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Tight cap on pvt placement for fund raising by firms

Sep 21 2013, 16:25 IST
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These norms are part of the second set of draft rules for the implementation of the new companies law. These norms are part of the second set of draft rules for the implementation of the new companies law.
SummaryThese norms are part of the second set of draft rules for the implementation of the new companies law.

Aimed at tightening the norms for the much-abused private placement route of raising funds, the government on Friday proposed a stringent cap on private placement route for fund raising by companies under the new Companies Act, 2013.

These norms are part of the second set of draft rules for the implementation of the new companies law. The second set of draft rules also bring clarity on the issues of private placement, registered valuers, creation of National Company Law Board (NCLB) and the tribunal (NCLBT) among others.

Private placement: The draft rules have made it clear that a company shall not make private placement unless the proposed offer of securities has been approved by the shareholders by way of a Special Resolution for each of the offers/invitations. Also, the draft rules proposes a cap on the number of private placement to 200 persons in one financial year subject to maximum of four such offers in a financial year.

Companies opting for private placement route for fund raising will need to maintain a minimum gap of 60 days between any two such offers. Also the value of such offer shall be with an investment size of not less than Rs 50,000 per person, the draft rules said.

The need to bring in stringent law on private placement mechanism for fund raising arose after instances of cases came to the fore where thousands of crores worth money was raised through private placement of various securities, including debentures, without going through the public offer route where norms are much more stringent. For example, a long-running regulatory dispute over such a fund raising has been in courts.

Sahara has been involved in a legal battle over allegations that it had raised over Rs 24,000 crore through issuance of certain debentures on private placement to more than three crore investors.

After Sebi cracked the whip, Sahara had challenged Sebi's jurisdiction saying that the money was raised through private placement and was not a public offer.

Dormant Company: Aimed at providing lakhs of inactive/defunct companies a chance to convert to the status of a 'dormant company', the draft rules on dormant company provides India Inc faster mechanism for either winding up financially stressed companies or resurrecting them within a five year time-frame because most rules and regulations of the Companies Act will not be applied on dormant companies during the duration of their dormant status.

However, in case

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