Section 42 Companies Act private placement rules
How a company raises capital through private placement under section 42 of the Companies Act, 2013: the offer to identified persons, the 200-person cap, the separate bank account, the allotment window, and the return of allotment in Form PAS-3.
In this guide
Section 42 of the Companies Act, 2013 lets a company issue securities to a select group of identified persons through a private placement offer, not to the public. The offer in a financial year cannot go to more than 200 persons in the aggregate, excluding qualified institutional buyers and employees under an ESOP. Application money must go into a separate bank account, allotment must happen within 60 days of receiving it, and the company must file a return of allotment in Form PAS-3 within 15 days of allotment.
What does section 42 cover?
Section 42 of the Companies Act, 2013 governs how a company raises money through private placement. Section 42 lets a company issue securities to a select group of identified persons, rather than offering them to the public.
The offer goes out as a private placement offer and application in Form PAS-4, only to persons the board has named. It is a controlled way to raise capital that keeps the issue private and off the public market.
Who can the offer go to?
A private placement offer goes only to persons the board identifies in advance. In a financial year, the offer cannot be made to more than 200 persons in the aggregate for each kind of security.
Two groups sit outside the 200-person count: qualified institutional buyers, and employees who receive securities under a scheme of employees' stock option. An offer that crosses the 200-person cap is treated as a public offer and pulls the company into the public-issue rules.
How is the money handled?
Application money must go into a separate bank account with a scheduled bank. Until the return of allotment is filed, that money can be used only to allot the securities or to repay applicants.
- Receive subscription money from each subscriber's own bank account.
- Keep it in a separate account, not in the general company account.
- Allot the securities within 60 days of receiving the money.
- If not allotted in 60 days, repay within the next 15 days.
- Money held beyond that carries interest at 12% per annum.
Payment cannot be made in cash. The subscription must come through the subscriber's bank account, and the company keeps the record of it.
What return must be filed?
The company must file a return of allotment in Form PAS-3 with the Registrar within 15 days of the allotment. The return carries the full list of allottees with their details.
The company cannot use the money raised through the private placement until PAS-3 is filed. Filing the return is the point at which the funds become available for the company's use.
How does it differ from a rights or public issue?
A private placement targets a named, limited group. A rights issue under section 62 offers new shares to existing shareholders in proportion to their holding, and a public issue offers securities to the public at large.
| Route | Offered to |
|---|---|
| Private placement (section 42) | Up to 200 identified persons a year, per security |
| Rights issue (section 62) | Existing shareholders, in proportion to holding |
| Public issue | The public at large, through a prospectus |
For the rights route in detail, read our section 62 rights issue guide.
What if the rules are broken?
If a company makes an offer or accepts money in contravention of section 42, the offer is treated as a public offer and the public-issue provisions apply. The company, its promoters, and directors can face a penalty that can extend to the amount raised or a set ceiling, whichever is lower, and the company may have to refund the money.
- The offer crossed 200 persons for a security in the year.
- Money was accepted in cash rather than through a bank account.
- Allotment slipped past 60 days without timely repayment.
- The company used the funds before filing PAS-3.
Where do companies go wrong?
- Counting only new investors and breaching the aggregate 200-person cap.
- Parking application money in the general account, not a separate one.
- Missing the 60-day allotment window.
- Using the funds before the PAS-3 return is filed.
- Making a fresh offer while an earlier one is still open.
Where are the private placement rules published?
Private placement sits in section 42 of the Companies Act, the offer letter and return forms in the rules made under it, and the rights route in section 62. Complied AI keeps MCA updates in one feed so you can open a form or rule change and read section 42 next to it.
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Common questions
How many persons can a private placement offer go to?
A private placement offer under section 42 cannot be made to more than 200 persons in the aggregate in a financial year, for each kind of security. Qualified institutional buyers and employees who receive securities under a scheme of employees' stock option are excluded from this count.
Can a private placement offer be advertised to the public?
No. A section 42 offer is made only to identified persons named by the board, through a private placement offer and application in Form PAS-4. The company cannot use public advertisements or any media, marketing, or distribution channel to inform the public about the offer.
Within how many days must securities be allotted?
A company must allot the securities within 60 days of receiving the application money. If it does not allot within 60 days, it must repay the money within 15 days after that. Money not repaid within those 15 days carries interest at 12% per annum from the end of the 60th day.
Where must private placement application money be kept?
Application money for a private placement must be kept in a separate bank account with a scheduled bank. The money can be used only for allotment or for repayment if allotment is not made, and cannot be used for any other purpose until the return of allotment is filed.
What is Form PAS-3 in a private placement?
Form PAS-3 is the return of allotment. After allotting securities under a private placement, the company must file PAS-3 with the Registrar within 15 days of the allotment, with the complete list of allottees. The company cannot use the money raised until PAS-3 is filed.
Can a company make a fresh private placement offer before closing the earlier one?
No. A company cannot make a fresh offer or invitation under section 42 unless the allotments for any earlier offer have been completed, withdrawn, or abandoned. A separate offer of a different kind of security can run alongside, but not a second offer of the same round left open.
Can private placement money be received in cash?
No. Payment for a private placement subscription must be made from the bank account of the person subscribing, and the company must keep the record of that account. Cash is not permitted, so the subscription money must move through banking channels.
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How this guide was prepared
This guide is published by the Complied AI research desk. Its source list and stated position were checked against the official records shown below on 19 September 2026.
Automation, including AI, may assist research, drafting and structure. It does not replace the official record or amount to an independent professional review. Read our editorial standards and corrections policy.
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