Raising Funds by Private Placement: PAS-4 and PAS-3

Short answer: Private placement is a method for companies to raise capital by issuing securities to a select group of up to 200 "identified persons" in a financial year, without a public offering. Governed by Section 42 of the Companies Act, 2013, the process requires issuing a Private Placement Offer Letter in Form PAS-4 and filing a Return of Allotment with the Registrar of Companies (RoC) in Form PAS-3 within 15 days of allotting the shares.

What is a Private Placement under Section 42?

A private placement is an offer or invitation to subscribe to a company's securities made to a pre-selected group of individuals or institutions, known as "identified persons." This method is distinct from a public offer, as it is not advertised to the general public. Section 42 of the Companies Act, 2013, and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, govern this process. The offer can be made to a maximum of 200 persons in aggregate in a financial year, excluding Qualified Institutional Buyers (QIBs) and employees receiving shares under an Employee Stock Option Plan (ESOP).

What is the step-by-step process for a private placement?

The process is stringent and requires strict adherence to timelines prescribed under the Companies Act, 2013.

1. Board Meeting: Convene a Board Meeting to identify the persons to whom the offer will be made, approve the draft Private Placement Offer Letter (Form PAS-4), and fix the date for an Extraordinary General Meeting (EGM) to seek shareholder approval.
2. Valuation Report: Obtain a valuation report from a Registered Valuer to justify the price at which securities are being offered.
3. Shareholder Approval (EGM): Hold the EGM and pass a Special Resolution to approve the private placement. This resolution is valid for 12 months.
4. File Form MGT-14: File the Special Resolution with the RoC within 30 days of passing it, using e-form MGT-14.
5. Issue Offer Letter (PAS-4): Circulate the Private Placement Offer Letter in Form PAS-4 to the identified persons within 30 days of recording their names. The offer must be sent either in writing or in electronic mode.
6. Open Separate Bank Account: Open a separate bank account in a scheduled bank to receive the application money.
7. Receive Application Money: The identified persons will remit the application money into this separate bank account. The payment must be made through banking channels (cheque, demand draft, or other electronic means) from the bank account of the person subscribing to the securities. Cash is not permitted.
8. Allotment of Securities: Convene another Board Meeting to allot the securities within 60 days of receiving the application money.
9. File Form PAS-3: File the Return of Allotment in e-form PAS-3 with the RoC within 15 days of the allotment. This form must include a complete list of all allottees.
10. Issue Share Certificates: Issue share certificates to the allottees within two months from the date of allotment.

What is Form PAS-4 (Private Placement Offer Letter)?

Form PAS-4 is the mandatory format for a Private Placement Offer-cum-Application Letter.

This is the core document that provides the investor with all necessary information to make an informed decision. It is not a public prospectus but a confidential offer. It must be numbered and addressed specifically to the identified person, containing details such as:

• Company Information (Name, address, business objects).
• Details of the offer, including the price per security and the basis of the price (with the valuation report attached).
• Objects of the issue and proposed use of funds.
• Particulars of any outstanding borrowings.
• Management's perception of risk factors.
• Financial position of the company.

This form ensures transparency between the company and the potential investor.

What is Form PAS-3 (Return of Allotment)?

Form PAS-3 is the e-form used to inform the Registrar of Companies (RoC) about the allotment of securities.

After the company's board approves the allotment of shares, it has a legal obligation to report this to the RoC. This is done by filing Form PAS-3 within 15 days from the date of the board resolution for allotment. Key attachments for Form PAS-3 include:

• A list of allottees, specifying their names, addresses, number of securities allotted, and the amount paid.
• The Board Resolution for allotment.
• The valuation report from the registered valuer.
• A copy of the contract or agreement, if securities are issued for consideration other than cash.

Failure to file PAS-3 on time can lead to significant penalties.

What are the key compliance requirements and restrictions?

Private placements are subject to strict rules to prevent misuse. Companies must adhere to the following checklist to ensure full compliance.

Compliance Checkpoint	Requirement	Governing Rule
Offer Limit	Maximum 200 identified persons in a single financial year.	Section 42(2)
No Public Advertisement	The company cannot release any public advertisements or use marketing agents.	Section 42(7)
Shareholder Approval	A Special Resolution must be passed by the shareholders.	Section 42(2)
Offer Letter	Offer must be made only through Form PAS-4.	Rule 14(3)
Payment Mode	Application money must be paid through the subscriber's bank account, not in cash.	Section 42(6)
Separate Bank Account	A separate bank account must be opened to receive the application money.	Section 42(6)
Allotment Timeline	Allotment must be completed within 60 days of receiving the application money.	Section 42(6)
Filing with RoC	Return of Allotment in Form PAS-3 must be filed within 15 days of allotment.	Section 42(8)
Record Keeping	A complete record of all private placements must be maintained in Form PAS-5.	Rule 14(4)
Use of Funds	Funds cannot be utilized until Form PAS-3 is filed with the RoC.	Section 42(6)

Worked example

Let's consider a scenario for a Bengaluru-based private limited company.

Company: InnovateAI Solutions Pvt. Ltd. a DPIIT-recognised startup in the AI space.

Goal: Raise ₹5 Crores for product development and market expansion.

Plan: Raise funds from 15 selected angel investors and one venture capital firm.

Step-by-Step Execution:

1. Board Meeting (1 Oct 2026): The Board of Directors identifies 16 investors, approves a draft PAS-4, and obtains a valuation report from a registered valuer pricing the equity shares at ₹2,500 per share. They resolve to call an EGM.

2. EGM (25 Oct 2026): Shareholders pass a Special Resolution approving the private placement of 20,000 equity shares at ₹2,500 each to raise ₹5 crores.

3. RoC Filing (5 Nov 2026): The company files Form MGT-14 with the RoC, attaching the Special Resolution.

4. Offer Dispatched (10 Nov 2026): The company sends the serially numbered PAS-4 offer letters to the 16 identified investors.

5. Funds Received (by 20 Dec 2026): All 16 investors accept the offer and transfer a total of ₹5 crores into the company's newly opened separate bank account.

6. Allotment (28 Dec 2026): The Board holds a meeting and passes a resolution to allot 20,000 equity shares to the investors. This is within the 60-day limit from receiving the funds.

7. RoC Filing (10 Jan 2027): The company's Chartered Accountant files Form PAS-3 with the RoC, attaching the list of allottees and the board resolution for allotment. This is within the 15-day filing deadline.

8. Share Certificates (by 27 Feb 2027): The company issues duly stamped share certificates to all 16 new shareholders within the 2-month timeline.

InnovateAI Solutions Pvt. Ltd. has successfully and compliantly raised its required capital.

Common mistakes

1. Failing to Pass a Special Resolution: A simple Board Resolution is insufficient. Shareholder approval via a Special Resolution is mandatory, and it must be filed with the RoC in Form MGT-14.
2. Exceeding the 200-Person Limit: Forgetting to count all offers made during the financial year can lead to a breach. The limit is on the number of persons to whom the offer is made, not just the final allottees.
3. Accepting Cash: The law strictly prohibits accepting cash for share applications. All money must come from the subscriber's bank account via banking channels.
4. Missing Filing Deadlines: The 15-day deadline for filing PAS-3 after allotment is critical. Delays attract heavy penalties.
5. Utilizing Funds Prematurely: The company cannot use the funds raised until the Return of Allotment (PAS-3) has been filed with the RoC.
6. Improper Record Keeping: Not maintaining a record of all private placement offers in the prescribed format (Form PAS-5) is a compliance failure.

How SP & SC helps

Navigating the complexities of a private placement requires meticulous attention to legal and procedural details. SP & SC Legal and Taxation Services provides end-to-end assistance for capital raising activities. We draft the necessary Board and Shareholder Resolutions, prepare the Private Placement Offer Letter (PAS-4) and valuation coordination, manage RoC filings including MGT-14 and PAS-3, and ensure all timelines are met. Our goal is to make your fundraising journey smooth and fully compliant. For comprehensive support with your company's regulatory obligations, see our annual filings compliance service.

Frequently asked questions

H3: Can a company make multiple private placements in a year?

Yes, a company can make more than one private placement in a financial year. However, the total number of persons to whom offers are made across all placements in that year cannot exceed the aggregate limit of 200.

H3: What happens if the company fails to allot shares in time?

If the company does not allot the securities within 60 days of receiving the application money, it must refund the entire amount to the subscribers within 15 days from the expiry of the 60-day period. If it fails to refund the money in this timeframe, it will be liable to repay that money with interest at the rate of 12% per annum from the expiry of the 75th day.

H3: Is a valuation report mandatory for private placement?

Yes, a valuation report from a valuer registered under the Companies Act is mandatory for a private placement of equity shares or convertible securities. This ensures the shares are issued at a fair market value, protecting the interests of both existing and new shareholders.

H3: Can the funds be used for any purpose?

No, the funds raised through private placement can only be utilized for the specific purposes stated in the Private Placement Offer Letter (Form PAS-4). Diverting funds for other purposes is a violation of the Act.

H3: What is the penalty for non-compliance with Section 42?

If a company makes an offer or accepts money in contravention of Section 42, the company, its promoters, and directors are liable for a penalty. The penalty may extend to the amount raised through the private placement or ₹2 crores, whichever is lower. Additionally, the company shall have to refund all monies to subscribers within 30 days of the order imposing the penalty.

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Raising capital is a critical step for any business. Ensure it is done right. Share your documents with us, and we will provide a written, fixed-fee quote for handling your private placement from start to finish. Contact SP & SC or WhatsApp us at +91 90356 74566 to get started.