Offer shares to a select group of investors and you're in Section 42 territory — a tightly drawn process where breaching the 200-person cap or missing the allotment window converts a private deal into a deemed public offer.
Hard limits: max 200 identified persons per security type per year; allot within 60 days; file PAS-3 within 15 days of allotment.
A company raising a bridge round collects application money from investors and, busy with the close, doesn't get around to formally allotting shares for over two months. That delay alone is a Section 42 breach: allotment must happen within 60 days, and money not allotted or refunded in time turns into a deposit under the Acceptance of Deposits Rules — dragging in a whole second compliance regime. Get the 200-person count wrong, and it's worse: the offer is deemed a public issue, and SEBI's rulebook lands on a private company that never meant to go public.
Section 42 is the most heavily penalised fundraising provision in the Act, and ROCs adjudicate it actively. The rules are precise; treat them precisely.
BOTTOM LINE
- Cap: Offer to a maximum of 200 identified persons per financial year, counted separately for each security type (QIBs and ESOP employees excluded).
- Process: Special resolution → PAS-4 offer letter to named persons → money into a separate bank account → allot within 60 days → file PAS-3 within 15 days.
- Miss it: Breach Section 42 and the offer is a deemed public offer; penalty up to the amount raised or ₹2 crore, whichever is lower, plus refund with interest.
What counts as a private placement?
Governs this section: Section 42 & Rule 14, Companies (Prospectus and Allotment of Securities) Rules, 2014
Private placement is an offer of securities — equity shares, preference shares, debentures, convertibles — to a select group of identified persons, recorded by name before the invitation goes out. It is not open to the public, and it is not advertised. When you issue equity or convertibles to specific investors, both Section 62(1)(c) (preferential allotment) and Section 42 apply together; the procedure is Section 42's.
The 200-person cap (and who's excluded)
Governs this section: Section 42(2) & Explanation III
You may offer to a maximum of 200 persons in a financial year, per kind of security. So 200 for equity, a separate 200 for preference shares, a separate 200 for debentures. Excluded from the count: qualified institutional buyers (QIBs) and employees offered shares under an ESOP.
PENALTY — the deemed public offer
Cross 200 persons (or otherwise breach the section) and the offer is treated as a public offer — triggering the full weight of the Companies Act, the SCRA and SEBI regulations, regardless of whether the company is private or unlisted and whether money was received. This is the trap that turns a routine raise into a securities-law problem.
The process and the PAS forms
Governs this section: Section 42(7), (8) & Rule 14
- Obtain a valuation report from a registered valuer (relevant date at least 30 days before the general meeting); not needed for non-convertible debentures.
- Pass a special resolution (explanatory statement carrying the prescribed disclosures); file MGT-14 within 30 days.
- Issue Form PAS-4 (the private placement offer letter) only to the named, identified persons — and only after MGT-14 is filed.
- Maintain the record of offers in Form PAS-5 (kept, not filed).
- Receive money, allot within 60 days, and file the return of allotment in Form PAS-3 within 15 days of allotment. Funds can't be used until PAS-3 is filed.
- Issue share certificates within 2 months.
PAS-4 and PAS-5 are no longer filed with the ROC (2018 amendment), but must be issued and maintained. There's no right of renunciation — the named person can only accept or reject.
Money rules: separate account, 60 days, no cash
Governs this section: Section 42(5) & (6)
DEADLINE — the 60-day allotment clock
Subscription money must arrive through banking channels (no cash) into a separate bank account in a scheduled bank, and can't be touched until PAS-3 is filed. Allot within 60 days of receiving it. If you can't, refund within 15 days of the 60-day expiry; fail that, and you owe 12% interest per annum from the expiry of the 60th day — and the money is now treated as a deposit, pulling in DPT-3 and the deposit rules.
What does non-compliance cost?
Governs this section: Section 42(10)
PENALTY — Section 42(10)
If a company accepts money in contravention of Section 42, the company, its promoters and directors are liable to a penalty up to the amount raised or ₹2 crore, whichever is lower — and the company must refund all monies with interest within 30 days of the penalty order.
Worked example
Mini-case — a clean Section 42 raise
A company raises ₹3 crore of equity from 12 angel investors. It gets a registered-valuer report, passes a special resolution and files MGT-14, then issues serially numbered PAS-4 letters to those 12 named investors. Their money lands in a dedicated scheduled-bank account. The company allots within 60 days, files PAS-3 within 15 days of allotment (pre-certified by a practising professional), and only then draws down the funds. Twelve investors is comfortably under 200, and the money never sat idle past the deadline — so none of the Section 42 tripwires fire.
Common mistakes
- Letting application money sit past 60 days. Unallotted, unrefunded money becomes a deposit — a separate, serious regime.
- Miscounting the 200 cap. It's per security type per year; sloppy counting risks a deemed public offer.
- Issuing PAS-4 before MGT-14. The offer letter goes out only after the resolution is filed, and only to named persons.
- Using one shared/operating bank account. Subscription money needs a separate scheduled-bank account, untouched until PAS-3.
- Skipping the valuation report. Required (except for NCDs) and dated within the relevant-date window.
Checklist
- Identify and name the specific investors before any offer.
- Obtain a registered-valuer report (relevant date ≥ 30 days before the GM).
- Pass the special resolution; file MGT-14 within 30 days.
- Issue serially numbered PAS-4 to the identified persons; maintain PAS-5.
- Collect money via banking channels into a separate scheduled-bank account.
- Allot within 60 days; file PAS-3 within 15 days; issue certificates within 2 months.
FAQ
How many people can I offer shares to under private placement? A maximum of 200 in a financial year, counted separately for each kind of security, excluding QIBs and ESOP employees.
Do I still file PAS-4 and PAS-5 with the ROC? No — since 2018, they aren't filed with the ROC, but you must still issue PAS-4 to investors and maintain PAS-5.
When must allotment happen? Within 60 days of receiving application money; otherwise refund within 15 days, or pay 12% interest and treat the money as a deposit.
What's the deadline for PAS-3? Within 15 days of allotment for a private placement, and funds can't be used until it's filed.
What happens if I exceed 200 persons? The offer is deemed a public offer, triggering SEBI and securities-law compliance, with penalties under Section 42(10).
Primary sources
- Section 42 (incl. 42(2), (5), (6), (7), (8), (10)), Companies Act, 2013
- Rule 14, Companies (Prospectus and Allotment of Securities) Rules, 2014
- Section 62(1)(c) — preferential allotment (applies alongside for shares/convertibles)
Disclaimer: This article is general information on a fast-changing area of company law, current at the time of writing. It is not legal or professional advice for any specific company. Verify the position against the live MCA rules and consult your company secretary before filing.