Private placement: how Indian startups issue shares under Section 42

A private placement is a way for a company to raise money without advertising to the public. The company picks the investors, makes them an offer and issues shares to those who accept. A venture round is almost always one: a fund agrees to invest, the company issues new shares to it, and the terms are fixed in a term sheet and later a subscription agreement.

It differs from a public offer such as an IPO, where anyone can apply, and from a rights issue, where the offer goes to existing holders in proportion. In India the main law is Section 42 of the Companies Act, 2013, read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. Section 62(1)(c) covers the issue of shares to persons other than existing holders, which is why you often see both sections cited.

The usual path has a fixed order. Skipping a step, or doing them out of order, can make the issue defective and invite penalties from the Registrar of Companies.

Founders and lawyers normally prepare the papers together with the investor. The board approves the issue and calls a shareholders meeting. The members pass a special resolution, which needs at least 75% of the votes cast in favour. The company then sends a private placement offer letter, form PAS-4, to named people, receives the money into a separate bank account, and allots the shares.

• Board meeting: approves the issue, price and offer, and fixes the meeting for members.
• Special resolution: the members approve the issue, usually filed with the Registrar in form MGT-14.
• Valuation: for shares issued on a preferential basis, the price is usually supported by a report from a registered valuer.
• Offer: the company records the names of the people it will offer to, and sends each a PAS-4 offer letter, with a PAS-5 record of the offer.
• Money: the subscriber pays through a bank into a separate account opened for the issue.
• Allotment: the board allots the shares, and the company files the return of allotment, form PAS-3, with the Registrar.

As of November 2026, Section 42 and Rule 14 set several tests that every private placement has to meet. The offer may go only to people the company has identified in advance, not to the world at large, and it cannot be advertised. The number of people the company can offer to in a financial year is capped at 200, and the cap applies separately to each kind of security. Qualified institutional buyers and employees offered shares under an employee stock option scheme are not counted towards the cap.

The application money has to arrive through a bank account, not in cash, and sits in a separate bank account that the company may not use until the shares are allotted and the return of allotment is filed. Shares must be allotted within 60 days of receiving the money. If they are not, the money has to be returned, and interest becomes payable if the refund is late. The return of allotment, form PAS-3, is due within 15 days of allotment.

An offer to more than 200 persons, or one that breaks these conditions, may be treated as a public offer, which brings the much heavier prospectus rules. Penalties for a breach can be large, reaching the amount raised or a fixed limit, so the checklist is not a formality. Check the latest text and forms with a company secretary.

People often use private placement and preferential allotment as if they meant the same thing. They overlap. Section 62(1)(c) covers the issue of shares to persons who are not existing holders, and Rule 13 of the Share Capital and Debentures Rules, 2014 adds conditions on pricing and approval for that route. Section 42 sets the process for the offer itself.

A private company issuing shares to a new investor usually satisfies both: a special resolution, a valuation, a PAS-4 offer, a separate bank account and a PAS-3 filing. A listed company issuing preferentially follows SEBI's ICDR regulations as well, which set a minimum price and approvals.

It is the only practical way to take money from a small group of investors. A startup does not want to publish a prospectus, and an investor does not want to share a cap table with anonymous buyers. A private placement lets the parties negotiate privately and move quickly.

The route also works for different instruments. Startups use it to issue compulsorily convertible preference shares and debentures, ordinary equity to angels and warrants. Foreign investors have extra steps under FEMA, such as pricing rules and reporting to the Reserve Bank of India, on top of the Companies Act rules.

The common problems are administrative. A company forgets to file a form within the time limit, lets the money sit in an ordinary account, offers to more than 200 people, or allots after the 60 days. Defects in the paperwork can come up later, in a due diligence review before a bigger round or an acquisition, and cost time and money to fix.

In headlines, phrases such as allotted shares, preferential allotment, raised via private placement and filed with the Registrar of Companies refer to this process. Funding news that cites regulatory filings often comes from PAS-3 forms, which list the number of shares allotted and the amount raised. These filings are public and can show a round before the company announces it.

A founder can save days by keeping a few documents ready: the latest articles, a current cap table, the board and shareholder meeting notices, the valuation report and the investor's details. The company secretary uses these to draft the resolution, the PAS-4 letter and the filings.

Check the order of events, the dates and the bank account before any money moves, because several limits run from the day the money arrives. A late PAS-3 or a missed 60-day window is far easier to prevent than to repair, and the Registrar can levy a penalty on the company and its officers.

A public offer is open to the public and needs a prospectus that is registered with the Registrar and, for listed offers, reviewed by SEBI. It is slower and costlier but reaches many investors. A private placement is limited, private and quicker, but cannot be advertised and has a ceiling on the number of people.

When a company grows and plans an IPO, it moves from a private placement to a public issue. The private placements it has made in the past, and the filings that went with them, are examined in due diligence. This is general information and not legal advice, so a founder or investor should check specifics with a company secretary or lawyer.