Two Private Placements in One Year and a Selective Rights Issue
Nimbus Bio Sciences Limited is an unlisted public company with a paid-up capital of ₹4 crore. In June 2024 it raised ₹6 crore by issuing equity shares to 130 individuals, none of whom was a qualified institutional buyer or an employee subscribing under an ESOS; the offer was made in Form PAS-4 and the return of allotment was filed in time. In January 2025 it proposes to raise ₹9 crore from 85 investors, of whom two are qualified institutional buyers and three are its own employees subscribing under an employees' stock option scheme. The draft offer letter prices the shares at ₹180, although a registered valuer's report of December 2024 puts the fair value at ₹240. The Board also proposes to allot shares worth ₹1.2 crore to four existing shareholders alone, describing it as a rights issue. The application money is to be credited to the company's working capital account and used to pay salaries, with allotment planned for the seventieth day after receipt of applications.
1. Count the persons to whom the January 2025 offer may lawfully be made. Does the proposed offer comply with section 42?
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The rule. Section 42 permits an offer of securities by private placement to not more than 200 persons in aggregate in a financial year. Offers to qualified institutional buyers and to employees under an ESOS are outside that sub-section, so they are not counted.
The count. Of the 85 proposed offerees, two are QIBs and three are ESOS employees - five are excluded, leaving 80 countable persons.
Aggregation within the financial year. The June 2024 placement was to 130 individuals, none of them QIBs or ESOS employees, so all 130 count. The June and January offers fall in the same financial year 2024-25. 130 + 80 = 210, which exceeds the ceiling of 200. The fact that each tranche is individually below 200 is irrelevant because the statute aggregates per financial year, not per offer.
Consequence. The January 2025 offer is outside section 42 and would be treated as a public offer, attracting the prospectus requirements of Chapter III. The June 2024 placement was valid in itself and cannot be undone, but the fresh offer cannot proceed on a private placement basis. The alternative is to defer the offer to financial year 2025-26, when the count restarts, or to make a public offer.
Penalty. Section 42(10) makes the company, its promoters and directors liable to a penalty up to the higher of the amount involved in the offer and the amount intended to be raised, and requires refund of all monies to subscribers within 30 days of the penalty order.
2. May the shares be issued at ₹180 against a registered valuer's fair value of ₹240, and can the four shareholders be allotted shares as a rights issue?
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Pricing. Section 42 does not require the issue price to equal the valuer's figure, but it does require the explanatory statement to the special resolution approving the placement to set out the basis or justification for the price, supported by a registered valuer's report. So ₹180 is not per se unlawful; issuing 25 per cent below the valuation must be justified on commercial grounds and disclosed. If the allottees are related parties (promoters or their relatives), the discounted allotment also attracts section 188 and the duty of the directors under section 166 not to make undue gain. An unexplained discount is the real problem, not the figure itself.
The four shareholders. A rights issue under section 62(1)(a) must offer the shares to all existing equity shareholders in proportion to their paid-up capital, by notice of at least seven days (or a shorter period agreed by 90 per cent of members), with the right to renounce. An allotment confined to four shareholders is not a rights issue at all - it is a private placement and must satisfy section 42: special resolution, offer letter in Form PAS-4, the 200-person cap and the separate bank account requirement. Describing it as a rights issue does not change its character.
Conclusion. Either make a genuine offer to every equity shareholder and allot only the unsubscribed portion in accordance with the Board's decision, or route the allotment as a compliant private placement with the special resolution and full pricing disclosure.
3. The company wants to use the application money for salaries and allot on the seventieth day. What does the law require, and what is the consequence of the present proposal?
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Separate bank account. Money received on private placement must be kept in a separate bank account in a scheduled bank and may be applied only towards allotment of the securities or refund to the applicants. It cannot be used to pay salaries or for working capital before allotment. Crediting it to the working capital account and spending it is a direct contravention.
Sixty-day rule. Allotment must be made within 60 days of receipt of the application money, and payment must have been received through banking channels, not in cash. If allotment is not made within 60 days, the money must be refunded within the next 15 days; failing that, interest at 12 per cent per annum runs from the expiry of the sixtieth day.
Documents. The offer must be made on the offer-cum-application letter in Form PAS-4, the record of the offer kept in Form PAS-5, the placement approved by special resolution, and the return of allotment filed in Form PAS-3 within 15 days of allotment.
Applying the facts. Allotting on day 70 is a breach of the 60-day rule, and using the money for salaries is a breach of the separate-account requirement. Because the January offer also breaches the 200-person ceiling, the whole offer is void and the subscribers must be refunded. The Board should park the money in a separate scheduled-bank account until a compliant offer is made, and note that the directors are personally exposed as officers in default.