The corporate affairs ministry is mulling expanding the scope of private limited companies to raise funds through private placements. At the same time, it is also planning new regulations to make fund raising by these companies more transparent.

The move would involve amending the Companies Act, 1956, allowing the private limited companies to retain their status while raising the shareholders? threshold from the current 50 to 99.

This will allow a larger number of people to invest in these firms and give them a wider scope to raise funds without the obligation of becoming a public limited company, which require greater disclosures.

The ministry, an official said, also wants to fix a time period within which the entire private placements have to be completed in line with the rules that currently govern IPOs.

The government?s move is prompted by the fact that a large number of private limited companies, being practically out of regulatory gaze, breach the threshold for number of shareholders through the private placement route. The idea is to endorse this practice up to a certain extent, but bring transparency to it.

Incidentally, some years ago, committees on debt market reforms had also asked the government to reform the market for private placements. Currently under section 67 (3) of the Companies Act, 1956, if a company wants to issue private placements in the form of fully or optionally fully convertible debentures then it cannot issue it to more than 50 persons. If it does exceed the 50-person cap then it has to go in for a public issue which requires greater disclosures.

?There are some grey areas in the Companies Act with respect to private placements which we are going to address,? a ministry source told FE. The source argued that the Act could be interpreted differently for those firms issuing placements to more than 50 people yet not wanting to get listed. ?There is no clarity on that front,? he said.

The move comes close on the heels of market regulator Sebi barring two Sahara Group companies ? Sahara India Real Estate Corporation and Sahara Housing Investment Corporation ? from raising Rs 40,000 crore from the public through OFCDs. Sebi had forwarded copies of its interim order to the ministry of corporate affairs for taking action against the two Sahara Group firms for any possible violation of the Companies Act.

The Subroto Roy-led group, however, reacted sharply saying that the matter was beyond the purview of Sebi as the companies in questions had no intention of getting listed in the bourses, citing section 55A of the Companies Act.

?Currently the time period for raising deposits by companies is determined between the issuer and the buyer with little government control. This makes it difficult for the RoCs to monitor the funds raised,? the source said.

The source added that the government was taking various opinions on board and a final decision would be made after consultations with Sebi. Last week senior officers of the ministry had met MCA secretary DK Mittal, on the issue of private placements. When contacted, Mittal told FE that the government was addressing the issue of private placements, refusing to divulge details.

Senior corporate lawyer Lalit Bhasin said that if the government increased the current cap of 50 persons for private placements then it would be welcomed by the industry. ?Increasing the cap would enable these companies to raise funds without the obligation of going in for a public issue which has its own requirements,? he said.

Partner at Delhi-based law firm SRGR Law Offices Saroj Jha said that setting a time period for the issuance of private placements was the right step. ?Apart from setting a time period, the government ought to take more steps to create transparency,? he said.

A leading corporate lawyer who works closely with MCA said that government must set a broad framework for the RoCs to keep a tab on private placements.

?The government must lay down penalties for companies trying to flout these rules,? he said.