Filing of Form PAS-4 in Private Placements

[Deepansh Guwalani is a 5th year student at ILS Law College, Pune]

Introduction

Private placement in India is regulated by section 42 of the Companies Act, 2013 (the “Act”) and rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (the “Allotment Rules”). The said laws have undergone a recent change by way of the Companies (Amendment) Act, 2017 and the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 (the “Amended Rules”). However, these amendments have created a vacuum with respect to issuing and filing of Form PAS-4 in case of issuing shares to existing shareholders and the purpose of this post is to highlight the same.

Position before the amendment

Prior to amendment to the Act, the position was that a company might make an offer or invitation to subscribe to securities through the issue of a private placement offer letter in Form PAS-4. According to rule 14(3), the company also needed to maintain a complete record of private placement offer letter in Form PAS-5. A copy of such record along with the private placement offer letter in Form PAS-4 also needed to be filed with the Registrar.

This position was changed by the Companies (Share Capital and Debentures) Amendment Rules, 2015. The amendment brought in the following addition to Rule 13 of the principal rules (the “Share Capital Rules”).

Provided that in case of any preferential offer made by a company to one or more existing members only, the provisions of sub-rule (1) and proviso to sub-rule (3) of rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 shall not apply.

This meant that Form PAS-4 was not required to be issued to the person to whom the offer was made or filed before the Registrar. Also, a copy of record maintained under Form PAS-5 was not required to be filed before the Registrar. However, it is to be noted that when a company makes a preferential offer to an existing shareholder, it must continue to comply with the rules and restrictions prescribed in section 42 of the Act and rule 14 of the Allotment Rules. This includes the requirement for the company to issue a private placement offer letter to the existing shareholder, except that the company does not need to make the disclosures or file the declarations required under Form PAS-4.

Position after the amendment

With the enactment of the Companies (Amendment) Act, 2017 and the Amended Rules, this position has undergone a change. Now, section 42(3) of the Act and rule 14(3) of the Amended Rules provide that a company making private placement shall issue a private placement offer and application in Form PAS-4 serially numbered and addressed specifically to the person to whom the offer is made, which it shall send to him either in writing or in electronic mode. This means that the filing of PAS-4 and PAS-5 required for a private placement has been done away with and the same is no longer restricted to the case of existing shareholders. However, the company needs to issue Form PAS-4 nonetheless.

The vacuum

This has created issues for companies that wish to issue (or are in the process of issuing) shares under a private placement to existing shareholders. The new amendments have effectively rendered the exemption available under the Share Capital Rules redundant. The exemption seems to have been superseded by Amended Rules since it can be fairly assumed that the Government was aware of this exemption and still went ahead and passed the Amended Rules, mandating the issue of PAS-4 and abolishing the filing. This is important as some companies may not want to adopt the disclosures required under PAS-4 but simply issue a private placement offer letter to existing shareholders.

The problem does not end here. Since the Amended Rules have not come into effect as of now (section 1(2) of the Amended Rules says that the same shall come into effect after their publication in the Official Gazette which has not been done) and the Companies Act, 2017 has come into effect, the companies are in a state of vacuum. They can exercise one of two options. First, they do not issue nor file the Form PAS-4 and a copy of record maintained under Form PAS-5 as was the position before the amendments. However, in spirit they will be going against the new section 42 which has been brought into existence keeping in mind the Amended Rules and consequently risk attracting penalty. Alternatively, they can issue but not file Form PAS-4 and a copy of record maintained under Form PAS-5 thereby giving effect to a law that has not come into effect.

Arguments in favour of both the ways can be made. The legislative intent approach suggests that exemption should be made invalid whereas section 8 of the General Clauses Act, 1897 says that references to repealed laws in any other enactments shall be construed as references to re-enacted laws. This means that, unless a different intention appears, the exemption under the Share Capital Rules that referred to Allotment Rules shall be construed to refer to the Amended Rules as well. The requirement of absence of contrary intention here is again debatable.

Conclusion

Until the legislature fills this vacuum, it is advisable for a company in the process of issuing shares under private placement to issue Form PAS-4 (filing was anyway not necessary prior to amendment also) to escape a fine of up to rupees two crores or the amount raised through private placement, whichever is lower, as provided under section 42(10) of the amended Act.

– Deepansh Guwalani