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A DISSERTATION REPORT ON

Private placement

SUBMITTED BY

“JANVI SHAH”

FOR THE DEGREE OF

BACHELORS OF MANAGEMENT STUDIES (B.M.S)

MITHIBAI COLLEGE OF MANAGEMENT

VILE PARLE (W), MUMBAI 400 056

SUBMITTED TO

UNIVERSITY OF MUMBAI

ACADEMIC YEAR

2012-2013

PROJECT GUIDE

MR. NAVEEN ROHATGI

1
DECLARATION

I, MISS JANVI SHAH OF MITHIBAI COLLEGE OF MANAGEMENT OF TYBMS


(SEMESTER V) HEREBY DECLARE THAT I HAVE COMPLETED MY PROJECT,
TITLED “” IN THE ACADEMIC YEAR 2012-2013.THE INFORMATION SUBMITTED
HEREIN IS TRUE AND ORIGINAL TO THE BEST OF MY KNOWLEDGE.

__________________________

SIGNATURE OF STUDENT

JANVI SHAH

2
CERTIFICATE

I MR. NAVEEN ROHATGI HEREBY CERTIFY THAT JANVI SHAH STUDYING IN TYBMS AT
HR COLLEGE OF COMMERCE AND ECONOMICS, HAS COMPLETED A PROJECT ON
“PRIVATE PLACEMENT” IN THE ACADEMIC YEAR 2012-2013 UNDER MY GUIDANCE.I
FURTHER CERTIFY THAT THE INFORMATION SUBMITTED IS TRUE AND ORIGINAL TO
THE BEST OF MY KNOWLEDGE.

_____________________ _____________________

Signature Of The Principal Signature Of The Project Guide

[Dr. Kiran V. Mangaonkar] [Mr. Naveen rohatgi]

______________________

Signature of External Examiner

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ACKNOWLEDGEMENT

IF WORDS ARE CONSIDERED AS A SYMBOL OF APPROVAL AND TOKEN OF


APPRECIATION THEN LET THE WORDS PLAY THE HERALDING ROLE EXPRESSING MY
GRATITUDE.DURING THE PERSEVERANCE OF THIS PROJECT, I WAS SUPPORTED BY
DIFFERENT PEOPLE, WHOSE NAMES IF NOT MENTIONED WOULD BE INCONSIDERATE
ON MY PART. I TAKE THIS OPPORTUNITY TO EXPRESS MY PROFOUND GRATITUDE
AND DEEP REGARD TO MY GUIDE MR NAVEEN ROHATGI FOR HER EXEMPLARY
GUIDANCE, VALUABLE FEEDBACK AND CONSTANT ENCOURAGEMENT
THROUGHOUT THE DURATION OF THE PROJECT HIS VALUABLE SUGGESTIONS WERE
OF IMMENSE HELP THROUGHOUT MY PROJECT WORK. HER PERCEPTIVE CRITICISM
KEPT ME WORKING TO MAKE THIS PROJECT IN A MUCH BETTER WAY. WORKING
UNDER HER WAS AN EXTREMELY KNOWLEDGEABLE EXPERIENCE FOR ME.

LAST BUT NOT LEAST, I WOULD LIKE TO THANK MY PARENTS AND MY FRIENDS FOR
THEIR SUPPORT AND FEELINGS WITHOUT WHICH THIS PROJECT WOULD HAVE NOT
BEEN POSSIBLE.

JANVI SHAH

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EXECUTIVE SUMMARY

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INDEX

Sr. No Description Page No.

1 Definition
2 Reasons for private placement

3 Different types of issue

4 Introduction of private placement

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Definition of private placement

‘The sale of securities to a relatively small number of select investors as a way of raising
capital. Investors involved in private placements are usually large banks, mutual funds,
insurance companies and pension funds. Private placement is the opposite of a public issue,
in which securities are made available for sale on the open market.’

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Why private placement?

The main reasons why companies go for private placements are summarised as follows:

 Every firm needs capital for investment. They need capital to meet expenditure like
expansion, diversification, modernization, M&A, etc., from time to time. When a
listed company doesn't want to go for further public issue and the objective is to raise
huge capital by issuing bulk of shares to selected group of people, preferential
allotment is a good option. A private placement is an issue of shares or of convertible
securities by a company to a select group of persons under Section 81 of the
Companies Act, 1956, which is neither a rights issue nor a public issue. This is a
faster way for a company to raise equity capital. In fact, promoters need such
investors in times when the market sentiment is weak and a public issue could fail.

 Moreover, if promoter is being allotted preferential issue and they acquire more
shares in the company, it is a good sign because it shows that the corporate ship is not
sinking and they have abiding interest in the company.

 There is no requirement of filing any offer document / notice to SEBI in case of the
preferential allotment and even no eligibility norm for the company for the
preferential allotment.

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The different kinds of issues

Primarily, issues can be classified as a Public, Rights or preferential issues (also known as
private placements). While public and rights issues involve a detailed procedure, private
placements or preferential issues are relatively simpler. The classification of issues is
illustrated below:

issues

public rights PRIVATE


PLACEMENT

PRIVATE PREFERENTIAL
QIP
IPO FPO PLACEMENT ISSUE
(LISTED CO.)
(UNLISTED CO.) (LISTED CO.)

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Introduction to private placement

A private placement is an issue of shares or of convertible securities by a company to a


select group of persons under Section 81 of the Companies Act, 1956 which is neither a
rights issue nor a public issue. This is a faster way for a company to raise equity capital.

A private placement of shares or of convertible securities by a listed company is generally


known by name of preferential allotment. A listed company going for preferential allotment
has to comply with the requirements contained in Chapter XIII of SEBI (DIP) Guidelines
pertaining to preferential allotment in SEBI (DIP) guidelines which interalia include pricing,
disclosures in notice etc, in addition to the requirements specified in the Companies Act.

Now we will learn three different types of private placement in detail:

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Preferential Allotment of Securities in Unlisted Companies

The Ministry of Corporate Affairs (MCA) has announced draft rules that will, when
promulgated, substitute the Unlisted Public Companies (Preferential Allotment) Rules, 2003.
This will make the process of issue of securities more stringent for unlisted public companies.
The Indian Legal Space blog has a nice comparison of the existing rules and the proposed
changes.

Some of the key features of the draft rules and their impact are as follows:

 Disclosures

Unlike the existing regime, the draft rules require companies to issue an offer document with
prescribed disclosures (Annexure I of the draft rules contain a list of 32 disclosures). This
significantly enhances disclosure requirements for securities offerings by unlisted companies,
and would make even private placements cumbersome and costly. While it increases overall
transparency in offerings of securities, the need for such extensive disclosures for offerings of
securities to specific individuals or institutions is perhaps overstated. Moreover, there is no
clarity regarding the liability of the company and its directors for statements made in such
offering document, although the Supreme Court has recently indicated the availability of
criminal laws to deal with misstatements in offering documents in private placements.

The offer document is also to be approved by shareholders through a special resolution. This
is also an onerous requirement as it might limit the flexibility of the company to alter the
document once it has been approved by the shareholders. In addition, this will also impose
complexities in timing and sequencing of compliances to effect a private placement
transaction.

 Timing

The draft rules stipulate two conditions regarding timing: (i) the gap between the opening and
closing of the issue should be limited to 30 days; and (ii) the minimum gap between the
closing of one issue and the opening of another issue must be 60 days. This is possibly
intended to deal with ambiguities that exist in the definition of a private placement/offering in
terms of section 67(3) of the Companies Act, 1956 where an offer is deemed to be made to

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the public if it is made to 50 persons or more. By setting time limits, the draft rules seek to
impose more objective criteria to differentiate private placements from public offerings. For a
greater discussion of this issue in the context of section 67(3), please see a previous post.

While objectivity is generally desirable, the idea of artificially delineating one private
placement from another through timing may add to the confusion. For example, it may be
possible for companies to structure successive private placements although the offering may
cumulatively be made to a large body of investors.

 Convertible Instruments

The draft rules make convertible instruments an unattractive option for public unlisted
companies.

First, the pricing rules for warrants (that presumably apply to other convertibles as well) are
rigid. The price for conversion of warrants must be determined before hand. In other words,
the conversion price has to be stated up front, and it appears that neither a conversion formula
nor a price band would be available. That removes all flexibility for conversion, which would
effectively make warrants in public unlisted companies unattractive as an investment option.
Note, however, that this is exactly contrary to the trend established by the FDI Policy of the
Government of India which has recently moved from a fixed conversion price to a
more flexible policy when it comes to investment in convertible instruments by foreign
investors.

Second, for any issue of convertible instruments that results in a cumulative amount of Rs. 5
crores or more, the company is required to seek the prior approval of the Central
Government. This is a retrograde step as it imposes hurdles to fund-raising activities of
companies. It is also likely to evoke problems that existed in the days of the controlled
economy prior to 1991, with the Controller of Capital Issues (CCI) acting as the authority that
indulged in merit regulation by specifically approving fund-raising by companies. In fact,
even the CCI regime applied only to public offerings where the interest of the investing
community at large was at stake. The application of a similar regime under current
conditions, and that too for private placements seems inexplicable. The draft rules buck the

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trend asother areas of corporate regulation have recently witnessed attenuation in government
regulation.

 Dematerialization of Securities

Here again, the flexibility of retaining securities either in physical form or demat form has
been taken away, as all securities issued under private placement have to be kept only in
demat form.

Overall, the draft rules make private placements in unlisted public companies an onerous
task. This may seriously impact financing in such companies. Curiously enough, some of the
requirements suggested in the draft rules go even beyond those prescribed for public listed
companies where larger interests are affected. These include the requirement for shareholders
to approve the offer document, restrictions on pricing for convertible securities, and the like.

It has been suggested that the draft could be the result of various scams involving unlisted
companies and also instances of ambiguities in securities regulation (such as those witnessed
in the Sahara episode previously discussed). While it is imperative that regulations be framed
to address scams and frauds, the imposition of onerous requirements on the corporate sector
as a whole to address a few bad apples imposes greater costs than the benefits it produces.
The strategy of painting all public unlisted companies with the same brush will be
counterproductive.

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Qualified Institutions Placement

We will learn following under QIP

• Concept of QIP

• Eligibility Criteria for QIP

• Other Key Conditions

• Pricing of Issue

• Disclosures in the Placement Document

• Key Considerations

• benefits of Qualified Institutional Placement

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Concept of QIP

QIP means allotment of eligible securities by a listed issuer to qualified institutional buyers
on private placement basis in terms of these regulations.

• Eligible Securities: “Eligible Securities” include equity shares, nonconvertible debt


instruments along with warrants and convertible securities other than warrants.

• Listed Issuer: The provisions of SEBI (ICDR) Regulations, 2009 are applicable to qualified
institutional placement made by a listed issuer.

• Private Placement Basis: The placement document for QIP shall clearly specify that no
offer is being made to the public or any other class of investors.Concept of QIP.

• Qualified Institutional Buyer” means:

i. a mutual fund, venture capital fund and foreign venture capital investor registered with the
Board;

ii. a foreign institutional investor and sub-account (other than a sub-account which is

a foreign corporate or foreign individual), registered with the Board;

iii. a public financial institution as defined in section 4A of the Companies Act, 1956;

iv. a scheduled commercial bank;

v. a multilateral and bilateral development financial institution;

vi. a state industrial development corporation;

vii. an insurance company registered with the Insurance Regulatory and

Development Authority;

viii. a provident fund with minimum corpus of twenty five crore rupees;

ix. a pension fund with minimum corpus of twenty five crore rupees;

x. National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated

November 23, 2005 of the Government of India published in the Gazette of India;

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xi. insurance funds set up and managed by army, navy or air force of the Union of India

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Eligibility Criteria for QIP

• The equity shares of the same class have been listed on a recognized stock exchange having
nation wide trading terminal for a period of at least one year prior to the date of issuance of
notice to its shareholders for convening the meeting to pass the special resolution.

• The issuer is in compliance with the requirement of minimum public shareholding specified
in the listing agreement with the stock exchange.

• A Special Resolution approving the qualified institutions placement has been passed by its
shareholders.

• The Issuer has appointed a Merchant Banker registered with the Board.Other Key
Conditions

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Other key conditions

• Restriction on Allotment:

issue size

mutual fund other QIBs

maximum 50%
minimum 10%
to single QIB

if not
subscribed

QIB belonging to the same group or who are under same control shall be

deemed to be a single allottee.

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Minimum number of allottees

Issue size Number of allottes


Less than INR 250 crores 2
More than INR 250 crores 5

• Tenure of convertible instruments issued through QIP shall not exceed sixty months from
the date of allotment.

• Aggregate of proposed QIP and all previous QIP in one FY shall not exceed 5 times of
Networth of the Issuer.

• Eligible securities issued through QIP shall not be transferrable except on a recognized
Stock Exchange.

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Pricing of the Issue

• Minimum Issue Price: The average of the weekly high and low of the closing prices of the
equity shares of the same class quoted on the stock exchange during the two weeks preceding
the relevant date.

• Relevant Date:

– In case of allotment of Equity Shares: Date of BM to open the proposed issue.

– In case of allotment of eligible convertible securities: Date of BM to open the proposed


issue, OR

The date on which QIB holders become entitled to apply for the equity shares.

• Equity shares allotted pursuant to QIP shall be fully paid-up at the time of allotment.

• The prices determined for qualified institutions placement shall be subject to appropriate
adjustments in case of any Corporate Action.

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Disclosures in the Placement Document

• Disclaimer that no offer is being made to the public or any other class of investors.

• Details of Financial statements.

• Merchant bankers/merchant bankers to the placement and other advisors

• Summary of the offering and eligible security

• Risk factor

• Market price information

• Use of proceeds

• Capitalization Statement

• The audited consolidated or unconsolidated financial statements prepared in accordance


with Indian GAAP.

• Report of Independent Auditors on the Financial Statements.

• Management’s Discussion and Analysis of financial condition and results of


operationsDisclosures in the Placement Document

• Industry description

• Business description

• Organizational structure and major shareholders

• Board of directors and senior management

• Taxation aspects relating to the eligible securities

• Legal proceedings

• Accountants

• General Information

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• Such other information as is material and appropriate to enable the

investors to make an informed decision.

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Key Considerations

• Relaxed timeline allowed upto a period of 12 months

• Conversion Period of eligible convertible securities is 60 Months

• Pricing of issue is allowed at the time of opening of Issue.

• No lock-in on acquisition of shares through QIP.

• Minimum allotment of 10% to Mutual Funds.

• FDI norms are applicable on allotment to NRIs.

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Benefits of qualified institutional placements

 Time saving

QIBs can be raised within short span of time rather than in FPO, Right Issue takes long
process.

 Rules and regulations:

In a QIP there are fewer formalities with regard to rules and regulation, as compared to
follow-on public issue (FPO) and rights Issue.

A QIP would mean that a company would only have to pay incremental fees to the exchange.
Additionally in the case of a GDR, you would have to convert your accounts to IFRS
(International Financial Reporting Standards). For a QIP, company’s audited results are more
than enough

 Cost-efficient:

The cost differential vis-à-vis an ADR/GDR or FCCB in terms of legal fees, is huge. Then
there is the entire process of listing overseas, the fees involved. It is easier to be listed on the
BSE/NSE vis-à-vis seeking a say Luxembourg or a Singapore listing.

 Lock-in:

It provides an opportunity to buy non-locking shares and as such is an easy mechanism


if corporate governance and other required parameters are in place.

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Public Offer Vs Private Placement

Financial Markets are governed by a set rules, regulations and choices.


The choices open to investors to participate in the ‘primary market’ is encouraged by the
belief that the investor will be guided and protected by the regulators who are expected to
ensure that activities of companies and operators are guided by a set of rules known to all
stakeholders. Fundamental to this is the need to understand the differences, advantages,
disadvantages, implications and remedy available under the
different options open to companies and where/how investors decide to engage in either
private placements or public offerings.
To contextualise this within the prism of the 2008 Starcomms offer and the attendant issues
arising therefrom, we have produce below a
table highlighting the characteristics of each offering, the peculiarities and the specifics of the
offer.
The immediate conclusions drawn was that the 2008 Starcomms offer was in all material
facts an Initial Public offering for which the
regulators ought to have identified and taken necessary and corrective steps to recalibrate or
rescind.
The Placement which is supposed to be undertaken by a few individuals was made prepared
and packaged like a public offer and made a
public affair to the extent that prospective investors started depositing for the placement, with
majority of them eventually not allotted
shares by the SEC but placed under ‘investment vehicles’ by firms and operators who ought
to have known better.
Yet to this day, there has been no official declaration from the Securities & Exchange
Commission (SEC) on this transaction that typifies the excesses that took place during the
capital market boom years; and sadly

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definition The first sale of stock The sale of securities to a
by a private company relatively small number
to the of select investors as a
public. IPOs are often way
issued by smaller, of raising capital.
younger Investors involved in
companies seeking the private placements are
capital to expand, but usually large banks,
can mutual funds, insurance
also be done by large companies and pension
privately owned funds.
companies Private placement is the
looking to become opposite of a public
publicly traded. In an issue, in
IPO, the issuer obtains which securities are
the made available for sale
assistance of an on the open
underwriting firm, market.
which helps it
determine what
type of security to
issue, the best offering
price and
the time to bring it to
market.
interpretation Generally, any sale of Securities not issued to
securities to more than the public – without
50 advertisement,
people is deemed to be public solicitation or
a public offering, and public issuance in any
thus form or shape.
requires the filing of

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registration statements
with the appropriate
regulator authorities.
The
offering price is
predetermined and
established by the
issuing company and
the investment bankers
handling the
transaction.
description When an issue /offer of When an issuer makes an
securities is made to issue of securities to a
new select group of persons
investors to become a not
part of the firms' exceeding 50, and which
shareholder family, it is neither a rights issue
is deemed a nor a
public issue. public issue, it is called a
private placement
allotment An issue becomes An issue becomes
public if its results of privately placed where an
allotment is to allotment
over 50 persons or is made to less than 50
more. persons who can be
directly
attributable to have 'paid'
for the shares on offer.
types Public issue can be Private placement of
further classified into shares or
Initial public Convertible securities by
offer (IPO) and Further listed
public offe (FPO) issuer can be of two

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types:
Preferentialallotment or
Qualified institutions
placement (QIP):
approval It is an unlawful act for No public company shall
any person to offer for offer securities by way of
sale or private
to buy or sell securities placement without the
which are subject to prior approval of the
the Commission.
provisions of the Act
or these Rules and
Regulations—a. before
the
Issuing house has filed
a registration statement
with the Commission;
or b.
after the registration
statement has been
filed but before it is
cleared
by the Commission; or
c.
after the Completion
Board
meeting but before the
issue is authorized to
open except in the
following
circumstances: i.
Preliminary
negotiations or

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actual agreement
between the issue and
the
underwriter; ii.Oral
offers not made to the
public;
iii. Notices of proposed
offering.
Collective fund trust This is a method that This is in line with basic
differs from Public characteristics of Private
Offerings – in some Placement - investors in
jurisdictions a trust plan shall be
such investment qualified investors if
vehicles are allowed to recognised under
partake in public the jurisdiction and if
offerings. properly disclosed in its
PPM
Methods of Firm is allowed to Cold Calling is not
promotion make public permitted,
promotional activities Advertisements, articles,
as approved by the notices or any other
SEC Communication cannot
be
published in any
newspaper,
magazine, newsletter or
similar media or
broadcast on TV, radio or
cable., No seminars or
meetings may be
held with regard to any
current offering unless
each invitee is known

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and qualified in advance,
No mention of any
specific offering or past
performance may be
made at
generic seminars (i.e.
seminars to discuss the
general concept of such
investments).
ownership Public offerings are Private placements are
used by companies used by family firms and
with more venture
Dispersed ownership capitalists with
before controlling owners
the offerings before the offerings
Time required Lot of formalities Quicker form of raising
involved due to money
stringent rules
pricing Sold at market value Investment relatively
priced (at a high
discount) to
compensate for absence
of
immediate liquidity as
compared to market
value
Share certificates Share certificates Share certificates are
expected to be issued unduly delayed and there
within is much
regulatory specified uncertainty about when
period such shares may be listed
due
to the absence of

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stringent regulatory
control
liquidity More liquid Illiquid as investors
cannot easily sell unless
when the
securities are listed on
the Exchange
Due diligence Necessary due Company's financial
dilligence and all health, accounting
important information records, or tax
would be presented for declarations are not fully
investors with known. On a general
attendant professional note, there is often less
and corporate liability information to help
well noted. investors do an extensive
analysis of the company
to aid informed
Investors profile Experts, sophisticated, Private placement should
institutional and retail be made only to investors
investors can invest in capable of evaluating the
IPO under a caveat merits and risks
emptor associated with the
investment
Investment intent It encourages both long Purchasers of private
and short term placement securities
investment must
Patterns purchase for investment
purposes and not for the
purpose of resale. The
typical
subscription documents
used in private
placements contains what

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is called "investment
letter language." This
representation should be
personally verified.
Consideration should be
given as to whether the
investment
representation makes
sense in
view of the surrounding
circumstances of the
proposed
purchaser.

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Private Placement Memorandum

To meet the requirement of Regulation D or the requirements of Section 4(2) of the 1933
Act (the private placement exemption), the issuer is almost always required to make
extensive disclosures regarding the nature, character and risk factors relating to an offering.
The disclosure document often is labeled “Offering Memorandum” or given a similar title,
which, in the normal course, is based upon information provided to counsel to the issuer.
While a properly executed private placement is exempt from the registration provisions
(i.e. Section 5 of the 1933 Act) of the federal securities laws, the transaction (and the
disclosures made or a lack thereof) is subject to the anti-fraud provisions. If the private
placement offering memorandumis a particular private placement turns out to be materially
misleading in terms of disclosures which have been made (or which should have been made),
the broker-dealer and its principals may be deemed to have violated or aided or abetted
violations of the anti-fraud provisions of the federal securities laws.

 Supplementary or Corrective Material

During the course of private placement activities on a particular issue, or prior to the closing,
it may become necessary to update or correct information supplied in the private placement
memorandum as originally prepared. The corrected information must be brought to the
attention of the offerees by means of a cover or transmittal letter which describes the changes
or additions. Depending upon the information transmitted, reconfirmation of an investors
desire to invest may be required. The files maintained with respect to a particular offering
must contain a record of what has been done. Prior to closing an offering of the private
placement, meaning the acceptance of investors in a transaction, a brokerage firm Principal
must verify that all such amendments have been sent to all subscribing offerees and that the
files are accurate and complete. All offerees should be notified of any changes.

 Offeree Access to Information

In most private placement offering memorandums, it is stated that the memorandum has been
prepared by counsel to the issuer (i.e., the corporation) from documents which have been
provided by representatives of the issuer. Offerees are invited to meet with representatives of

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the issuer to make an independent investigation and verification of the matters disclosed in
the offering memorandum. Courts, reviewing private placements when challenged, weigh
investor access to underlying information about the transaction very heavily in the
determination of whether there has been compliance with the private placement exemption.
The brokerage firm’s designated Principal should obtain a commitment from the Issuer that
potential purchasers and their representatives shall be given access to underlying information
about the transaction if they desire to pursue such information. The fact that information is
available to offerees should be specifically disclosed to the offerees at a conspicuous point in
the offering documents.

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Private Placement Offering Process

 Offering Commencement and Termination


The commencement date of private placement offerings is fixed generally at the date of the
availability of the approved private placement offering documents, such as s real estate
private placement memorandum PPM, for distribution to sales personnel.
The termination date for a private placement offering is dependent on the type of private
placement offeringbeing made. An “all or nothing” offering contains, by its terms, a fixed or
defined date for the termination of the offering. A “best efforts” offering may have an
indeterminate termination period meaning that the offering continues until the full number of
Securities is placed and the subscribers are formally accepted by both the issuer (or a duly
authorized representative) and by a Principal of the brokerage firm.
The sales objectives in a best efforts offering, of course, is that all securities will be placed
with suitable investors. However, short of all securities being placed, it is required that a
minimum amount of moneyneed be raised which shall be sufficient, after the funding of all of
the organizational and offering expenses, and giving consideration to the fixed contractual
obligations of the issuer, without changing the nature of the investment called for by the
general terms of the private placement offering. The issuer may be given the option of
funding required issuer obligations by the making of loans or deferral of fees. In such a case
where the issuer funds financial requirements prior to the placement of all of the securities, it
is the obligation of the brokerage firm to assure itself that appropriate disclosure to all
offerees (and subscribers) be made and to assure itself that the basic nature and character of
the transaction called for by the terms of the offering are maintained. If it appears that they
cannot be maintained, then the transaction must be rescinded and monies paid by subscribers
must be refunded.

 Possible Need for a Purchaser Representative

A judgment must be made as to the business “sophistication” of a purchaser. If it is


determined that a particular purchaser is not sufficiently sophisticated in business matters to
effectively evaluate the investment opportunity, then he or she must be assisted by a
“purchaser representative,” i.e., a person possessing the requisite sophistication (chosen by
the purchaser) who is able to and does assist in evaluating the investment opportunity and

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who is not an affiliate of the issuer, not the brokerage firm. Also,State Blue Sky laws impose
additional requirements for their investors. Only customers known to registered
representative personally should be sent only brokerage firm approved private placement
offering materials. If there is doubt about the individual’s need for a purchaser representative,
the subscriber should be required to obtain one.

 No General Solicitation

1. Cold Calling is not permitted.

2. Advertisements, articles, notices or any other communication cannot be published in any


newspaper, magazine, newsletter or similar media or broadcast on TV, radio or cable.

3. No seminars or meetings may be held with regard to any current offering unless each
invitee is known and qualified in advance.

4. No mention of any specific offering or past performance may be made at generic seminars
(i.e. seminars to discuss the general concept of such investments).
No Fee Sharing

Fees may not be split with non-registered persons such as lawyers, accountants or investment
advisers.

 Investment Intent

Purchasers of private placement securities must purchase for investment purposes and not for
the purpose of resale. The typical subscription documents used in private placements contains
what is called “investment letter language.” This representation should be personally verified.
Consideration should be given as to whether the investment representation makes sense in
view of the surrounding circumstances of the proposed purchaser.

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 Oral Representations

Offerees, having received private placement offering memorandum documents, frequently


request oral explanations or supplements to the information presented. Great care should be
taken in making oral disclosures regarding a private placement. Deviation from the printed
material is prohibited. Written notes of conversations with offerees (and their representatives)
should be made, dated and placed in the client’s file.

 Acceptance Of Offerees As Purchasers

In all private placement offerings, the subscribers must be formally accepted by the issuer.
The acceptance of subscribers is based upon a subscriber questionnaire and, possibly, the
customers account information (a document signed by the client). A review of the contents of
this form by a representative of the firm who is qualified to make such determinations is
imperative.
Following the acceptance of the subscribers in an offering by both the issuer and the
principal, the offering shall be terminated by notification to all involved sales persons or
entities.

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Mechanics of the Private Placement Offering Process

1. The offering documents should be numbered. Unnumbered copies should be marked “For
Information Only”, “File Copy”, “Memorandum Number” and other appropriate notation.
2. A distribution control sheet should be created, and monitored. As offering documents are
assigned to particular registered representatives, the number of the offering documents,
together with the registered representative’s name, should be placed on the control sheet.

3. A sales control sheet will be maintained reflecting current sales.

4. Incoming checks, subscription agreements, and executed suitability documents should be


logged on a daily basis or when applicable.

5. Checks should be reviewed for acceptability by the firm, recorded on the brokerage firm’s
receipts blotter, and forwarded to the individual bank escrow agent, and where appropriate to
the Issuer, together with the purchaser’s name, address, social security number, and number
of shares/units.

6. Incoming subscription agreements should be approved by the firm, recorded on the sales
blotter and forwarded to the Issuer for acceptance. A copy must be maintained for the
brokerage firm files.

7. Confirmations should be sent immediately to the subscriber upon acceptance, to the


registered representatives, and a file copy should be retained (e.g. a copy of the Subscription
Documents.)

8. Form D will be filed, on a timely basis, by counsel to the Issuer, with the SEC and with
those states that require it.

9. Care should be taken that any other forms necessary to comply with the state Blue Sky
authorities will be timely filed. Counsel to the issuer or brokerage firm counsel should
generally be consulted as to the required forms in the states where the securities have been
sold. Generally, this is accomplished by counsel to the issuer. (Some states require no forms.)

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10. A complete file containing the above-described documents for each private
placement should be maintained as part of the brokerage firm’s records.
Escrow Account - Private Placements Only
The federal securities law (the Exchange Act) is very specific with respect to the required
treatment of an escrow account maintained in an “all or none” or “part or none” private
placement offering.
The rules applicable to “all or none” or “part or none” offerings relating to the maintenance
of an escrow account for a given offering are Rules 10b-9 and 15c2-4 of the Securities
Exchange Act of 1934. Rule 10b-9 requires, in general, that in an “all or none” or “part or
none” offering (as opposed to a “best efforts” offering) monies paid for the purchase of
securities must be returned to the investors if the specified number/dollar amount of securities
is not sold within a specified time. In other words, the “all or none” or “part or none” offering
requires specification of the number of securities and the time of the selling period.

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Validity of private placement

 The shareholders resolution approving QIP would be valid for 12 months. There
should be a gap of at least 6 months between each placement in case of multiple
placements.

 The pricing is the average of high or low the last two weeks
 The QIP would be managed by SEBI-registered merchant bankers who should
exercise due diligence and furnish a due diligence certificate to the stock exchange
stating that the issue complies with all the relevant requirements along with the
application for seeking in-principle approval and final permission for listing of the
specified securities
 The specified securities would be issued on the basis of a placement document
containing all material information

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Disclosures in Placement Document

1. Disclaimer that no offer is being made to the public or any other class of investors.
2. Glossary of Terms /Abbreviations
3. Financial statements contained
4. Merchant bankers/ managers to the placement and other advisors
5. Summary of the offering and instrument
6. Risk factors
7. Market price information
8. Disclose particulars of
(a) High, low and average market prices of shares during the preceding three years.
Monthly high and low prices for the six months preceding the date of filing of
placement document.
(b) Number of shares traded on the days when high and low prices were recorded in
the relevant_
stock exchange during period of (a) and (b) above, and total volume traded on
those dates
(c) the stock market data referred to above shall be shown separately for periods
marked by

change in capital structure, with such period commencing from the date the concerned
stock exchange recognises the change in the capital structure (e.g., when the share
have become ex-rights or ex-bonus).
(e) The market price immediately after the date on which the resolution of the Board of
Directors approving the issue was approved.
The volume of securities traded in each month during the six months preceding the
date on which the offer document is filled with ROC.
(g) Along with high, low and average prices of shares of the company, details relating
to volume of business transacted should also be stated for respective periods.
9. Use of proceeds
(a) Purpose of the issuer.
(b). Break-up of the cost of project for which the money is -raised through issue.
(c) The means of financing such, project and
(d) Proposed deployment status of the proceeds at each stage of the project.

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10. Capitalisation statement
11. Dividends
12. Selected financial and other information
The audited consolidated or unconsolidated financial statements prepared in accordance
with Indian GAAP should contain the following:
(a) Report of independent auditors on the financial statements
(b) Balance sheets
(c) Schedules to accounts
(d) Schedules to accounts
(e) Statement of changes in stockholders' equity
Statements of cash flows
(g) Statement of accounting policies
(h) Notes to financial statements
(i) Statement relating to subsidiary companies (in case of unconsolidated financial
statements)
13. Management's discussion and analysis of financial condition and results of operations.
14. Industry description
15. Business description
16. Organisation structure and major shareholders
17. Board of Directors and senior management
1
8. Taxation aspects relating to the instrument
1
9. Legal proceedings
20. Accountants
21. General information
22. Such other information as is appropriate to enable the investor to make an informed
decision.

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Private Placement Memorandum Checklist

A private placement memorandum (PPM) is a document best created with the help of
a professional. While samples and templates exist and are sold on the internet, your
PPM must go far beyond the generic level to specifically address the terms and risks
of your offering. That said, these are the major sections of a PPM which should be
included for almost any private placement offering.

Cover Sheet and Table of Contents: To open the document, use a cover sheet with
your company name, contact information and date. The table of contents should then
delineate all of the sections within as well as the appendices or exhibits attached.

Key Disclosures: Before entering into the terms of the investment, cautionary
language should be used to explain the intent of the document and the limitations of
its uses.

Summary: A summary over a few pages should detail an overview of the entire
document, the business, and the securities that are offered.

Risk Factors: This section should focus on both the specific and general risks facing
the company which will impact the value of shares.

Use of Proceeds: Investors are keen to understand how their dollars will be used to
leverage the company to future success. The funding shouldn’t be used for general
operating expenses (except during a limited startup period), but should be used to
develop capacity or purchase assets which will allow significant growth.

Capitalization and Dilution: The capitalization section or “cap table” should explain
who currently owns what in the company. Dilution details what will happen to those
shares as additional shares are issued including both ownership and voting rights.

Financial Data and Analysis: This is an opportunity to present a financial summary of


the past and projected future of the company and to offer the management’s analysis
of the company’s financial situation.

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Business and Management: These sections, similar to a business plan, give a greater
overview of the business and the management team.

Term Sheet: The term sheet or offering summary explains the specific offer that is
being made including the number of shares, the offering price, commissions that the
company must pay on the capital raised, and the type of shares. There may be a
minimum and maximum number of shares to sell for the private placement to move
forward. A table format is appropriate for this information.

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Restrictions affecting private placement

 The SEC formerly placed many restrictions on private placement transactions. For
example, such offerings could only be made to a limited number of investors, and the
company was required to establish strict criteria for each investor to meet.
Furthermore, the SEC required private placement of securities to be made only to
"sophisticated" investors—those capable of evaluating the merits and understanding
the risks associated with the investment. Finally, stock sold through private offerings
could not be advertised to the public and could only be resold under certain
circumstances.
 In 1992, however, the SEC eliminated many of these restrictions in order to make it
easier for small companies to raise capital through private placements of securities.
The rules now allow companies to promote their private placement offerings more
broadly and to sell the stock to a greater number of buyers. It is also easier for
investors to resell such securities. Although the SEC restrictions on private
placements were relaxed, it is nonetheless important for small business owners to
understand the various federal and state laws affecting such transactions and to take
the appropriate procedural steps. It may be helpful to assemble a team of qualified
legal and accounting professionals before attempting to undertake a private
placement.
 Many of the rules affecting private placements are covered under Section 4(2) of the
federal securities law. This section provides an exemption for companies wishing to
sell up to $5 million in securities to a small number of accredited investors.
Companies conducting an offering under Section 4(2) cannot solicit investors
publicly, and the majority of investors are expected to be either insiders (company
management) or sophisticated outsiders with a preexisting relationship with the
company (professionals, suppliers, customers, etc.). At a minimum, the companies are
expected to provide potential investors with recent financial statements, a list of risk
factors associated with the investment, and an invitation to inspect their facilities. In
most respects, the preparation and disclosure requirements for offerings under Section
4(2) are similar to Regulation D filings.
 Regulation D—which was adopted in 1982 and has been revised several times
since—consists of a set of rules numbered 501 through 508. Rules 504, 505, and 506
describe three different types of exempt offerings and set forth guidelines covering the
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amount of stock that can be sold and the number and type of investors that are
allowed under each one. Rule 504 covers the Small Corporate Offering Registration,
or SCOR. SCOR gives an exemption to private companies that raise no more than $1
million in any 12-month period through the sale of stock. There are no restrictions on
the number or types of investors, and the stock may be freely traded. The SCOR
process is easy enough for a small business owner to complete with the assistance of a
knowledgeable accountant and attorney. It is available in all states except Delaware,
Florida, Hawaii, and Nebraska.
 Rule 505 enables a small business to sell up to $5 million in stock during a 12-month
period to an unlimited number of investors, provided that no more than 35 of them are
non-accredited. To be accredited, an investor must have sufficient assets or income to
make such an investment. According to the SEC rules, individual investors must have
either $1 million in assets (other than their home and car) or $200,000 in net annual
personal income, while institutions must hold $5 million in assets. Finally, Rule 506
allows a company to sell unlimited securities to an unlimited number of investors,
provided that no more than 35 of them are non-accredited. Under Rule 506, investors
must be sophisticated. In both of these options, the securities cannot be freely traded.

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CASE STUDY

Ranbaxy raises Rs 500 cr by issuing 5,000 NCDs

NEW DELHI: Ranbaxy Laboratories said it has raised Rs 500 crore via issue of non-
convertible debentures to be utilised for general corporate purposes.
"The company on November 23, 2012 has issued 5,000 secured 9.20 per cent redeemable
Non-Convertible Debentures of face value of Rs 10,00,000 each, for cash at par, aggregating
Rs 500 crore, on a private placement basis, for general corporate purposes," Ranbaxy
Laboratories said in a filing to the BSE.

These debentures have been rated AA+ by CARE and are proposed to be listed on National
Stock Exchange of India (NSE), it added.

Earlier in the day, the company had announced that it is recalling its generic version of
cholesterol- lowering drug Lipitor from the US market, leading to temporary disruption in the
supply.

The shares of the company declined by 3.27 per cent from its previous closing price to end
the day on the BSE at Rs 495.95 per scrip.

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MCNALLY BHARAT BOARD APPROVES RS.120 CRORE FUND RAISING

NEW DELHI, DEC 4:


McNally Bharat Engineering today said its board gave approval to raise up to Rs 120 crore
through non-convertible preference shares in one or more tranches.

McNally’s Board has accorded approval ”...to create, issue/offer, allot and deliver in one or
more tranches on a private placement and or preferential basis not exceeding 1.2 crore non-
convertible redeemable preference shares of Rs 100 each of an aggregate amount not
exceeding Rs 120 crore,” it said in a BSE filing.

The shares could be offered to strategic and domestic investors, institutional buyers, mutual
funds, banks, FIls, NRIs, insurance companies and corporate bodies, subject to necessary
provisions and approvals, it added.

McNally said its Board, at its meeting today, also gave approval for raising the authorised
share capital of the firm to Rs 160 crore from Rs 40 crore earlier.

Scrips of the company today settled at Rs 99.85 apiece, up 1.17 per cent in the BSE over the
previous closing.

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India Inc mops up Rs 21k-cr via share sale to inst investors
PTI Oct 6, 2009, 08.16pm IST

NEW DELHI: India Inc has mobilised over Rs 21,000 crore through share sale to
institutional investors in the past six months, which is nearly half the amount proposed to be
raised by these companies.

According to data compiled by SMC Capital, during the period starting March 2009, Indian
corporates raised about Rs 21,377 crore through 29 Qualified Institutional Placement (QIP)
issuances.

"The companies are preparing for a second round of institutional placement. The firms which
have not raised the amount they had proposed initially is most likely to launch another QIP
issue," SMC Capital Equity Head Jagannadham Thunuguntla said.

Despite the fact that Indian corporates were quite aggressive in QIP fund raising in the past
six months, on an average they raised only 48.63 per cent of the amount approved by their
board or shareholders, he said.

Early this year, India Inc announced intentions for raising funds through QIP, as all possible
sources of fund raising dried up.

Of the total fund raised thorough the QIP route in the past six months, over Rs 10,300 crore,
comprising nearly half of the total amount raised, has been mobilised by the cash-starved real
estate companies, including DLF, Unitech and Indiabulls Realestate.

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BIBLIOGRAPHY

1. www.google.com
2. www.wikipedia
3. www.sebi.gov
4. Economic times
5. corporateprofessionals.com
6. indiatimes.com

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