CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Private Funding
Orbit Pharma Ltd, an unlisted company, offered and allotted securities by private placement to 70 identified persons in a financial year, none being qualified institutional buyers or ESOP employees, and no higher number was prescribed beyond fifty for the purpose. What is the legal consequence under Section 42?
The issue is deemed a public offer. Section 42(11) says a private placement not complying with the limit on identified persons in sub-section (2) is treated as a public offer, bringing the Companies Act, SCRA and SEBI Act provisions into application.
- AOnly a penalty of Rs 1,000 per day applies, and the issue stays a private placement
- BThe issue is valid if the Board identified every person in advance
- CThe issue is deemed a public offer, and the Act, SCRA and SEBI Act provisions applyCorrect
- DThe issue is void only for the 20 persons exceeding fifty
Explanation
Section 42(2) caps identified persons at fifty (or a higher prescribed number), excluding QIBs and ESOP employees. Under Section 42(11), a placement not complying with sub-section (2) is deemed a public offer, and the Act, SCRA 1956 and SEBI Act apply. This applies notwithstanding the penalties in sub-sections (9) and (10). Board identification does not cure exceeding the limit.
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