Counting Offerees Under Section 42: The 200-Person Ceiling in Practice
This article explains how the numerical ceiling on private placements under Section 42 of the Companies Act, 2013 and Rule 14(2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 is counted, and what follows if it is crossed.
The point matters because an excess of even one offeree changes the character of the whole issue. Companies that raise money repeatedly from the same circle of investors, including their own shareholders, need a counting discipline that is built into the offer process and not reconstructed after the allotment.
The Issue
The statute speaks of a number of "persons" in a financial year, but companies commonly ask four things: whether existing shareholders count, whether an investor who receives two offers is counted once or twice, whether equity shares, preference shares and debentures share one limit, and whether poor take-up reduces the count. A fifth question follows for private companies, which face a separate membership ceiling.
The Governing Law
Section 42(2) permits a private placement only to persons identified by the Board, subject to a limit of 50 persons or such higher number as may be prescribed, in a financial year. Qualified institutional buyers and employees offered securities under an employee stock option scheme in terms of Section 62(1)(b) are excluded from that number.
Rule 14(2) prescribes the higher number: "persons more than two hundred in the aggregate in a financial year". The Explanation to Rule 14(2) adds that the restriction is reckoned individually for each kind of security, namely equity shares, preference shares and debentures.
Three further provisions complete the frame:
Section 42(5)ordinarily bars a fresh offer until an earlier offer is completed, withdrawn or abandoned. Its proviso permits more than one issue to a class of identified persons, subject to the maximum number underSection 42(2).- Explanation III to
Section 42treats an offer, invitation, allotment or agreement to allot securities to more than the prescribed number of persons as an offer to the public, whether or not payment is received and whether or not listing is intended. - Rule 14(4) requires a complete record of offers in Form PAS-5, and offers are made through serially numbered offer-cum-application letters in Form PAS-4.