Private Placement of Shares in India: A Complete Guide for Startups and Founders

Key takeaways

Private placement is a method of raising capital by offering securities to a select group of identified persons, without making a public offer. Section 42 of the Companies Act, 2013 governs it for all companies.
Securities can only be offered to persons identified by the board. The offer cannot reach anyone outside that list, and the offer doesn't carry the right of renunciation.
The offer cannot be made to more than 200 persons per class of security per financial year. QIBs and ESOP recipients are excluded from this count.
Subscription money cannot be used until allotment is complete and Form PAS-3 is filed with the RoC. Allotment must happen within 60 days of receiving application money.
When foreign investors participate, FEMA and the FEM (NDI) Rules, 2019 apply in parallel. Form FC-GPR must be filed with the RBI within 30 days of allotment. This is a separate obligation from the Companies Act process and has independent penalties under Section 13 of FEMA.

What is private placement of shares?

Private placement is a method of raising capital by offering securities to a select group of identified persons, without making a public offer.

Section 42 of the Companies Act, 2013 defines it as any offer or invitation to subscribe to securities made to a select group of persons by a company, other than by way of a public offer, through a private placement offer-cum-application letter, subject to the conditions specified in that section.

A few things worth noting about scope:

Section 42 applies to both private limited and public limited companies
It covers a wide range of instruments: equity shares, preference shares, compulsorily convertible preference shares (CCPS), compulsorily convertible debentures (CCDs), non-convertible debentures (NCDs), and warrants
It does not apply to rights issues, ESOP grants, or bonus shares. Each of those is governed by separate provisions of the Companies Act, 2013

Disclosures required in the shareholder notice for a private placement

Before the company passes a special resolution for a private placement, the notice sent to shareholders must be accompanied by an explanatory statement that gives them enough information to make an informed decision before they vote.

Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes exactly what this explanatory statement must cover six things:

The particulars of the offer, including the date on which the board resolution approving the issue was passed
The the type of security (equity shares, CCPS, CCDs, NCDs, or warrants) and the price at which each is being offered
The basis for the price: the justification for arriving at that price, including the premium being charged if any. This is where the valuation report feeds in — the price cannot simply be stated without showing how it was derived
The valuer's details: the name and address of the Registered Valuer who conducted the valuation
The amount the company intends to raise: the total amount being raised through the issue
The material terms of the offering: this includes the proposed timeline for completing the issue, the purpose for which the funds are being raised, whether the promoters or directors are contributing funds as part of or alongside the offer, and the principal terms of any assets being charged as security

Key features of a private placement under Indian law

Private placement has specific characteristics that define what it is, why founders prefer it, and what compliance obligation each feature carries.

Securities are offered only to persons identified by the board

A private placement can only be made to a select group of persons who have been identified by the board. These are called "identified persons." Their names and addresses must be recorded by the company before the offer goes out. The offer cannot reach anyone outside this list.

The private placement offer and application issued to identified persons carries no right of renunciation. An identified person cannot transfer or assign their right to subscribe to someone else.

No public advertising or marketing of the issue

The company can't make any public advertisements or use any media, marketing, or distribution channels or agents to inform the public about the issue.

The identified persons limit is capped at 200

Under Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the number of identified persons shall not exceed 200 per financial year, per class of security.

Two categories sit outside this count entirely:

Qualified Institutional Buyers (QIBs), as defined under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Employees of the company being offered securities under an ESOP scheme in terms of Section 62(1)(b) of the Companies Act, 2013.

The limit applies separately for each class of security. A company may offer equity shares to 200 persons and NCDs to another 200 persons in the same financial year without breaching the cap.

Subscription money must be paid through banking channels only

Every identified person applying to a private placement must pay subscription money by cheque, demand draft, or other banking channel. Cash payments are explicitly prohibited.

Subscription money cannot be used until allotment is made and PAS-3 is filed

Under Section 42(6) of the Companies Act, 2013, the company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar. Founders who plan to deploy capital immediately after receiving funds need to account for this timeline. Section 42(9A)/(10) prescribes Rs. 1,000 per day up to Rs. 25 lakh for failure to file PAS-3 on time.

No fresh offer until certain conditions are met

The company can’t make a new private placement offer unless allotments from any earlier offer have been completed, or that earlier offer has been withdrawn or abandoned.

60-day allotment period

The company must allot securities within 60 days from the date of receipt of application money. If it fails to do so, it must refund the money within 15 days from the end of that 60-day period. Failure to refund within those 15 days makes the company liable to repay the full amount with interest at 12% per annum from the 60th day.

Subscription money must be held in a separate scheduled bank account

All monies received through a private placement must be kept in a separate bank account in a scheduled bank. That account can only be used for two purposes: adjusting the amount against allotment of securities, or refunding the money if allotment cannot be made.

Return of allotment must be filed within 15 days

After allotment, the company must file a return of allotment with the Registrar within 15 days from the date of allotment. The filing must include a complete list of all allottees with their full names, addresses, number of securities allotted, and such other relevant information as prescribed.

Documents required for private placement

The table below consolidates every document, form, and statutory filing required at each stage of a private placement under the Companies Act, 2013. Statutory references are to the Companies Act, 2013 and the Companies (Prospectus and Allotment of Securities) Rules, 2014, as amended up to the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018.

S. no.	Document / Form	Legal reference	Purpose & notes
A. Pre-offer stage
1	Board resolution	Section 179(3)(c)	Approve private placement proposal, valuation report, draft PAS-4, and notice of GM
2	Valuation report	Rule 14(1), Section 247	From IBBI-registered valuer; justifies offer price. Must be dated before the Board meeting. For FEMA cases: not older than 90 days from allotment date
3	Notice of general meeting with explanatory statement	Section 101	Must disclose: kind of securities, price and its basis, valuer details, amount to be raised, material terms, promoter contribution
4	Special resolution	Section 42(2)	Separate resolution required for each offer or invitation; not required for NCDs within Section 180(1)(c) limits
5	Form MGT-14 (Board Resolution)	Section 179(3)(c), Section 117	File with ROC within 30 days of passing Board Resolution
6	Form MGT-14 (Special Resolution)	Section 42(2), Section 117	File with ROC within 30 days of passing the Special Resolution in General Meeting
B. Offer & subscription stage
7	Separate bank account	Section 42(6)	Open in a Scheduled Bank before making any offer; all subscription money deposited here
8	Private placement offer letter (Form PAS-4)	Rule 14(3)	Serially numbered, addressed to each identified person; issued only after MGT-14 filings; sent within 30 days of recording names
9	Record of private placement offers (Form PAS-5)	Rule 14(4)	Maintain complete record of all offers; to be maintained internally (post-2018 amendment, filing with ROC no longer mandatory)
10	Application forms (from Investors)	Section 42(3)	Subscription via cheque, DD, or banking channels only (no cash).
C. Post-allotment stage
11	Return of allotment (Form PAS-3)	Section 42(8), Rule 14(4)	File with ROC within 15 days of allotment; company cannot utilise funds until PAS-3 is filed.
12	Share certificates / demat credit	Section 46, Section 56	Issue within 2 months of allotment (physical) or credit to demat account
13	Register of members (Form MGT-1)	Section 88	Update within 7 days of allotment with details of new allottees
14	Statutory Registers Update	Section 88, Section 42	Update Register of Members (MGT-1) or Register of Debenture Holders (MGT-2), as applicable

Step-by-step private placement process

Step 1: List the identified persons and obtain a valuation report

The board must formally identify the persons to whom the offer will be made and record their names. This must happen before the offer letter is issued.

Simultaneously, the company must obtain a valuation report from a registered valuer. The valuation report must be in hand before the board resolution is passed. It cannot be obtained retroactively. The valuation report establishes the issue price.

Step 2: Pass the board resolution and the shareholder special resolution

Once the valuation report is ready, the board passes a resolution approving the list of identified persons, the draft offer letter (PAS-4), the issue price, and the class of security being offered.

The company then calls a general meeting and obtains shareholder approval through a special resolution. A special resolution requires at least 75% of votes cast to be in favour.

Form MGT-14 must be filed with the Registrar of Companies (RoC) within 30 days of the general meeting.

Step 3: Issue the private placement offer letter (Form PAS-4)

PAS-4 is the private placement offer-cum-application letter. It must be issued to the identified persons within 30 days of recording their names in the board resolution.

PAS-4 must be addressed to each specific named person. Applications received from anyone not named in PAS-4 are invalid.

A complete record of all private placement offers must be maintained by the company in Form PAS-5.

Step 4: Receive subscription money and complete allotment

Subscription money must be received only from the identified person's own bank account, and only into the company's dedicated private placement account. Third-party payments are not permitted.

Allotment must be completed within 60 days of receiving application money. If allotment is not completed within 60 days, the money must be refunded within the next 15 days. A failure to refund within that 15-day window attracts interest at 12% per annum from the 60th day.

Step 5: File Form PAS-3 and issue share certificates

Form PAS-3 is the return of allotment. It must be filed with the RoC within 15 days of the date of allotment. Note that this is shorter than the 30-day window that applies to other types of allotments.

PAS-3 must include a complete list of all allottees with their full name, address, PAN, email ID, class of security, date of allotment, number of securities, nominal value, amount paid, and particulars of consideration if the securities were issued for non-cash consideration.

Subscription funds can only be transferred from the dedicated account to the company's operating account after PAS-3 is filed. Share certificates must be issued within 2 months of the date of allotment.

Private placement vs. preferential allotment vs. rights issue

Private placement, preferential allotment, and rights issue are three distinct share issuance routes under the Companies Act, 2013.

Private placement is an offer of any securities to a select group of identified persons, other than by way of public offer.
Preferential allotment is the issuance of shares or equity-convertible securities to select persons on a preferential basis. It is limited to equity shares and instruments convertible into equity.
Rights issue is an offer made to existing shareholders only, in proportion to their current holding.

	Private placement (Section 42)	Preferential allotment (Section 62(1)(c))	Rights issue (Section 62(1)(a))
Who can receive securities	Any identified person	Any identified person	Existing shareholders only
Instruments that can be issued	All securities including NCDs	Equity and equity-convertible securities only	Equity and equity-convertible securities only
Valuation report required	Yes	Yes	No
Special resolution required	Yes	Yes	No. Board resolution required
New investors allowed	Yes	Yes	Indirectly allowed via renunciation (or REs in listed companies)

Additional compliance when foreign investors participate in a private placement

When a person resident outside India subscribes to a private placement, two regulatory frameworks operate simultaneously. The Companies Act, 2013 governs the issuance of securities. FEMA governs the receipt and reporting of the foreign investment. Both must be complied with independently.

Permitted instruments for FDI in a private placement

Under the FEM (NDI) Rules, 2019, foreign investment must be made through equity instruments: equity shares, CCPS, CCDs, or convertible notes. Convertible notes are exclusively available to startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). They require a minimum investment of Rs. 25 lakh in a single tranche, and must be converted into equity within five years.

Pricing for all share issuances to foreign residents must comply with the valuation norms under the FEM (NDI) Rules, 2019.

Form FC-GPR: the mandatory post-allotment RBI filing

After allotting equity instruments to a person resident outside India, the Indian company must file Form FC-GPR with the RBI through the FIRMS portal within 30 days of the date of allotment.

The documents required for FC-GPR filing are:

Foreign Inward Remittance Certificate (FIRC) from the Authorised Dealer (AD) bank
KYC report of the foreign investor in RBI's prescribed format
Valuation certificate from a SEBI-registered merchant banker or practising Chartered Accountant.
Board resolution approving the allotment
Company Secretary certificate confirming compliance with both the Companies Act and FEMA
Shareholding pattern before and after the issue

Late filing attracts a Late Submission Fee (LSF). If the delay exceeds 3 years from the due date, a compounding application must be made to the RBI.

Annual FLA return

Every Indian company that has received foreign investment must file a Foreign Liabilities and Assets (FLA) return with the RBI annually by July 15, reporting the total foreign investment position as of March 31 of that year.

Penalties for non-compliance with private placement rules

The consequences of non-compliance with Section 42 extend well beyond a financial penalty. A procedurally defective private placement can be reclassified as a public offer, exposing the company, its promoters, and its directors to SEBI enforcement and full repayment obligations.

Deemed public offer under Section 42(11)

Any private placement that does not comply with the conditions of Section 42(2) is deemed to be a public offer. When this happens, the provisions of the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992 apply to the issue automatically.

Financial penalty

The company, its promoters, and its directors are jointly liable for a penalty that may extend to the amount raised through the non-compliant placement or Rs. 2 crore, whichever is lower.

Repayment obligation

Refund must be made within 30 days of the penalty order; if not, interest at 12% per annum applies from the expiry of that period.

FEMA penalties under Section 13

For contraventions involving foreign investors, penalties under Section 13 of FEMA can reach up to three times the amount involved in the contravention. For continuing contraventions, an additional Rs. 5,000 per day applies.

Closing thoughts

Private placement is the route through which most Indian startups raise capital at every stage. The valuation report, the special resolution, the dedicated bank account, the PAS-3 filing: each of these must happen in a specific order and on a specific timeline.

For founders raising from foreign investors, Section 42 and FEMA run as two parallel tracks. Completing one does not satisfy the other. Building both into your fundraising timeline from the start is what keeps a round clean from term sheet to allotment.

FAQs for private placement of shares

Is the private placement limit 50 or 200?

Section 42(2) of the Companies Act, 2013 states that the number of identified persons shall not exceed 50 or such higher number as may be prescribed. Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes that higher number as 200 persons per class of security per financial year.

Is a valuation report mandatory for private placement?

Yes. A valuation report from an IBBI-registered valuer is mandatory for any private placement of securities. The report is required both for determining the price at which securities are issued and for valuing the consideration when securities are issued for consideration other than cash.