Chapter III - Prospectus and Allotment of Securities
Section 42
Section 42: how a company raises money through private placement
Section 42 lets a company offer securities to a select group of identified persons without a public issue, provided it follows the conditions on numbers, offer documents, payment, allotment, filing and publicity.
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This article is for general information. Refer to the Companies Act, 2013 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(1) A company may, subject to the provisions of this section, make a private placement of securities.
(2) A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed fifty or such higher number as may be prescribed [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be prescribed.
(3) A company making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed: Provided that the private placement offer and application shall not carry any right of renunciation. Explanation I.—“private placement” means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the conditions specified in this section. Explanation II.—“qualified institutional buyer” means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009, as amended from time to time, made under the Securities and Exchange Board of India Act, 1992. Explanation III.—If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of 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, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter.
(4) Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person alongwith subscription money paid either by cheque or demand draft or other banking channel and not by cash: Provided that a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub-section (8).
(5) No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company: Provided that, subject to the maximum number of identified persons under sub-section (2), a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.
(6) A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day: Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—(a) for adjustment against allotment of securities; or (b) for the repayment of monies where the company is unable to allot securities.
(7) No company issuing securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.
(8) A company making any allotment of securities under this section, shall file with the Registrar a return of allotment within fifteen days from the date of the allotment in such manner as may be prescribed, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.
(9) If a company defaults in filing the return of allotment within the period prescribed under sub-section (8), the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.
(10) Subject to sub-section (11), if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-section (6) to subscribers within a period of thirty days of the order imposing the penalty.
(11) Notwithstanding anything contained in sub-section (9) and sub-section (10), any private placement issue not made in compliance of the provisions of sub-section (2) shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be applicable.
Introduction
Private placement is the route most unlisted companies use to bring in investors. Section 42 sets the statutory conditions; the detailed procedure, forms and the prescribed number of persons are in rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
The current section was substituted by section 10 of the Companies (Amendment) Act, 2017 with effect from 7 August 2018 (S.O. 3921(E)). An offer that breaks the numerical limit in sub-section (2) is deemed a public offer under sub-section (11), bringing in the public-issue regime.
Key takeaways
Identified persons only
The Board identifies the offerees. Their number cannot exceed fifty or a higher prescribed number in a financial year, excluding qualified institutional buyers and employees under an ESOP scheme.
Money is ring-fenced
Subscription must come through banking channels, sit in a separate scheduled-bank account and cannot be used until allotment is made and the return of allotment is filed.
Strict timelines
Allot within 60 days of receiving application money; otherwise refund within 15 days after that, failing which interest at 12% a year runs from the expiry of the sixtieth day.
What counts as a private placement
Explanation I defines private placement as an offer or invitation to subscribe, or issue of securities, to a select group of persons by a company, other than by way of public offer, through a private placement offer-cum-application that satisfies the section’s conditions. It covers “securities”, which clause (81) of section 2 takes from the Securities Contracts (Regulation) Act, 1956, so it is not limited to equity shares despite the heading.
Explanation III deems an offer or allotment to more than the prescribed number of persons to be an offer to the public governed by Part I of Chapter III, whether or not payment was received and whether or not listing is intended.
- India Code consolidated Companies Act, 2013, section 42
- Companies (Amendment) Act, 2017 (1 of 2018), section 10 substituting section 42 — Gazette
- Commencement notification S.O. 3921(E): section 10 of the 2017 Amendment Act from 7 August 2018
- Original section 42 commencement, S.O. 902(E), 1 April 2014
- Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018, G.S.R. 752(E) (rule 14 substituted)
- Original Gazette of the Companies Act, 2013
Who may be offered and how
Sub-section (2) limits the offer to persons identified by the Board, not exceeding fifty or such higher number as may be prescribed in a financial year. Qualified institutional buyers (as defined in the SEBI ICDR Regulations referred to in Explanation II) and employees offered securities under an ESOP scheme under section 62(1)(b) are excluded from the count.
Sub-section (3) requires a private placement offer and application in the prescribed form, sent to identified persons whose names and addresses the company records. The offer carries no right of renunciation, so it cannot be passed on to another person.
Payment, allotment and use of funds
Subscribers must pay by cheque, demand draft or other banking channel, not cash (sub-section (4)). Application money must be kept in a separate bank account with a scheduled bank and used only for adjustment against allotment or for refunds (proviso to sub-section (6)). The company cannot use the money until allotment is made and the return of allotment is filed with the Registrar.
Allotment must be made within sixty days of receipt of application money. If it is not, the money must be repaid within fifteen days after those sixty days; if repayment is late, interest at twelve per cent. per annum runs from the expiry of the sixtieth day. No fresh offer may be made until earlier allotments are completed or the earlier offer is withdrawn or abandoned, though more than one issue to a prescribed class of identified persons is allowed within the overall limit (sub-section (5)).
No publicity, filing and penalties
Sub-section (7) bars public advertisements and the use of media, marketing or distribution channels or agents to inform the public about the issue. Sub-section (8) requires a return of allotment, with a complete list of allottees and the prescribed details, within fifteen days of allotment.
For late filing of the return, the company, its promoters and directors are liable to a penalty of one thousand rupees for each day the default continues, up to twenty-five lakh rupees (sub-section (9)). For an offer or acceptance of money in contravention of the section, the penalty may extend to the amount raised or two crore rupees, whichever is lower, and the company must refund all money with interest within thirty days of the penalty order (sub-section (10)). An issue that breaches sub-section (2) is deemed a public offer and attracts this Act, the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992 (sub-section (11)).
Where the rules come in
Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 supplies the prescribed number, forms and approvals. As substituted by G.S.R. 752(E) on 7 August 2018, it required a special resolution for each offer (with relaxations for certain non-convertible debenture issues), set the limit at two hundred persons in aggregate in a financial year reckoned separately for each kind of security, and prescribed Form PAS-4 for the offer letter, Form PAS-5 for the offer record and Form PAS-3 for the return of allotment. Rule 14 may have been amended after that date; confirm the current rule text on the MCA website before relying on these figures.
Practical preparation
Board resolution identifying offerees and recording names and addresses; shareholder approval as required by the current rule 14; count offerees for the financial year excluding QIBs and ESOP employees; issue offer letters in the prescribed form; open a separate scheduled-bank account; accept money only through banking channels; allot within sixty days or refund; file the return of allotment within fifteen days; use funds only after filing.
Practical checklist
Do
- Keep the identified-persons list, offer letters and bank records together for each issue.
- Track the sixty-day allotment and fifteen-day filing deadlines from the actual dates of receipt and allotment.
- Check the current rule 14 limit and approval requirements before the Board identifies offerees.
Avoid
- Do not accept subscription in cash or into the company’s operating account.
- Do not advertise the issue or use agents to market it to the public.
- Do not open a new offer while an earlier one remains unallotted, unless the earlier offer is withdrawn or abandoned. The proviso to sub-section (5) still allows more than one issue at any time to a prescribed class of identified persons, within the sub-section (2) limit.
Illustrative example
Hypothetical: an unlisted company raises seed capital from 30 investors
An unlisted private company plans to issue equity shares to 30 angel investors and five employees under its ESOP scheme in one financial year.
Count
The 30 investors count towards the section 42(2) limit; the ESOP employees are excluded from it.
Offer
The Board records the identified persons and issues offer letters in the prescribed form; no renunciation is allowed.
Money
Subscriptions arrive by bank transfer into a separate scheduled-bank account.
Allot and file
The company allots within sixty days and files the return of allotment within fifteen days before using the funds.
Outcome
- Following each step keeps the issue a private placement and avoids the deemed-public-offer and penalty consequences in sub-sections (9) to (11).
Glossary
- Identified persons
- The select group of offerees identified by the Board under section 42(2).
- Return of allotment
- The filing with the Registrar under section 42(8), due within fifteen days of allotment.
- Qualified institutional buyer
- An investor so defined in the SEBI ICDR Regulations referred to in Explanation II; excluded from the section 42(2) count.
Frequently asked questions
Can subscribers pay in cash?
No. Sub-section (4) requires payment by cheque, demand draft or other banking channel and not by cash.
When can the company spend the money raised?
Only after allotment is made and the return of allotment is filed with the Registrar under sub-section (8).
What if allotment is not made within sixty days?
The application money must be repaid within fifteen days after the sixty days expire; if not, interest at twelve per cent. per annum runs from the expiry of the sixtieth day.
Does section 42 apply to debentures as well as shares?
Yes. The section speaks of securities, which takes the Securities Contracts (Regulation) Act, 1956 meaning through section 2(81).
What happens if the offer goes to too many people?
An issue not complying with sub-section (2) is deemed a public offer, and the Companies Act, the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992 apply to it.
Need help applying this provision to your situation?
Contact BizeneedLast updated 11 October 2026