How a private placement actually works
Section 42 of the Companies Act, 2013, explained by the people who file the forms.
Almost every private company in India that raises outside money does it through a private placement. It is a well-worn route with clear rules. The trouble is that the rules are unforgiving in places people do not expect, and the consequences of getting them wrong land on the company raising the money rather than on whoever introduced the investor.
What a private placement is
It is an offer of securities to a selected group of identified people, rather than to the public. That word — identified — is doing an enormous amount of work. The offer goes to named individuals. It is not put on a website, not posted to a WhatsApp group, and not advertised.
The alternative is a public issue, which drags in the whole SEBI apparatus: a prospectus, merchant bankers, listing requirements. For a business in a district town wanting to raise fifty lakh, that is not a realistic route. Private placement exists precisely so it does not have to be.
The 200-person cap
You may offer securities to a maximum of 200 people per financial year, per class of security. Qualified institutional buyers and employees receiving shares under an ESOP scheme sit outside the count.
Three things people routinely get wrong here:
- It counts offers, not acceptances. If you sent an offer to 220 people and only 40 subscribed, you have still breached it.
- It resets each financial year, but per class. Equity shares and preference shares are counted separately.
- It is the company's cap, not the platform's. If a company raised from investors last year through someone else, those count too. Ask.
The paperwork, in order
- Board resolution approving the offer.
- Shareholder special resolution. For equity shares this is generally required before the offer.
- PAS-4 — the private placement offer cum application letter, addressed to a specific named person. This naming is what makes the offer private.
- PAS-5 — the record of the people the offer went to.
- Money into a separate bank account of the company. Not the promoter's account, not an intermediary's, not cash.
- Allotment within 60 days of receiving the money. Miss it and the money must be refunded within 15 days, with interest after that.
- PAS-3, the return of allotment, filed within 15 days of allotment.
The single most common failure we expect to see is not any of these forms. It is money reaching a promoter's personal account because it was convenient at the time. That one shortcut is very hard to unwind afterwards.
What makes it go wrong
Advertising it
A private placement must not be advertised to the public. Publishing the terms on a website, running an ad, or forwarding a deal sheet into open WhatsApp groups can convert the raise into a deemed public issue. The company then faces consequences it never contemplated. This is precisely why serious platforms keep opportunities behind a login — it is not exclusivity for its own sake.
Using an intermediary's bank account
Subscription money must go to the company's own separate account. A platform that pools investor money in its own account has created deposit-taking and payment-intermediary exposure for itself, and has muddied the company's compliance position too.
Renegotiating after money arrives
Once money is received against a PAS-4 the terms are fixed. Changing them afterwards means refunding and starting again.
Losing count
The 200-person figure needs to be tracked as a live number across the whole financial year, including offers that came to nothing. This should be a system that blocks, not a spreadsheet someone remembers to update.
What it costs
Board and shareholder meetings, a company secretary for the resolutions and filings, a valuation report where required, legal review of the offer documents, and MCA filing fees. For a straightforward raise in a smaller company these are modest against the amount raised — but they are not zero, and they are not optional.
If you take one thing away
Private placement is a normal, well-established route. It is not a loophole and it does not need to feel risky. What it does need is that the steps happen in order, the money lands in the right account, and nobody advertises it. Those three things prevent almost every serious problem.
Where to go next. If you are thinking about raising, the funding readiness scorecard shows whether your file would survive diligence, and the dilution calculator shows what a raise costs you in ownership.
General explanation, not advice on your situation. Rules change and facts differ. Take professional advice before acting.