Private placement refers to the process of raising capital that involves selling of securities to a selected group of investors.
Private Placement Meaning
As per the Section 42 of the Companies Act, 2013, private placement means any offer or invitation to subscribe or issue of securities to a selected group of persons by a company (other than by way of public offer) through private placement offer-cum-application form, which satisfies the conditions specified in section 42 of the Companies Act, 2013.
Section 42 of the Companies Act, 2013 states that the maximum allotment that can be done in a year is 200, exceeding which the issue is considered public and the company has to follow the procedure of public issue.
In the process of private placement, no prospectus is issued.
Types of Private Placement
There are two types of private placement that are followed:
1. Preferential Allotment
2. Qualified institutional placement
Preferential Allotment: Preferential allotment is the practice of issuing of securities to a selected group of entities such as mutual fund companies, financial institutions or promoters at a particular price.
The directives for such an allotment is specified in the Chapter XIII of SEBI (DIP) guidelines. The investors may also have a lock-in period for the issue of securities and the company needs to take.
Qualified Institutional Placement: In this mode of private placement, a listed company is able to issue shares or other securities to only institutional buyers. It is a way of encouraging the listed companies to raise capital from the domestic market. The rule governing such placements is specified in Chapter XIIIA of SEBI (DIP) guidelines.
Advantages of Private Placement
The following are the advantages of private placement.
1. Speeds up financing: A company willing to raise capital through fresh issue by going for public issue of shares has to go through a lot of procedures that will be time consuming. Whereas it becomes easier to raise capital from private placement within a few months.
2. Economical: For public issue of shares, a company has to spend on preparation and printing of prospectus, application forms, transportation and also on advertisement in various forms of media. All these expenses will not be required if a public placement route is selected.
3. Confidentiality: In private placement, the shares are allotted to selected business groups and hence, the whole procedure is confidential, while in a public issue many disclosures need to be made.
4. Market Stability: The private placement market is more stable as compared to the stock market. There is less volatility in the private placement market.
5. Raising small capital: Small amounts of capital can be raised through private placement, whereas public issue is required when the capital requirement is high.
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