Raising capital under Section 42 of the Companies Act, 2013 — offering shares or other securities to a select group of investors in India, structured to stay within the private-placement rules and clear of a deemed public offer.
Quick Summary
A private placement is how an unlisted company raises money by offering shares — or other securities such as preference shares or debentures — to a specific, identified group of investors rather than to the public. It is governed by Section 42 of the Companies Act, 2013 (read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014), and it is the route most private companies and startups use to bring in capital from angels, funds, and private investors. The defining limit: the offer may be made to no more than 200 investors in a financial year (excluding qualified institutional buyers and employees under an ESOP), and crossing that line turns the raise into a public offer, with all the heavier regulation that follows.
Section 42 is precise about process: shareholder approval by special resolution, a valuation of the securities, an offer made through a numbered offer-cum-application letter (Form PAS-4) addressed to named investors, subscription money received only through banking channels into a separate account, allotment within 60 days, and a return of allotment (Form PAS-3) filed before the money can be used. Since 1 July 2025, most private companies must also issue these securities in dematerialised form. Luke & Luka structures and documents private placements end to end — keeping the raise within Section 42, aligning it with the company's shareholders' agreement and articles, and steering clear of the deemed-public-offer trap.
Key references: Ministry of Corporate Affairs · Companies Act, 2013 (India Code) · SEBI · Last reviewed: June 2026
When a private company needs to raise money — to grow, hire, build, or fund operations — it generally does so by issuing securities: shares, preference shares, or debentures. A private placement is the route for offering those securities to a chosen, identified group of investors rather than to the public at large.
The distinction matters because offering securities to the public triggers an entire regime of regulation — a prospectus, listing rules, SEBI oversight. A private placement deliberately stays on the other side of that line: it is a private transaction with a limited, named set of investors, governed by Section 42 of the Companies Act, 2013, read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
It is the most common way private companies and startups raise capital. When an angel investor, a venture fund, or a small group of private investors puts money into a company in exchange for shares, that transaction is almost always a private placement — and getting its mechanics right is what keeps the raise clean and the company out of difficulty later.
Private placement is the working tool of private fundraising. It is used by:
The boundary that defines this world is the 200-investor limit: a company may offer a private placement to no more than 200 persons in a financial year, with some exclusions. Within that limit, a company can raise substantial capital privately and repeatedly. Beyond it, the offer is no longer private — it is treated as a public offer.
The right time to run a private placement properly is whenever real money is changing hands for securities. The cost of doing it loosely — an offer to too many people, money used too early, a missing valuation — is not just a penalty; it can recharacterise the entire raise.
Section 42 is one of the more closely prescribed parts of the Companies Act, and for good reason — it is the line between private fundraising and a public offer. The main requirements, in plain terms:
The offer must be made to a specific group of persons the board has identified by name — not to the public, and not by general advertisement. The number cannot exceed 200 persons in a financial year, counted separately for each kind of security and excluding qualified institutional buyers and employees under an ESOP. The offer letter is addressed to the named investor and cannot be renounced in favour of anyone else.
Before the offer, the shareholders must approve it by special resolution, and the price of the securities must be supported by a valuation report from a registered valuer. The price cannot simply be set at will; it has to be justified.
The offer is made through a private placement offer-cum-application letter in Form PAS-4, serially numbered and addressed to the identified investor. It sets out the terms of the offer and is the formal document on which the investor applies.
Subscription money must be paid only through banking channels — cheque, demand draft, or electronic transfer — never in cash, and it must be held in a separate bank account opened for the purpose with a scheduled bank.
The company must allot the securities within 60 days of receiving the application money. If it does not, the money must be refunded within 15 days; beyond that, interest becomes payable. The window is firm.
After allotment, the company files a return of allotment in Form PAS-3 with the Registrar of Companies. Critically, the money raised cannot be used until that return is filed — the sequence is money in, allotment, return filed, then use.
Since 1 July 2025, private companies other than small companies must issue securities only in dematerialised form. In practice this means a private placement now requires the company to have an ISIN, the securities to be allotted in demat form, and the investors to hold demat accounts — a step that should be in place before the raise, not scrambled for during it.
If the offer breaches Section 42 — most often by being made to more than the permitted number of persons, or by resembling a public solicitation — it is treated as a public offer. That pulls the company into the prospectus and listing regime under the Companies Act, the Securities Contracts (Regulation) Act, and SEBI rules, with serious consequences. Avoiding this is the central discipline of a private placement.
A private placement does not happen in isolation — it changes who owns the company. New investors come onto the cap table, and the terms on which they join are usually set not in the offer letter alone but in the company's shareholders' agreement: their board rights, consent rights over major decisions, anti-dilution protection, and exit expectations.
A well-run raise therefore moves on two tracks at once. The Section 42 process handles the mechanics of issuing the securities — resolution, offer letter, allotment, filing. The shareholders' agreement and articles handle the relationship the new investor now has with the company. The two have to align: the securities issued must match what the agreement promises, and any new rights must be reflected in the articles.
Treating the private placement as a pure compliance exercise, separate from the governance documents, is how companies end up with investors whose paperwork and whose actual rights do not match — a problem that surfaces at the next round.
The failures in a private placement are usually failures of process, and they are costly because they can unwind the raise:
Each of these is avoidable with the sequence planned in advance. A private placement run to a clear timeline is straightforward; one run in a hurry is where the breaches happen.
The firm structures and documents private placements as a single, sequenced process:
The aim is a raise that is clean on its own terms and that holds up at the next round, when a new investor's advisers examine how the earlier capital came in. Subject to the applicable law and the specific facts, the placement is structured to keep the company firmly within Section 42 and aligned with its existing arrangements.
A private placement is an offer by a company to subscribe to its securities — shares, preference shares, debentures, or similar — made to a select, identified group of persons rather than to the public. It is governed by Section 42 of the Companies Act, 2013, read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. The offer is made through a private placement offer-cum-application letter in Form PAS-4, addressed to the named investors the company's board has identified, and it must satisfy the conditions of Section 42 — including shareholder approval, a valuation, and receipt of money through banking channels — to remain a private placement rather than a public offer.
A private placement may be offered to no more than 200 persons in a financial year, counted separately for each kind of security, and excluding qualified institutional buyers and employees being offered securities under an ESOP scheme. If an offer is made to more than the permitted number, it is treated as a public offer under Section 42, which brings the company within the heavier requirements of the Companies Act, the Securities Contracts (Regulation) Act, and SEBI regulation. Staying within the 200-person limit is therefore one of the central compliance points of any private placement.
A rights issue offers new shares to a company's existing shareholders in proportion to their current holdings. A private placement offers securities to a select group of identified persons — who may be new investors, not existing shareholders — under Section 42. A rights issue is the route to raise from those who already own the company; a private placement is the route to bring in outside capital from angels, funds, or other private investors. They serve different purposes, and a company raising its first external round almost always does so by private placement.
No. Subscription money received in a private placement must be kept in a separate bank account with a scheduled bank and cannot be utilised by the company until the securities have been allotted and the return of allotment (Form PAS-3) has been filed with the Registrar of Companies. Allotment must be completed within 60 days of receiving the money; if it is not, the money must be refunded within 15 days, failing which interest becomes payable. This sequencing — money in, allotment, return filed, then use — is a strict requirement of Section 42.
In most cases, yes. Since 1 July 2025, under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, 2014, private companies other than small companies must issue securities only in dematerialised form. This means a private placement by such a company must be allotted in demat form, the company must have obtained an ISIN, and the investors must hold demat accounts. Small companies are presently exempt, though a small company that is a holding or subsidiary company must still comply.
The firm advises private companies, startups, and investors on raising capital by private placement under Section 42 of the Companies Act, 2013 — structuring the round, preparing the documentation, and aligning the raise with the company's shareholders' agreement. Matters are handled for clients in Kerala and across India.
luka@lukeandluka.in+91 96057 61330