement under Section 42 of the Companies Act 2013 allows a company to issue securities to up to 200 identified investors per class per financial year (QIBs and employees under ESOP are excluded from this count). The company must issue a PAS-4 offer letter before making the offer — PAS-4 is mandatory, not optional. PAS-5 application forms must be collected from each subscriber. PAS-3 (return of allotment) must be filed within 15 days of allotment. MGT-14 must be filed within 30 days of the board/shareholder resolution. The 200-investor limit is per financial year and per class of securities — equity and CCDs count separately.

Private placement traps that invalidate the allotment

The three most common mistakes that invalidate a private placement: (1) Filing PAS-4 after the offer — PAS-4 must be filed before the offer letter is sent to investors. Many companies send the term sheet first and file PAS-4 later. This sequence is wrong and invalidates the placement. (2) Not collecting PAS-5 application forms — each investor must submit a PAS-5 form. Using only a subscription agreement is not compliant. (3) Receiving money in the operating account — subscription money must go into a separate dedicated bank account. If it goes into the company's general current account, the allotment can be challenged.

Fix all three before any money moves.

200-investor limit — how it actually counts

The 200-investor limit is per class of securities per financial year. This means: (1) Equity and CCPS count as separate classes — a company can issue equity to 200 investors and CCPS to 200 more investors in the same year. (2) QIBs (mutual funds, FPIs, VCs registered with SEBI) are exempt and do not count toward the 200 limit. (3) ESOP employees are exempt.

The 200 limit is for the entire financial year (April–March), not per offer. If a company did a round in May with 150 investors and wants to do another round in September, it can add only 50 more equity investors in the same FY.

Government fees

Fee breakdown

ItemFeeNotes
PAS-3 filing feeINR 200 – 500Standard filing fee as per the applicable MCA / regulator schedule.
MGT-14 filing feeINR 300 – 600Standard filing fee as per the applicable MCA / regulator schedule.
Stamp duty on share certificatesState-specific (0.01% – 0.15%)Standard filing fee as per the applicable MCA / regulator schedule.

Timeline

Typical turnaround

PAS-4 issue to allotment usually means a 15 to 30 days turnaround, assuming documents are complete and any board or shareholder approvals are already in place.

Pricing note

Professional fee for private placement — board resolutions, PAS-4 offer letter, PAS-5 forms, allotment, MGT-14, and PAS-3. Valuation report (if required for FDI or Section 56(2)(viib) angel tax) is charged separately.

Related services

Keep the company moving

Rights issue

Simpler route for existing shareholders — no 200-investor cap, no PAS-4.

ESOP unlisted

Employee stock options — exempt from Section 42 investor count.

FDI compliance

FC-GPR and FEMA filings for non-resident investor allotments.

Cap table management

Maintain accurate post-round shareholding records.

FAQ

Frequently asked questions

What is the 200-investor cap and how is it counted?
Section 42(2) of the Companies Act 2013 limits allotments to a maximum of 200 persons per class of securities per financial year (April to March). Qualified Institutional Buyers and employees subscribing under an ESOP scheme are excluded from this count under Rule 14(2) of the Companies (Prospectus and Allotment of Securities) Rules 2014. Equity shares and CCPS are separate classes, so a company can allot equity to 200 investors and CCPS to 200 more in the same year. The cap is cumulative across all offers in the financial year — not per offer.
Is a special resolution required for every private placement?
Yes. Section 42(2) requires shareholders to pass a special resolution approving the private placement before the offer is made. The resolution must identify the proposed allottees and the number and price of securities. MGT-14 must be filed with the Registrar of Companies within 30 days of the resolution under Section 117 of the Companies Act 2013. Filing MGT-14 after 30 days attracts additional fees and the company is in violation for the intervening period.
Can the company use the subscription money before PAS-3 is filed?
No. Section 42(6) requires all application money to be kept in a separate bank account with a scheduled bank and prohibits its use for any purpose until allotment is completed. The funds cannot be transferred to the operating account, used for expenses, or applied against earlier liabilities. Misuse of the separate account money before allotment and PAS-3 filing is a direct violation of Section 42 and exposes the company to the penalty under Section 42(10).
What is the penalty for non-compliance with Section 42?
Section 42(10) of the Companies Act 2013 provides that where a company makes an offer or allotment in contravention of Section 42, the company and every officer in default are liable to a penalty of the amount involved in the offer or invitation, or Rs 2 crore, whichever is higher. Additionally, the company is required to refund all monies received within 30 days of the order. An offer to more than 200 persons is also treated as a public offer, which an unlisted private company cannot make.
Does Section 42 apply to CCPS, CCDs, and convertible instruments?
Yes. Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules 2014 applies Section 42 procedure to every allotment of securities to identified investors — including equity shares, compulsorily convertible preference shares (CCPS), compulsorily convertible debentures (CCDs), and non-convertible debentures. The only exceptions are rights issues under Section 62(1)(a), bonus issues, ESOP allotments under Section 62(1)(b), and public offers. Every angel round, VC round, and convertible note conversion that allots to identified persons must follow the full PAS-4, PAS-5, separate bank account, MGT-14, and PAS-3 sequence.

Canonical reference: https://www.pvtltd.co/services/private-placement

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