Private Placement Under Section 42: PAS-4 & PAS-3 Complete Guide

Legal Framework: Section 42 and Rule 14

The private placement framework is governed by Section 42 of the Companies Act, 2013 (as amended by the Companies (Amendment) Act, 2017) and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. The 2017 amendment consolidated the erstwhile Sections 42 and 62(1)(c) to create a unified private placement procedure.

Key Provisions of Section 42

• Section 42(1): A company may make a private placement of securities subject to the provisions of this section
• Section 42(2): The offer shall be made to not more than 200 persons in aggregate in a financial year, excluding QIBs and ESOP employees. If the limit is exceeded, the offer is deemed a public offer.
• Section 42(3): A private placement shall be made only to identified persons who have been identified by the Board (and only to those persons whose names are recorded by the company prior to the invitation to subscribe)
• Section 42(4): The offer must be made by way of a private placement offer letter in Form PAS-4
• Section 42(5): A special resolution is required for each offer of securities. However, a single special resolution can cover multiple tranches if the aggregate amount is specified.
• Section 42(6): Application money must be received through banking channels from the subscriber’s own bank account. Allotment must be made within 60 days, failing which the money must be refunded within 15 days with 12% interest.
• Section 42(7): No company shall utilise the application money unless allotment is made and the return of allotment (Form PAS-3) is filed with the ROC
• Section 42(8): Return of allotment must be filed within 15 days of allotment

Step-by-Step Private Placement Process

At Virtual Auditor, we follow a structured 10-step process for every private placement engagement. Each step has specific compliance requirements under Section 42 and Rule 14.

Step 1: Identify the Proposed Allottees

The Board must identify the persons to whom the offer is proposed to be made. Under Section 42(3), only persons whose names are recorded by the company prior to the invitation can subscribe. This means the company cannot issue a general invitation — each proposed allottee must be specifically identified by the Board.

The 200-person limit under Section 42(2) is calculated in aggregate for the financial year, across all offers of all classes of securities. However, this limit excludes:

• Qualified Institutional Buyers (QIBs) as defined under SEBI regulations
• Employees under an Employee Stock Option Plan (ESOP)

Step 2: Board Meeting — Approve the Private Placement

Convene a Board meeting to:

• Approve the private placement of securities, including the class and number of securities, the price per security, and the total amount to be raised
• Identify and approve the list of proposed allottees
• Approve the draft private placement offer letter in Form PAS-4
• Authorise the convening of an EGM (or postal ballot) to pass the special resolution
• Fix the record date and other procedural matters

For board resolution templates, refer to our board resolution templates guide.

Step 3: Special Resolution

Under Section 42(5), every private placement requires a prior special resolution of shareholders. The explanatory statement annexed to the notice of the general meeting must contain the following particulars (as prescribed under Rule 14(2)):

• Particulars of the offer including the date of passing the Board resolution
• Kinds of securities offered and the price at which they are offered
• Basis or justification for the price (including a valuation report, if applicable)
• Name and address of the valuer who performed the valuation
• Amount which the company intends to raise by way of securities
• Material terms of raising such securities, proposed time within which allotment is to be completed
• Names and addresses of the proposed allottees
• Purpose or objects of the issue
• Contribution by the promoters or directors (either as part of this offer or separately)
• Principle terms of assets charged as security, if any

The special resolution must be filed with the ROC in Form MGT-14 within 30 days of passing.

Step 4: Issue Private Placement Offer Letter (Form PAS-4)

After the special resolution is passed, issue the private placement offer letter in Form PAS-4 to identified persons. The offer letter must be issued in the name of each identified person and is not transferable.

Mandatory Contents of Form PAS-4

Rule 14(3) prescribes that the offer letter must contain:

• General information: Name and address of the registered office, corporate identity number, date of incorporation, names of the promoters and directors
• Financial information: Audited financial statements for the last two financial years, statement of net worth, turnover, and profit after tax
• Particulars of the offer: Class of securities, number, face value, issue price, premium (if any), total amount to be raised
• Pricing basis: Justification for the price at which the securities are being offered, including the name and address of the valuer (if a valuation was conducted)
• Terms of the issue: Payment terms, proposed date of allotment, rights attached to the securities, conditions for refund
• Objects of the issue: Purpose for which the funds are being raised and the estimated utilisation
• Risk factors: A statement of risk factors specific to the company and the securities being offered
• Undertakings: That the securities have not been offered to more than 200 persons in aggregate in the financial year; that the company is not in default of payment of any listed debentures

Step 5: File Record of Private Placement Offer (Form PAS-5 — Now Part of PAS-4 Filing)

A record of the private placement offer must be filed with the ROC. Under the current MCA portal workflow, the private placement offer letter details are captured as part of the Form PAS-4 e-filing. The filing must be made within 30 days of circulation of the offer letter.

Step 6: Receipt of Application Money

Under Section 42(6), the application money must be:

• Received only through banking channels — cheque, demand draft, RTGS, NEFT, or other electronic banking modes
• Received from the bank account of the subscriber — third-party payments are not permitted
• Deposited in a separate bank account maintained for this purpose

Cash payments are strictly prohibited. Any money received in cash must be refunded within 15 days and shall not be utilised for allotment.

Step 7: Allotment of Securities

The Board must allot the securities within 60 days from the date of receipt of the application money. If allotment is not made within 60 days:

• The company must repay the application money within 15 days from the expiry of the 60-day period
• If the company fails to repay, it must pay interest at the rate of 12% per annum from the expiry of the 60th day
• The directors who are officers in default are personally liable for the repayment

The allotment is made by passing a Board resolution at a Board meeting, approving the allotment to the specific allottees, the number of securities allotted, and the consideration received.

Step 8: File Return of Allotment (Form PAS-3)

Under Section 42(8), the return of allotment in Form PAS-3 must be filed with the ROC within 15 days of allotment. The return must include:

• Complete list of allottees with names, addresses, PAN, and number of securities allotted
• Class and nominal value of the securities allotted
• Amount paid up on each security
• Particulars of the consideration received (cash, cheque, RTGS, etc.)
• The special resolution authorising the private placement

Critical compliance point: Under Section 42(7), the company cannot utilise the application money until the allotment is made and the return of allotment in Form PAS-3 is filed with the ROC. This means the money must remain in the separate bank account until PAS-3 is filed.

Step 9: Issue Share Certificates or Debenture Certificates

Under Section 46 read with Rule 5 of the Companies (Share Capital and Debentures) Rules, 2014, the company must deliver share certificates within two months of allotment (for shares) or six months from the date of allotment (for debentures). If the shares are held in dematerialised form, the company must credit the securities to the allottees’ demat accounts.

Step 10: Update Statutory Registers

After allotment, update the following registers:

• Register of Members (Section 88) — add the new allottees with details of securities allotted
• Register of Charges (if debentures are secured) — under Section 77
• Minutes Book — record the Board resolution for allotment and the EGM/postal ballot minutes for the special resolution

Pricing of Securities in Private Placement

The pricing of securities issued under private placement is critical — it has implications under the Companies Act, Income Tax Act, and FEMA regulations (for non-resident allottees).

Companies Act Requirements

Rule 14(2) requires the explanatory statement to the special resolution to disclose the basis or justification for the price. While the Companies Act does not prescribe a specific valuation methodology, the price must be justifiable. We recommend obtaining an independent valuation report.

Income Tax Act — Section 56(2)(viib)

For shares issued by a company (not being a company in which the public are substantially interested) at a premium, the excess of the issue price over the fair market value is taxable as income under Section 56(2)(viib). The fair market value can be determined using:

• Rule 11UA(2)(a): Net Asset Value (NAV) method — fair market value of all assets minus all liabilities as per the balance sheet
• Rule 11UA(2)(b): Discounted Cash Flow (DCF) method — present value of expected future cash flows, as certified by a merchant banker or an accountant

Note: The Finance Act, 2024 abolished the angel tax for investments received from both residents and non-residents for assessments from AY 2025-26 onwards. However, proper documentation of valuation remains essential.

FEMA Requirements for Non-Resident Allottees

When securities are issued to non-residents under private placement, the pricing must comply with FEMA (Non-Debt Instruments) Rules, 2019:

• Issue price must be at or above the fair market value determined by a SEBI-registered merchant banker or an IBBI-registered valuer (for unlisted companies)
• For convertible instruments, the pricing formula must be specified upfront
• FC-GPR must be filed with the RBI within 30 days of allotment

CA V. Viswanathan (IBBI/RV/03/2019/12333) is a registered valuer under the IBBI and provides FEMA-compliant valuation certificates. Visit our valuation services page for details.

200-Person Limit: Counting Rules and Exceptions

The 200-person limit under Section 42(2) is one of the most frequently misunderstood provisions. Here are the counting rules:

What Counts Towards the 200-Person Limit

• Every identified person to whom the offer letter is sent — not just those who actually subscribe
• Offers of all classes of securities in the financial year are aggregated — equity shares, preference shares, and debentures are all counted together
• Multiple offers in the same financial year are cumulated

What Is Excluded From the 200-Person Limit

• Qualified Institutional Buyers (QIBs) — mutual funds, FPIs, AIFs, scheduled commercial banks, insurance companies, pension funds, etc.
• ESOP employees — employees to whom securities are offered under an Employee Stock Option Scheme under Section 62(1)(b)

Consequence of Exceeding the Limit

If the offer is made to more than 200 persons (after exclusions), the offer is deemed to be a public offer under Section 42(2). This triggers compliance with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, including the requirement to file a prospectus with SEBI and ROC. Non-compliance attracts penalties under both the Companies Act and SEBI regulations.

Non-Transferability of the Offer

Under Rule 14(3), the private placement offer letter is not transferable or negotiable. If the offer letter or application form is transferred or if any person subscribes to securities who was not specifically identified by the Board, the allotment is void and the company must refund the money with interest at 12% per annum.

This is a critical control point. The offer letter must bear the name of the identified person, and the application money must come from that person’s bank account. Any mismatch triggers non-compliance.

Penalties for Non-Compliance (Section 42(10))

Section 42(10) prescribes the following penalties for contravention of Section 42:

• Company: Penalty which shall not be less than the amount raised through the private placement or Rs 2 crore, whichever is lower
• Every officer in default (including every director): Penalty which shall not be less than Rs 25,000 which may extend to Rs 25,00,000 (Rs 25 lakh)
• The company must also refund all monies received from subscribers with interest at the rate of 12% per annum

Private Placement of Debentures: Additional Requirements

When the private placement involves debentures, the following additional compliances apply:

Section 71 Requirements

• A company can issue debentures with an option to convert them into shares only with the approval of shareholders by a special resolution
• Secured debentures require the creation of a charge on the assets of the company and appointment of a debenture trustee before the offer is made
• The charge must be registered with the ROC in Form CHG-1 within 30 days of creation
• A Debenture Redemption Reserve (DRR) must be created — currently, listed companies and NBFCs are exempt from DRR, but other companies must create a DRR of 10% of the outstanding debentures

SEBI NCS Regulations (for Listed Debentures)

If the debentures are proposed to be listed, the company must comply with SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021, including credit rating, due diligence certificate, and listing agreement compliance.

Private Placement vs. Preferential Allotment vs. Rights Issue

Common Compliance Errors and How to Avoid Them

Error 1: Not Filing MGT-14 for the Special Resolution

The special resolution must be filed with the ROC in Form MGT-14 within 30 days. Many companies pass the resolution but forget to file MGT-14, which creates a compliance gap that surfaces during audits and due diligence.

Error 2: Utilising Money Before PAS-3 Is Filed

Section 42(7) explicitly prohibits utilisation of application money until allotment is made and PAS-3 is filed. Maintain the money in a separate bank account and release it only after ROC acknowledgement of PAS-3.

Error 3: Accepting Third-Party Payments

The subscription money must come from the subscriber’s own bank account. We have seen cases where a promoter pays on behalf of another allottee — this is a direct violation of Section 42(6) and can void the allotment.

Error 4: Exceeding the 60-Day Allotment Window

If allotment is not made within 60 days of receipt of money, the company must refund with 12% interest. This is a strict deadline — plan the allotment Board meeting well within the 60-day window.

Error 5: Sending Offer Letters Without Board Identification

The Board must identify and record the names of proposed allottees before the offer letter is sent. Sending PAS-4 to persons not identified by the Board invalidates the offer.

For secretarial compliance support, visit our company secretary services guide or contact us for a free consultation.

Private Placement for Startups: Practical Considerations

For startups registered under the Startup India initiative, private placement is the most common route for raising equity capital from angel investors, venture capital funds, and private equity funds. Key considerations include:

• Valuation: Investors require a credible valuation report. A DCF or market-comparable valuation from an IBBI-registered valuer strengthens the company’s negotiating position and satisfies regulatory requirements.
• Shareholders’ Agreement: The terms agreed in the SHA (anti-dilution, liquidation preference, drag/tag rights) must be reflected in the special resolution and offer letter.
• FEMA compliance: If the investor is a non-resident (foreign VC fund, NRI angel), FEMA pricing norms apply. The company must file FC-GPR with the RBI within 30 days.
• Convertible instruments: Compulsorily convertible preference shares (CCPS) and compulsorily convertible debentures (CCDs) are common structures. The conversion terms must be specified upfront in the offer letter.

For private limited company registration and post-incorporation compliance including share issuance, Virtual Auditor provides end-to-end support. For governance frameworks, see our corporate governance checklist for Series A startups.

Our Private Placement Services at Virtual Auditor

We handle the complete private placement lifecycle:

1. Structuring: Advise on the class of securities (equity, preference, debentures, convertible instruments) and pricing strategy
2. Valuation: CA V. Viswanathan (IBBI/RV/03/2019/12333) provides FEMA-compliant and Income Tax-compliant valuation reports
3. Documentation: Draft the Board resolution, special resolution, explanatory statement, and Form PAS-4 offer letter
4. Filing: File MGT-14 (special resolution), PAS-4 (offer letter record), and PAS-3 (return of allotment) on the MCA portal
5. Post-allotment: Issue share certificates, update the Register of Members, and file FC-GPR (for non-resident allotments)
6. Compliance monitoring: Track the 60-day allotment deadline and 15-day PAS-3 filing deadline

View our pricing or contact us for a consultation.

Frequently Asked Questions

What is private placement under Section 42?

Private placement under Section 42 is a method of issuing securities (equity shares, preference shares, or debentures) to a select group of identified persons through a private placement offer letter in Form PAS-4. The offer cannot be made to more than 200 persons in a financial year (excluding QIBs and ESOP employees). It requires a special resolution and compliance with Rule 14.

What is the maximum number of persons to whom an offer can be made?

Under Section 42(2), the offer can be made to not more than 200 persons in aggregate in a financial year. This excludes QIBs and ESOP employees. If the limit is exceeded, the offer is deemed a public offer and must comply with SEBI regulations for public issues.

What is Form PAS-4 and when must it be filed?

Form PAS-4 is the prescribed private placement offer letter issued to identified persons before accepting subscription money. A record of the offer must be filed with the ROC within 30 days of circulation. PAS-4 must contain disclosures about the company’s financials, securities offered, pricing basis, and risk factors.

What is Form PAS-3 and what is the filing deadline?

Form PAS-3 is the return of allotment filed with the ROC within 15 days of allotment. The company cannot utilise the application money until allotment is made and PAS-3 is filed. PAS-3 includes details of allottees, securities allotted, and consideration received.

Can private placement money be received in cash?

No. Under Section 42(6), payment must be made through banking channels from the subscriber’s own bank account. Cheque, demand draft, RTGS, NEFT, and other electronic banking modes are permitted. Cash payments are strictly prohibited.

What happens if the company fails to allot within 60 days?

The company must repay the application money within 15 days from the expiry of the 60-day period. If it fails to repay, interest at 12% per annum accrues from the expiry of the 60th day. Directors who are officers in default are personally liable.

Is a valuation report required for private placement?

While Section 42 does not explicitly mandate a valuation report, pricing justification is required under Rule 14(2). For shares issued to non-residents, FEMA regulations require fair market value determination by an IBBI-registered valuer or SEBI-registered merchant banker. A valuation report from CA V. Viswanathan (IBBI/RV/03/2019/12333) provides robust pricing documentation for regulatory compliance.

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