Citizens' Issues
Fallout of the Sahara case: Companies Bill, 2012 too strict on private placement provisions

The new Companies Act will ensure that innocent investors will not be cheated the way they were by. However, the provisions are severe and small companies will face unnecessary problems in raising funds through group companies or other family members and relatives

Companies raise funds for working capital, capital expenditure, and general corporate purposes by issuing securities. Securities do not necessarily mean shares—it may be bonds, debentures, preference shares, and convertibles. Companies raise such funds by issuing securities either by way of public offers or through private placements. Public offers are few and far between. This option is available only to listed companies, and given the level of preparation involved, companies cannot afford to go public every now and then. Hence, the most common way of raising capital by companies is through private placements, which is the issue of securities other than public or rights offers. All offers of securities by private companies are private placements.

The Sahara case[1] highlighted abuse of this provision—some Rs20,000-plus crores were raised from a few million investors. But it was still termed private placement. In response, the Companies Bill, 2012, passed by the Lok Sabha on 18 December 2012 and Rajya Sabha on 20 December, has tightened the provisions pertaining to private placements. But the rules are now so stringent that it may choke companies’ attempts to flexibly raise capital.

What adds to the rigours of the section is that that section is applicable to all securities—debt and equity, and to all companies, public and private.

‘Private Placement’ under the Companies Act, 2012


Part II of Chapter III of the Companies Bill 2012 (on notification, Bill to be called Companies Act, 2012) deals exclusively with private placements. The process of private placements has greatly tightened under the Act. Every offer of securities other than public, rights or bonus offer amounts to a private placement and shall be governed by the Section 42. The Section also requires issue of private placement offer letters for every privately placed offer of securities.

Explanation II (ii) to sub section (2) of section 42 of the Act defines “private placement” as:

Private Placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section.

In terms of Section 42(2) of the Act, a company can make allotment of securities to a maximum of 49 persons in a private placement offer during a financial year. Whiles counting the maximum limit of allottees, qualified institutional buyers (QIBs) and employees who have been issued securities under ESOP may be excluded.

Deemed public offers

Section 42(4) of the Act makes it very clear that all offers or invitations which do not comply with the provisions of the Section 42 shall be deemed public offers. The explanation to sub-section (2) of the said section also clarifies that any offer to more than 49 persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, shall be deemed to be a public offer and shall be regulated by the provisions of the Act as prescribed for a public offer. In addition, compliance with applicable provisions SCRA and SEBI will also be required.

It is important to note here that no exception has been provided to any class of companies, including the NBFCs (non-banking finance companies). However, the limit of 50 subscribers can be extended as and when so deemed fit by the central government. Unless specified, NBFCs and other small private companies will be facing big time as the section covers all companies, whether small or big, private or public.


The provisions on the private placements are applicable to all companies, including small and private companies. This is evident from the language of Section 23 (2) which specifically burdens private companies with compliance of Section 42 in case of private placement offers.


It is important to note here that the Act has relaxed certain provisions for “small companies”[2]; however, no such exemption has been provided to even small companies for making allotments through private placements.

Extremely stringent provisions—thanks to Sahara ruling

The effect of the Sahara ruling is apparent from the extremely stringent provisions of Section 42 of the Act prescribed for private placements by ALL companies. The compliances/procedure for a privately placed offer is explained below:

  • Every private placement is to be made by way of an offer letter [Section 42 (1)]


  • The company has to prove that the company had the names of the each of the recipients of the offer and the offer will be addressed by name of such subscribers [Section 42(7)]


  • Offer can be made only to 49 persons in a financial year [Section 42(2)]


  • Unlike the existing Companies Act, 1956, under which the private companies’ members are restricted to 50, private companies under the Act can have members up to 200 and under private placement, in a year, a company (including private company) can make allotment to a maximum of 49 people.


  • No further offer or invitation of securities can be made by the company unless securities under previous offer have been fully allotted or offer has been withdrawn or abandoned by the company [Section 42[3)]


  • This mean if there are unallotted applications out of the past issues, one cannot invite further applications from the subscribers unless the offer has been withdrawn or abandoned by the company.


  • One of the rigorous conditions prescribed is that the application money cannot be received in cash. Cheque, demand draft or banking channels is the only way for issue of securities even under privately placed offers. [Section 42(5)]


  • All securities under private placement are to be allotted within a period of 60 days from the receipt of application money. If the securities are not allotted within the specified period, the application money is to be refunded within a period of 15 days from completion of 60 days’ time. [Section 42(6)]


  • Like public offers, interest penalty has been prescribed if the application money is not refunded within the said period of 15 days. The companies shall be liable to pay interest at 12% per annum from the 16th day along with the application money.


  • The entire amount raised by the issue of offer or invitation will need to be parked in a separate bank account and cannot be used until allotted. [Proviso to section 42(6)]


  • Additional compliances for every private placement offers is that:


  • The particulars of every private offer shall be filed with the Registrar within 30 days of circulation of offer letter. [Section 42(7)]


  • The companies offering or inviting subscriptions under private placement cannot advertise or utilise any marketing media. [Section 42(8)]


  • Return of allotment is required to be filed with the Registrar. [Section 42(9)]


  • Important to note that the time for filing such return has not been prescribed. In the existing Companies Act, 1956, the time limit for filing return of allotment is 30 days from the date of allotment.


The authority to approve the private placements—whether is to be approved by board or the members—has not been specified in the Section. However, adding to other harsh and rigorous provisions on private placements, the Section has prescribed severe monetary penalties for promoters and directors of companies making default in compliance with the prescribed provisions. Section 42(10) lays down the penalty as amount involved in the offer or Rs2 crore—whichever is higher—and, in addition, the company shall also be liable to refund whole monies to the subscribers so raised under the relevant privately placed offer.

Last December, the finance ministry issued Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011 (the Rules) and made the preferential allotment rules as applicable to public companies more stringent. The private placement provisions as contained in the Act appear to have been prepared incorporating the provisions of the Rules. The difference between the two is that the Rules are applicable to public companies only and the provisions of the Act on private placement will apply to all companies. The other point of difference is that the Rules require consent of members by way of special resolution for making preferential allotments whereas the Act is silent on such authority approving the private offers. Once the Act comes into force, one will have to wait and watch that whether the Rules will be repealed or the public companies will be required to comply with both the Act as well as the Rules.

[1] The whole text of ruling is available at

[2] Small companies has been defined in section 2(85) as companies other than public companies having:

  1. Paid up share capital of less than Rs50 lakh or such amount not exceeding Rs5 crore; or
  2. Turnover as per last profit and loss account does not exceed Rs2 crores or such higher amount not exceeding Rs20 crores




Vikas Gupta

5 years ago

Sahara is the most corrupt Organisation. SEBI is already not Investor Friendly at all. SEBI is advertising SCORES on Tv but that is only to get bribes from the Corporates from the Complaints received.

nagesh kini

5 years ago

A simple case of locking the stable after the horse has run away!
The intent of law doesn't matter. Any complaint to SEBI will only go on to the staggering 28lakh pending disposal.
Sahara is only buying time by coming to SEBI with truck loads of dud papers and full page unsigned ads and no audited numbers. So much for implementations of the provisions of laws!

nagesh kini

5 years ago

A simple case of locking the stable after the horse has run away!
The intent of law doesn't matter. Any complaint to SEBI will only go on to the staggering 28lakh pending disposal.
Sahara is only buying time by coming to SEBI with truck loads of dud papers and full page unsigned ads and no audited numbers. So much for implementations of the provisions of laws!

CWG fraud: Kalmadi to face trial for 'misusing office and cheating'

Besides cheating and conspiracy, Kalmadi and gang will also be charged with the offences of forgery under the IPC and criminal misconduct by public servants under the Prevention of Corruption Act

New Delhi: Sacked chief of Commonwealth Games (CWG) Organising Committee Suresh Kalmadi will face trial for allegedly abusing his office and causing loss of over Rs90 crore to exchequer in a games-related graft case before a Delhi court which ordered today framing of cheating and conspiracy charges against him, reports PTI.

Special CBI Judge Talwant Singh fixed 10th January for framing of charges against Kalmadi and nine others.

Besides cheating and conspiracy, they will also be charged with the offences of forgery under the Indian Penal Code and criminal misconduct by public servants under the Prevention of Corruption Act.

"Charges under section 120B (criminal conspiracy), read with 201 (destruction of evidence), 420 (cheating), 467, 468, 471 (relating to forgery), 506 (criminal intimidation) of the IPC and section 13(1)(d) read with section 13(2) (criminal misconduct by public servants) of the PC Act is ordered to be framed against all the accused," the court said.

The judge, however, said since accused Swiss firm, Swiss Timing Omega, which was allegedly awarded the contract at exorbitant rates, is not appearing in the court despite proper service of summons, its "trial is separated."

"Investigating Officer is directed to file a copy of charge sheet separately against accused number 11 (Swiss Timing Omega)," the court said.

The accused have been charge sheeted by the CBI for "illegally" awarding a contract to install Timing, Scoring and Results (TSR) system for the 2010 CWG to Swiss Timing at an inflated rates causing a loss of over Rs90 crore to the public exchequer.

Besides Kalmadi and Bhanot, the other accused in the case are OC's Director General VK Verma, Director General (Procurement) Surjit Lal, Joint Director General (Sports) ASV Prasad and Treasurer M Jayachandran. They are no more associated with the sporting body.


HC asks Maharashtra to fill up vacancies in consumer redressal forums

Out of 40 consumer district forums across Maharashtra, 19 are dysfunctional due to vacant posts of presidents and members, the Mumbai Grahak Panchayat said in its PIL

Mumbai: Irked with the lackadaisical attitude of Maharashtra government regarding vacancies in consumer redressal forums across the state, the Bombay High Court on Friday directed it to complete the selection process of candidates for the vacant posts by 31 January 2013, reports PTI.


A division bench of acting Chief Justice DD Sinha and Justice KK Tated was hearing a public interest litigation (PIL) filed by NGO Mumbai Grahak Panchayat which stated that out of 40 consumer district forums across Maharashtra, 19 are dysfunctional due to vacant posts of presidents and members.


The bench, which has been directing the government since May this year to fill up these vacancies, was irked with the State Consumer Redressal Commission registrar's affidavit seeking extension of time to fill up vacancies.


According to the affidavit, out of 40 posts for presidents of district forums across the state, 34 are lying vacant and the total number of vacancies in the posts for non- judicial members is 55.


The affidavit stated that interviews have already been held for filling up of the posts of presidents.


The bench then directed the government to complete the selection process of vacant posts by 31 January 2013 and issue appointment orders within three weeks thereafter.


The court also said that henceforth, when a person retires, the state government should issue advertisements to fill up the post three months in advance.


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