Section 42 of the Companies Act, 2013

Published On: 14th March, 2024

Authored By: Aaditya Kumar
ICFAI Law School, Hyderabad


This article examines the private fundraising options available to businesses under Section 42 of the Companies Act. We will first discuss the importance of fundraising before revealing Section 42’s definition, its applicable parties, and its guidelines. We’ll go through the procedures involved in a private placement, including the paperwork and how businesses use the funds.

We’ll also examine current modifications, and practical applications, and cross-reference our standards with other legal frameworks. The paper concludes with a discussion of the difficulties ahead, potential solutions, and useful advice for businesses and regulators. Anyone looking for a clear understanding of Section 42 and how it affects corporate fundraising should find it to be an easy read.


The ability to raise finance becomes essential to a company’s survival and growth. Shares must be issued by companies limited by shares in order to raise the funds needed to run the business. As per section 23 of the Companies Act 2013, a company can issue securities by 3 means :

  1. To the public through a prospectus (public offer)
  2. Through private placement
  3. Through a right issue or a bonus issue.

In this article, we are going to have a brief discussion on Private Placement section 42 of the Companies Act 2013, which means how a company can raise capital by issuing securities to a limited number of people i.e. issue of shares on a private placement basis. It isn’t limited to private companies; Public companies can also issue private placement.

Private Placement

A private placement is a capital raising technique where a limited group of people are offered the opportunity to subscribe to securities. The Companies Act’s Section 42 grants corporations the authority to sell securities through private placements. “Any offer or invitation to subscribe for the securities or issue the same to a select group of people” is the definition of “private placement” as given in Explanation I to Subsection 3 of Section 42. We also refer to these particular groupings of people as “identified persons.”


The control that private placement gives companies over their investor base is one of its main benefits. Through the process of vetting potential investors, businesses can form strategic alliances that go beyond simple financial backing. Furthermore, private placements’ anonymity protects sensitive data, giving businesses a safe way to raise money without giving up important information to the general public. All things considered, private placement is a useful tool for businesses looking to strategically and effectively generate money while keeping control, flexibility, and secrecy over their financial activities.

Private Placement Offer – Cum Application:

A private placement company needs to submit a private placement offer and application in form PAS 4, serially numbered, and specifically addressed to the person to whom the offer is made. The offer and application must be sent to the person in writing or electronically, and they must arrive within 30 days of the person’s name being recorded. There will be no renunciation rights associated with the private placement offer or application.

Maximum Number Of Persons To Whom Offer Can Be Made

According to section 42(2) of the Companies Act 2013, a private placement can only be made to a limited group of people that the board has identified and cannot exceed 200. This group does not include qualified institutional buyers (QIBs) or company employees who are being offered securities under an Employee Stock Ownership Plan (ESOP).

Further sub-rule 7 provides that the provision of sub-rule 2 shall not be applicable to:

  1. Non-banking financial companies are registered with the Reserve Bank of India under the RBI Act, 1934; and
  2. Under the National Housing Bank Act of 1987, housing finance companies are registered with the National Housing Bank.

Application To Private Placement

According to section 42 (4) of the Companies Act 2013, Each person who has been identified as willing to subscribe to the private placement issue must apply for the private placement and submit an application along with the subscription money, which must be paid via check, demand draft or another banking channel rather than cash.

Stipulated that unless an allocation is made and the return of allotment is submitted with the Registrar in compliance with sub-section (8), a firm is not permitted to use funds raised through private placement.

Details Of The Identified Person Section 42 (3)

According to section 42 (3) of the Companies Act, A company engaging in private placement must send out offers and applications for private placement in the format and style that may be specified to individuals who have been identified and whose names and addresses are on file with the business in the format and style that may be specified.

As long as there is no renunciation right attached to the private placement offer or application.

The respondent company’s directors distributed shares through a private placement without adhering to the required protocol in the matter of Mrs. Proddaturi Malathi v. SRP Logistics Pvt. Ltd (2018). The National Company Law Appellate Tribunal ruled that the allotment of shares that followed the increase in share capital, as well as their validity, could be set aside.

Time Limit For Allotment And Payment of Interest/Refund of Subscription Money

Section 42 (6) of the Companies Act 2013, states that a company:

  • Allot the securities within 60 days from receipt of application
  • If not allotted then repay the application money within 15 days from the expiry of 60
  • If not repaid, liable to pay interest @12% p.a from the expiry of 60th

The National Company Law Appellate Tribunal addressed the issue of whether application money in the event of a non-allotment of shares would be regarded as “loan/debt” and fall under the purview of Section 5(8) of the Insolvency and Bankruptcy Code (IBC) in the case of Kushan Mitra vs. Amit Goyal (2021). According to the tribunal’s opinion, “application money falls within the ambit of ‘financial debt’ as defined under Section 5(8) ICB, 2016 and attracts interest under Section 42(6) of the act in the event of non-allotment of shares.” The tribunal has additionally decided that the individual in question would get payment for the time value of the funds that were provided to the business as application funds.

Subscription Money To Be Kept In A Separate Bank Account

Money received by the firm upon application must be maintained in a separate bank account at a scheduled bank and used exclusively for the following purposes, according to the proviso to section 42(6) of the Companies Act of 2013:

  • For adjustment against allotment of securities; or
  • For the repayment of money where the company is unable to allot

No Information To the Public About the Issue:

According to section 42 (7) of the Companies Act 2013, No company issuing securities under this provision may use any media, marketing, distribution, or agent channels, or public advertising, to educate the general public about such an issue.

Return of Allotment:

  1. Submitting a return of allotment (Form PAS-3) to the Registrar within 15 days of the date of allocation, along with the appropriate securities information and a comprehensive list of all
  2. Penalty for failing to file Form PAS-3: The firm, its directors, and promoters will be assessed a penalty of 1000 for each day that the default persists, up to a maximum of Rs. 25 lakhs.


In the event that a company violates the provisions of the Companies Act, it, along with its promoters and directors, may be subject to a penalty that could reach up to two crore rupees or the amount raised through private placement, whichever is lower. Additionally, the company must reimburse all subscribers for their money, including interest, within 30 days of the order imposing the penalty.

Conditions Applicable To Private Placement

  • A special resolution passed by the company’s shareholders must have previously approved the proposed securities offer. The price (including the premium) at which the offer or invitation is being made must be justified in the explanatory statement included in the notification of the special resolution for the general meeting.
  • If the company passes a preceding special resolution only once a year for all offers or invitations for non-convertible debentures made during the year, it will be adequate in the case of such an offer or invitation.
  • The company shall maintain a complete record of private placement offers in form PAS –
  • Filing with ROC:
    1. Form PAS – 3 within 15 days of
    2. Form MGT – 14 for filing with ROC Special Resolution/Board Resolution within 30 days.


A comprehensive process for private placement is outlined in Section 42, which covers everything from choosing the “identified person” to assigning securities to them. It also includes restrictions and requirements for private placement share issuance. Section 42 of the Act is supplemented by Rule 14 of the Companies (Prospectus and Allotment of Shares) Rules, as revised in 2022.

Furthermore, there are still some unanswered questions regarding private placement. For example, startups suffer most when investors impose their wills on the main company. All things considered, private placement presents fewer obstacles for the business when it comes to acquiring capital, and more and more organizations these days are choosing it over the public offering of stock. However, research is still needed to determine the reason behind the market’s extreme interest in private placement.


  2. Bare Act: The Companies Act, 2013
  3. Companies Act by Avtaar Singh

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