# Private Placement of Shares to Foreign Investors under Section 42

> Source: https://krystal7.com/insights/private-placement-pas-4-foreign-investors
> Publisher: Krystal7 Consultants (Krystal7 Innovations Private Limited), Gurugram, India
> Author: CA Nandini
> Published: 16 Mar 2026; updated 24 Oct 2026
> Summary: A private placement of shares needs a special resolution, Form PAS-4 to named investors, allotment within 60 days and Form PAS-3 within 15 days.

*Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.*

## AI Overview Summary

- A private placement under section 42 of the Companies Act, 2013 needs a special resolution for each offer, filed with the Registrar before the company sends Form PAS-4 to named investors.
- Rule 14(2) caps a private placement at 200 persons in a financial year for each kind of security, excluding qualified institutional buyers and employees under an ESOP scheme.
- The company keeps the money in a separate bank account, allots within 60 days of receipt, refunds within the next 15 days and pays 12 percent interest on late refunds.
- The return of allotment in Form PAS-3 is due within 15 days of allotment, and a late filing costs INR 1,000 a day up to INR 25 lakh under section 42(9).
- Shares issued to a foreign investor must be priced at not less than fair value under rule 21 of the NDI Rules and reported in Form FC-GPR within 30 days.

**A private placement of shares is an offer to a select group of named investors. Section 42 of the Companies Act, 2013 and rule 14 of the Prospectus and Allotment Rules govern it. The company passes a special resolution and sends each investor Form PAS-4. It banks the money separately, allots within 60 days and files Form PAS-3 within 15 days. A foreign investor's shares also need FEMA pricing and Form FC-GPR within 30 days.**

This page walks through each step of a private placement to a foreign investor, from the board meeting to the FEMA filings. It also compares a private placement with a rights issue and gives a worked example with dates.

## What is a private placement of shares under section 42?

A private placement is an offer of securities to a select group of persons identified by the board. The company makes it through a private placement offer cum application letter, under section 42 of the Companies Act, 2013. The offer goes only to named persons, cannot carry a right to renounce and cannot be advertised.

[Section 42](https://www.incometaxindia.gov.in/w/section-42-118) has eleven sub-sections. The ones a foreign owned company meets most often are these:

1. Section 42(2) limits the offer to identified persons, up to the number the rules prescribe in a financial year.
2. Section 42(3) requires the offer in the prescribed form, sent only to persons whose names the company has recorded. The offer carries no right of renunciation.
3. Section 42(4) requires payment through a bank channel, not cash. The company cannot use the money until it allots and files the return of allotment.
4. Section 42(5) bars a fresh offer until earlier allotments are complete or the earlier offer is withdrawn.
5. Section 42(6) requires allotment within 60 days of receiving the money, with refund and interest rules.
6. Section 42(7) bars public advertisement and the use of media, marketing or agents.
7. Section 42(8) requires the return of allotment within 15 days.

Explanation III to section 42 deals with excess offers. An offer to more than the prescribed number of persons is a deemed public offer, whether or not the company is listed. Section 42(11) adds that a placement that breaks section 42(2) is a public offer. The Securities Contracts (Regulation) Act and the SEBI Act then apply.

A private company faces a second limit. [Section 2(68)](https://www.incometaxindia.gov.in/w/section-2-148) requires its articles to prohibit any invitation to the public to subscribe for its securities. It also caps members at 200, excluding employees and former employees. So a Private Limited company can only raise equity from outsiders by a private placement or a rights issue.

## When does a share issue to a foreign investor count as a private placement?

A share issue to a new foreign investor is a preferential allotment under section 62(1)(c), because the shares go to selected persons. Section 62(1)(c) makes that allotment subject to Chapter III, which includes section 42. So the issue follows both section 62(1)(c) and the private placement rules in section 42 and rule 14.

The [text of section 62(1)(c)](https://www.incometaxindia.gov.in/w/section-62-101) allows an issue to any persons by special resolution, for cash or other consideration. The price must come from a registered valuer's report. The clause adds that the issue is subject to compliance with the applicable provisions of Chapter III and any other prescribed conditions.

Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 sets the preferential issue conditions. The main ones are a registered valuer's report on the price and an explanatory statement with set disclosures. The allotment must be completed within twelve months of the special resolution, or the company passes a fresh one.

Some issues to a foreign investor are not private placements:

1. A rights issue to the foreign parent as an existing shareholder, under section 62(1)(a).
2. A bonus issue.
3. ESOPs and sweat equity, under section 62(1)(b) and section 54.
4. Shares issued on conversion of a loan or debenture under a section 62(3) option approved in advance.

Our pages on the [rights issue route](/insights/rights-issue-indian-subsidiary-foreign-parent) and [sweat equity shares](/insights/sweat-equity-shares-india-companies-act) cover the first and third. The rest of this page assumes a cash issue to one or more foreign investors who are not offered shares pro rata.

If the investor will take compulsorily convertible instruments instead of equity, our guide to [CCD vs CCPS for foreign investors](/insights/compulsorily-convertible-debentures-ccd-preference-shares-fdi) explains when they count as FDI.

## What approvals does a private placement need?

The board approves the offer and records the investors' names. The shareholders then pass a special resolution for each offer, under rule 14(1). The company files the resolution with the Registrar in Form MGT-14 and may send Form PAS-4 only after that filing, under rule 14(8). A preferential issue also needs the rule 13 disclosures and valuation.

Rule 14(1) lists what the explanatory statement must disclose:

1. The particulars of the offer, including the date of the board resolution.
2. The kinds of securities offered and the price.
3. The basis or justification for the price, including any premium.
4. The name and address of the valuer who performed the valuation.
5. The amount the company intends to raise.
6. The material terms, the time schedule, the objects and any contribution by promoters or directors.
7. The principal terms of any assets charged as security.

Rule 14 has two provisos that do not usually help a share issue. Non convertible debentures need one special resolution a year, or only a board resolution within the section 180(1)(c) borrowing limit. Offers to qualified institutional buyers also need only one special resolution a year. The proviso for qualified institutional buyers was inserted on 16 Oct 2020.

Rule 14(8) sets an order of steps. The company files the special resolution, or the board resolution where that is enough, with the Registrar before the offer letter goes out. A proviso makes a private company also file the board or special resolution that approves the issue under section 179(3)(c). We file Form MGT-14 on the day of the meeting where we can, because PAS-4 cannot go out until the filing is done.

A general meeting other than the AGM can be held at shorter notice. Section 101(1) needs consent from a majority in number of the members entitled to vote. They must hold at least 95 percent of the paid up voting capital. A subsidiary with a single foreign parent usually gives that consent on the day.

| Approval or document | Who | When | Rule |
|---|---|---|---|
| Board resolution approving the offer and recording names | Board | Before the notice | Section 179(3)(c), section 42(3) |
| Registered valuer's report on the price | Registered valuer | Before the special resolution | Section 62(1)(c), rule 13 |
| FEMA valuation certificate | Chartered Accountant, SEBI registered merchant banker or practising cost accountant | Not more than 90 days before allotment | Rule 21, NDI Rules; paragraph 8.11 of the Master Direction |
| Special resolution with explanatory statement | Shareholders | For each offer | Rule 14(1), rule 13 |
| Form MGT-14 | Company | Within 30 days, and before PAS-4 goes out | Section 117; rule 14(8) |
| Government approval for a land border investor | Investor and company | Before the offer, attached to PAS-4 | Proviso to rule 14(1), inserted 5 May 2022 |

## What must Form PAS-4 contain and how is it sent?

Form PAS-4 is the private placement offer cum application letter. Rule 14 requires it to be serially numbered and addressed to one named person. The company sends it in writing or electronically within 30 days of recording that person's name. Only the addressee can apply, and any other application is invalid.

The form carries a set of disclosures about the company, the issue, the objects, the risk factors and the financial position. We prepare it as a complete document for each investor, not as a cover letter. A foreign fund's legal team reads it alongside the subscription agreement, so the two must match on price, number of shares and conditions.

The company records every offer in Form PAS-5, under rule 14. PAS-5 lists each person to whom PAS-4 went and the date. We attach the PAS-5 record and a copy of the PAS-4 to the PAS-3 filing.

The proviso inserted on 5 May 2022 deals with investors from countries that share a land border with India. A company cannot make an offer to a body corporate incorporated in such a country, or to its national, without government approval under the NDI Rules. The approval must be attached to the PAS-4. Our page on [Press Note 3 and land border FDI](/insights/press-note-3-fdi-land-border-countries) explains who needs approval.

## How many investors can a private placement cover?

Rule 14(2) caps a private placement at 200 persons in aggregate in a financial year. The count excludes qualified institutional buyers and employees offered securities under an ESOP scheme under section 62(1)(b). The limit applies separately to each kind of security: equity shares, preference shares and debentures.

Section 42(2) itself says fifty, "or such higher number as may be prescribed". Rule 14(2) prescribes 200. An offer to more persons is a deemed public offer under Explanation III to section 42.

The 200 limit counts persons offered, not persons who subscribe. A seed round that sends PAS-4 to 210 angels breaks the rule even if only 40 invest. We keep the PAS-5 register as the live count across all rounds in the financial year.

The older version of rule 14 also required a minimum investment of INR 20,000 of face value per person. The rule as substituted on 7 Aug 2018 does not carry that condition, so a small angel ticket is allowed.

## How must the subscription money be paid and held?

The investor pays from its own bank account, and the company keeps the money in a separate account with a scheduled bank. Rule 14 requires payment from the subscriber's bank account, and section 42(4) bars cash. The company can use the money only after it allots the shares and files Form PAS-3.

For joint holders, rule 14 requires payment from the account of the person named first in the application. The company keeps a record of the bank accounts the money came from.

Section 42(6) requires the separate bank account. The company can use that account only for two things: adjusting the money against the allotment, or repaying it where the company cannot allot.

FEMA adds its own conditions for a non resident investor. Schedule I of [FEMA 395/2019-RB](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0) requires the consideration by inward remittance through banking channels. The money can also come from the investor's repatriable account in India. The Authorised Dealer bank issues a Foreign Inward Remittance Certificate (FIRC) and a KYC report on the remitter. Both go with the FC-GPR.

We open the separate account before PAS-4 goes out and give its details in the subscription agreement. A foreign fund's wire usually lands in the company's main current account if nobody tells it otherwise. Moving the money afterwards is possible, but the bank trail then needs explaining at the PAS-3 and FC-GPR stage.

## What are the allotment and refund deadlines?

The company must allot within 60 days of receiving the application money, under section 42(6). If it cannot, it repays the money within 15 days after the 60 days end. A late repayment carries interest at 12 percent a year from the 60th day. FEMA sets the same 60 and 15 day periods for a non resident's money.

The two laws line up on the main clock. Schedule I of FEMA 395/2019-RB requires the shares within 60 days of receipt and a refund within 15 days after that. For partly paid shares, paragraph 2.4 of Annex 1 to the Master Direction runs the 60 days from each call payment.

The special resolution has its own life. Rule 13 of the Share Capital and Debentures Rules requires a preferential allotment within twelve months of the resolution. So the company can pass one resolution and take money in tranches. Each tranche must be allotted within 60 days of receipt, and all within twelve months.

| Deadline | Period | Starts from | Rule |
|---|---|---|---|
| Send PAS-4 | Within 30 days | Recording the person's name | Rule 14 |
| Allot the shares | Within 60 days | Receipt of application money | Section 42(6); Schedule I, FEMA 395/2019-RB |
| Refund if not allotted | Within 15 days | End of the 60 days | Section 42(6); Schedule I, FEMA 395/2019-RB |
| Interest on late refund | 12 percent a year | The 60th day | Section 42(6) |
| Complete a preferential allotment | Within 12 months | The special resolution | Rule 13 |
| File Form PAS-3 | Within 15 days | Allotment | Section 42(8) |
| File Form FC-GPR | Within 30 days | Date of issue | Regulation 4(1), FEMA 395/2019-RB |
| Valuation certificate age | Not more than 90 days | On the date of allotment | Paragraph 8.11, Master Direction on Foreign Investment |

## When is Form PAS-3 due and what goes with it?

Form PAS-3 is due within 15 days of a private placement allotment, under section 42(8). It carries the complete list of allottees with their names, addresses and number of securities. For a late filing, section 42(9) charges INR 1,000 a day, capped at INR 25 lakh, on the company, its promoters and its directors.

Rule 14 sets out the details for each allottee. They are the name, address, PAN and email, the class of security and the date of allotment. The return also gives the number of securities, the nominal value, the amount paid and any non cash consideration. A foreign corporate investor often has no Indian PAN, so we check how the V3 form treats that field before filing.

The 15 day clock is half the usual 30 days in section 39(4). Companies that file every other allotment within 30 days miss this one more than any other date in the process. We prepare the PAS-3 attachments before the board meeting that allots the shares. Our [PAS-3 guide](/insights/pas-3-return-of-allotment-foreign-investors) lists them.

The money also stays locked until the filing is done. Section 42(4) bars the company from using the subscription money until it allots and files the return. A late PAS-3 therefore delays the use of the funds as well as attracting the penalty.

## How is the issue price fixed for a foreign investor?

Three valuation rules can apply to one issue. Section 62(1)(c) and rule 13 need a registered valuer's price. Rule 21 of the NDI Rules sets a FEMA floor at fair value. The Income Tax Act, 2025 can tax the investor if the price is below fair market value under rule 57.

[Rule 21 of the NDI Rules](https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083) says an unlisted company cannot issue equity instruments to a non resident below fair value. Fair value comes from an internationally accepted pricing method on an arm's length basis. A Chartered Accountant, a SEBI registered merchant banker or a practising cost accountant certifies it. Paragraph 8.11 of the [Master Direction on Foreign Investment](https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200) limits the certificate's age to 90 days on the date of investment.

FEMA sets a floor only. The company can issue above fair value to a non resident. The angel tax in section 56(2)(viib) of the Income Tax Act, 1961 was omitted from AY 2025-26. The Income Tax Act, 2025 has no successor. So a premium above fair market value no longer creates income for the company.

The investor side still matters. [Section 92(2)(m)](https://www.incometaxindia.gov.in/w/section-92-92) of the Income Tax Act, 2025 replaced section 56(2)(x). It taxes a person who receives shares for less than fair market value. A resident co investor who pays the same price as the foreign fund is exposed if the price is below the rule 57 value.

| Purpose | Who values | Test | Rule |
|---|---|---|---|
| Companies Act price for a preferential issue | Registered valuer | Price determined by the valuation report | Section 62(1)(c), rule 13 |
| FEMA floor for a non resident | Chartered Accountant, SEBI registered merchant banker or practising cost accountant | Issue price not below fair value | Rule 21(2)(a), NDI Rules |
| Age of FEMA certificate | Not applicable | Not more than 90 days on the allotment date | Paragraph 8.11, Master Direction |
| Income tax for the investor | Method in rule 57 | Shares received below fair market value are taxed | Section 92(2)(m), Income Tax Act, 2025 |
| Income tax for the company | Not applicable | No tax on premium; old section 56(2)(viib) omitted | Income Tax Act, 2025 has no successor |

We use the highest of the values as the floor for the issue price. Our page on [FEMA pricing guidelines](/insights/fema-pricing-guidelines-share-valuation) explains the methods.

## Which FEMA filings follow the allotment?

The company files Form FC-GPR on the FIRMS portal within 30 days of the allotment, under regulation 4(1) of FEMA 395/2019-RB. It then reports the foreign holding in the annual FLA return by 15 July. A late filing attracts a late submission fee, and a government route investment needs approval before the money comes in.

The FC-GPR goes through the Authorised Dealer bank. The bank usually asks for the board resolution allotting the shares, the valuation certificate and the FIRC with the KYC report. It also asks for a company secretary's certificate and the shareholding pattern. Our [FC-GPR filing guide](/insights/fc-gpr-filing-timeline-and-process-for-foreign-founders) lists the attachments and the portal steps.

Two other steps sit alongside the FEMA filings:

1. **Demat.** Rule 9B of the Prospectus and Allotment Rules applies to a private company that is not a small company. It must issue securities only in demat form. Check the current text of rule 9B on mca.gov.in before you issue. Section 2(85) excludes a holding or subsidiary company from the small company definition. So a foreign owned subsidiary needs its investor to hold a demat account in India before allotment.
2. **Stamp duty.** The Indian Stamp Act, 1899, as amended from 1 Jul 2020, charges 0.005 percent on an issue of shares. The [PIB release of 30 Jun 2020](https://pib.gov.in/PressReleasePage.aspx?PRID=1635399) says depositories collect the duty on an issue in demat form.

The [FEMA 395 regulations](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0) also require the FLA return by 15 July each year. It covers every company that holds foreign investment. Our [late submission fee guide](/insights/late-submission-fee-fema-reporting) explains the fee if a date is missed.

## What happens if section 42 is breached?

Section 42(10) sets a penalty of up to the amount raised or INR 2 crore, whichever is lower, on the company, its promoters and its directors. The company must also refund all the money with interest within 30 days of the penalty order. A placement that breaks the 200 person limit is a deemed public offer under section 42(11).

| Breach | Consequence | Who is liable | Rule |
|---|---|---|---|
| Late Form PAS-3 | INR 1,000 a day, capped at INR 25 lakh | Company, promoters, directors | Section 42(9) |
| Offer or acceptance of money in breach of section 42 | Penalty up to the amount raised or INR 2 crore, whichever is lower | Company, promoters, directors | Section 42(10) |
| Same breach | Refund of all money with interest within 30 days of the order | Company | Section 42(10) |
| Offer to more than 200 persons | Deemed public offer, with Companies Act, SCRA and SEBI Act provisions applying | Company | Section 42(11); Explanation III |
| Allotment after 60 days with no refund | Repayment with 12 percent interest from the 60th day | Company | Section 42(6) |
| Late FC-GPR | Late submission fee | Company | Regulation 5, FEMA 395/2019-RB |

A breach that gets past the Registrar can still surface later. A buyer's due diligence often finds a placement where the company used the money before filing the return. So does a Registrar's scrutiny of a later PAS-3. We see this most where the company paid salaries from the subscription money in the gap between receipt and allotment.

## How does a private placement differ from a rights issue?

A rights issue under section 62(1)(a) offers shares to existing equity holders in proportion to their holding, with a right to renounce. A private placement offers shares to named persons by PAS-4, with no renunciation. A rights issue needs no special resolution or registered valuer, but a private placement needs both.

For a wholly owned subsidiary raising money from its own parent, a rights issue is usually simpler. For a new foreign investor, it does not work, because the investor is not yet a shareholder. Our [rights issue guide](/insights/rights-issue-indian-subsidiary-foreign-parent) covers the parent route in detail.

| Point | Private placement (preferential allotment) | Rights issue |
|---|---|---|
| Companies Act basis | Section 62(1)(c), section 42, rule 13, rule 14 | Section 62(1)(a) |
| Who can be offered | Identified persons, up to 200 a year for each kind of security | Existing equity holders, pro rata |
| Shareholder approval | Special resolution for each offer | Board decision; no special resolution under section 62(1)(a) |
| Offer document | Form PAS-4, serially numbered; PAS-5 record | Letter of offer by notice |
| Renunciation | Not allowed | Allowed unless the articles provide otherwise |
| Offer period | Not fixed; allotment within 60 days of money | At least 7 days (rule 12A) and up to 30 days |
| Registered valuer under the Companies Act | Required | Not required |
| Separate bank account | Required by section 42(6) | Not required by section 62 |
| Return of allotment | Form PAS-3 within 15 days | Form PAS-3 within 30 days (section 39(4)) |
| FEMA price for a non resident | Not below fair value (rule 21) | Not below the price offered to residents (rule 7 for unlisted) |
| Renounced rights bought by a non resident | Not applicable | Priced under rule 21 (rule 7A) |
| FEMA reporting | Form FC-GPR within 30 days | Form FC-GPR within 30 days |

Rule 7 of the NDI Rules sets the rights price for a non resident in an unlisted company. It cannot be less than the price offered to resident shareholders. Rule 7A applies the rule 21 floor to renounced rights a non resident buys. So a rights issue to a foreign parent can be priced below fair value if every shareholder pays the same price. A private placement cannot.

## What changed in 2026

We found no 2026 amendment to section 42 or rule 14. The changes came from FEMA's land border test and the move to the Income Tax Act, 2025. This page carries a publish date of 16 Mar 2026, one day after Press Note 2 (2026 Series) was issued.

| Old rule | New rule | Date | Instrument |
|---|---|---|---|
| Beneficial ownership in a land border country not defined for FDI | Beneficial ownership tied to control and to the thresholds in rule 9(3) of the PML Rules | 15 Mar 2026 (Press Note); effective from the date of the FEMA notification | Press Note 2 (2026 Series) |
| Investor taxed on shares received below value under section 56(2)(x), Income Tax Act, 1961 | Section 92(2)(m), with value under rule 57 | 1 Apr 2026 | Income Tax Act, 2025 and Income Tax Rules, 2026 |
| Company taxed on premium above fair market value under section 56(2)(viib) | Omitted from AY 2025-26, and the new Act has no successor | 1 Apr 2026 (new Act) | Income Tax Act, 2025 |

The Cabinet approved the land border change on 10 Mar 2026. Its [release](https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2237806&reg=3&lang=2) says investors with non controlling beneficial ownership of up to 10 percent from a land border country can use the automatic route. The investee must report the details to DPIIT. [Press Note 2 (2026 Series)](https://www.dpiit.gov.in/static/uploads/2026/03/b9da5830b052c2f2d788593e97d07c63.pdf) of 15 Mar 2026 amended paragraph 3.1.1 of the FDI policy. It defines the beneficial owner by the PMLA and rule 9(3) of the PML Rules, and it does not itself state the 10 percent figure. It takes effect from the date of the FEMA notification.

### What has happened since

The Ministry of Finance then amended the NDI Rules. The Gazette notification of the [NDI (Third Amendment) Rules, 2026](https://egazette.gov.in/WriteReadData/2026/273406.pdf) (S.O. 3030(E) of 12 Jun 2026) lists two earlier 2026 amendments: S.O. 2174(E) of 1 May 2026 and S.O. 2186(E) of 2 May 2026. The [NDI Rules on rbi.org.in](https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083), updated up to 2 Sep 2026, carry the beneficial owner test as Explanation 2 to rule 6(a).

Read both May notifications on egazette.gov.in for the exact insertion date.

For a private placement, this matters at the PAS-4 stage. Take a Singapore fund with small, non controlling limited partners from a land border country. On our reading, rule 6(a) of the NDI Rules may no longer push it onto the government route. The 2022 proviso to rule 14 speaks of a body corporate incorporated in, or a national of, a land border country. We test the ownership chain under both before PAS-4 goes out.

The Corporate Laws (Amendment) Bill, 2026 was introduced in the Lok Sabha on 23 Mar 2026 and went to a Joint Committee. It was still a Bill in the last official record we checked, on 27 Sep 2026. Its [text](https://egazette.gov.in/WriteReadData/2026/271201.pdf) touches section 42(2) and section 62(1)(b), so the private placement wording could change. Check its status before an issue.

## Worked example

A Bengaluru SaaS company is a Private Limited company with 10,00,000 equity shares of INR 10. Its founders hold all of them. A Singapore venture fund and a US angel investor agree to invest INR 20 crore in total. Software is a 100 percent automatic route sector, and neither investor has owners in a land border country. The figures are illustrative.

| Item | Working | Result |
|---|---|---|
| Registered valuer's price (rule 13) | Report dated 30 Jun 2026 | INR 960 a share |
| FEMA fair value (rule 21) | CA certificate dated 1 Jul 2026 | INR 975 a share |
| Issue price agreed | Not below the higher of 960 and 975 | INR 1,000 a share |
| Singapore fund | 1,80,000 shares × INR 1,000 | INR 18,00,00,000 |
| US angel | 20,000 shares × INR 1,000 | INR 2,00,00,000 |
| Total raised | 2,00,000 shares × INR 1,000 | INR 20,00,00,000 |
| Share capital | 2,00,000 × INR 10 | INR 20,00,000 |
| Securities premium | 2,00,000 × INR 990 | INR 19,80,00,000 |
| Stamp duty at 0.005 percent | 20,00,00,000 × 0.005 percent | INR 10,000 |
| Shareholding after the issue | 1,80,000 and 20,000 of 12,00,000 shares | Fund 15.00 percent, angel 1.67 percent, founders 83.33 percent |

The timeline runs like this:

1. **6 Jul 2026.** The board approves the offer, records both investors' names and calls a general meeting at shorter notice.
2. **8 Jul 2026.** The shareholders pass the special resolution with the rule 13 and rule 14 disclosures.
3. **9 Jul 2026.** The company files Form MGT-14 and opens a separate account with a scheduled bank.
4. **13 Jul 2026.** The company emails PAS-4 numbers 1 and 2 to the two investors and enters both in Form PAS-5. The last date was 5 Aug 2026, 30 days after the names were recorded.
5. **20 Jul 2026.** The fund's money arrives. The 60 day allotment deadline is 18 Sep 2026.
6. **24 Jul 2026.** The angel's money arrives. The 60 day allotment deadline is 22 Sep 2026.
7. **31 Jul 2026.** The board allots 2,00,000 shares into the investors' demat accounts. The FEMA certificate is 30 days old, inside the 90 day limit.
8. **15 Aug 2026.** Last date for Form PAS-3.
9. **30 Aug 2026.** Last date for Form FC-GPR.

Now change one fact. Suppose the angel's KYC fails, and on 31 Jul 2026 the board allots only the fund's 1,80,000 shares. The angel's 60 days end on 22 Sep 2026, and his refund is due by 7 Oct 2026. If the company refunds on 17 Oct 2026, interest runs from 22 Sep 2026 for 25 days. The interest is INR 2,00,00,000 × 12 percent × 25 ÷ 365 = INR 1,64,384.

The company reports the fund's allotment alone in PAS-3 and FC-GPR. The fund's stake then becomes 1,80,000 of 11,80,000 shares, which is 15.25 percent. The subscription agreement should say what happens to the price and the stake if one investor drops out.

## Common mistakes

1. **Sending PAS-4 before filing the special resolution.** Rule 14 allows the offer letter only after the resolution is filed. Fix: file Form MGT-14 first, then send PAS-4.
2. **Taking the money into the main current account.** Section 42(6) requires a separate bank account. Fix: open it before PAS-4 goes out and put its details in the subscription agreement.
3. **Using the money before PAS-3 is filed.** Section 42(4) bars use until allotment and the return. Fix: file PAS-3 on the day of allotment or soon after.
4. **Filing PAS-3 in 30 days.** A private placement allotment has a 15 day limit under section 42(8). Fix: diarise 15 days from the board meeting that allots.
5. **Counting subscribers, not offerees, for the 200 limit.** Rule 14(2) counts persons offered. Fix: treat the PAS-5 register as the running count for the financial year.
6. **Letting the FEMA certificate expire.** The certificate must be no more than 90 days old on allotment. Fix: date it close to the expected allotment, or refresh it.
7. **Pricing at the registered valuer's number when FEMA fair value is higher.** Rule 21 is a separate floor. Fix: use the highest of the valuations.
8. **Ignoring land border owners of a fund.** The 2022 proviso to rule 14 and rule 6(a) of the NDI Rules can require government approval. Fix: get the fund's ownership chain before PAS-4 goes out.
9. **Allotting in physical form.** Rule 9B requires demat for a private company that is not a small company. Fix: get the investor's demat account opened before allotment.

To plan a private placement with a foreign investor, see our [funding advisory service](/services/startup-planning-advisory.html).

## Checklist

1. Confirm the sector, the entry route and the cap, and check each investor's ownership for land border links.
2. Check the authorised capital and increase it if the new shares need room.
3. Obtain the registered valuer's report and the FEMA valuation certificate.
4. Hold the board meeting, approve the offer and record the investors' names.
5. Pass the special resolution with the rule 13 and rule 14 disclosures.
6. File Form MGT-14 before any offer letter goes out.
7. Open a separate bank account with a scheduled bank.
8. Send each investor a serially numbered Form PAS-4 within 30 days and enter it in Form PAS-5.
9. Collect the money by inward remittance into the separate account, with the FIRC and KYC report.
10. Allot the shares in demat form within 60 days of receipt, or refund within the next 15 days.
11. File Form PAS-3 within 15 days of allotment.
12. File Form FC-GPR within 30 days of allotment and include the holding in the next FLA return.

## Key terms

- **Private placement**: A private placement is an offer of securities to identified persons, not the public, under section 42 of the Companies Act, 2013 and rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. It needs a special resolution, a PAS-4 offer letter, at most 200 persons a year and a separate bank account. (https://krystal7.com/glossary#private-placement)
- **Form PAS-4**: Form PAS-4 is the private placement offer letter a company sends to a named offeree under rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. The company can send it only after the special resolution is filed in Form MGT-14, and within 30 days of recording the offeree's name in Form PAS-5. (https://krystal7.com/glossary#form-pas-4)
- **Form PAS-5**: The record of private placement offers that a company keeps under rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. It lists the persons to whom the company sent Form PAS-4, with the date of each offer. (https://krystal7.com/glossary#form-pas-5)
- **Form PAS-3**: Form PAS-3 is the return of allotment a company with share capital files with the Registrar of Companies after allotting securities, under section 39(4) of the Companies Act, 2013 and rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. It lists the allottees and is due within 30 days, or 15 days for a private placement. (https://krystal7.com/glossary#form-pas-3)
- **Preferential allotment**: A preferential allotment is an issue of shares to chosen persons rather than to all existing members, under section 62(1)(c) of the Companies Act, 2013. It needs a special resolution and a registered valuer's report. For an unlisted company it must also follow section 42, so the PAS-3 is due within 15 days. (https://krystal7.com/glossary#preferential-allotment)
- **Form FC-GPR**: The report an Indian company files with the Reserve Bank of India on the FIRMS portal after issuing equity instruments to a person resident outside India. Regulation 4(1) of FEMA 395/2019-RB requires it within 30 days of the issue. The shares must be issued within 60 days of receiving the money, or the money is refunded within 15 days after. (https://krystal7.com/glossary#form-fc-gpr)
- **Pricing guidelines (FEMA)**: Rule 21 of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019 sets the price floor and ceiling for unlisted shares. A resident selling to a non resident must receive at least fair value. A non resident selling to a resident may receive at most fair value, certified by a Chartered Accountant, SEBI registered merchant banker or practising cost accountant. (https://krystal7.com/glossary#pricing-guidelines)

## Frequently Asked Questions

### What is a private placement of shares?

A private placement is an offer of securities to a select group of persons identified by the board. The company makes it through Form PAS-4, not through a public offer. Section 42 of the Companies Act, 2013 and rule 14 of the Prospectus and Allotment Rules govern it. The offer cannot be advertised and carries no right to renounce.

### Is a special resolution required for a private placement?

Yes. Rule 14(1) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 requires a special resolution for each offer, with an explanatory statement. Only non convertible debentures and offers to qualified institutional buyers can use a yearly resolution. The company files the resolution in Form MGT-14 before it sends Form PAS-4.

### What is Form PAS-4?

Form PAS-4 is the private placement offer cum application letter. Rule 14 requires it to be serially numbered, addressed to one named person and sent within 30 days of recording that person's name. It can go in writing or electronically. Only the person addressed can apply, and any other application is invalid.

### What is Form PAS-5?

Form PAS-5 is the record of private placement offers a company keeps under rule 14 of the Prospectus and Allotment Rules. It lists every person to whom the company sent Form PAS-4 and the date of the offer. We attach it to Form PAS-3 and use it to track the 200 person limit.

### How many persons can be offered shares in a private placement?

Up to 200 persons in aggregate in a financial year, under rule 14(2), counted separately for each kind of security. Qualified institutional buyers and employees offered securities under an ESOP scheme do not count. An offer to more persons is a deemed public offer under section 42 of the Companies Act, 2013.

### Is there a minimum investment for a private placement?

Not any more. The earlier version of rule 14 required an investment of at least INR 20,000 of face value per person. The rule as substituted by the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 of 7 Aug 2018 does not carry that condition. FEMA sets no minimum for a share issue either.

### Can a private placement be made to a foreign investor?

Yes. A share issue to a foreign investor is a preferential allotment under section 62(1)(c), made by private placement under section 42. FEMA allows it within the sectoral cap and entry route, at not less than fair value under rule 21 of the NDI Rules. The company files Form FC-GPR within 30 days of allotment.

### Why does private placement money go into a separate bank account?

Section 42(6) of the Companies Act, 2013 requires the application money to be kept in a separate account with a scheduled bank. The company can use it only to adjust against the allotment or to repay investors. Section 42(4) also bars use of the money until the company allots and files Form PAS-3.

### What is the time limit for allotment in a private placement?

The company must allot within 60 days of receiving the application money, under section 42(6). If it cannot, it repays within 15 days after the 60 days end. A late repayment carries interest at 12 percent a year from the 60th day. FEMA 395/2019-RB sets the same 60 and 15 day periods.

### What is the due date for PAS-3 after a private placement?

Form PAS-3 is due within 15 days of allotment under section 42(8) of the Companies Act, 2013. It must carry the complete list of allottees. For a late filing, section 42(9) charges INR 1,000 a day, capped at INR 25 lakh, on the company, its promoters and its directors.

### What is the penalty for breaching section 42?

Section 42(10) imposes a penalty of up to the amount raised or INR 2 crore, whichever is lower. The company, its promoters and its directors are liable. The company must also refund all the money with interest within 30 days of the order. A placement to more than 200 persons is a deemed public offer.

### How is the price fixed for shares issued to a foreign investor?

Section 62(1)(c) and rule 13 need a registered valuer's report. Rule 21 of the NDI Rules adds a floor at fair value. A Chartered Accountant, a SEBI registered merchant banker or a practising cost accountant certifies it. The FEMA certificate must be no more than 90 days old on allotment. We use the higher value.

### Can a company send PAS-4 to an investor from China?

Only with government approval. A proviso to rule 14(1), inserted on 5 May 2022, covers countries that share a land border with India. It bars an offer to a body corporate incorporated there, or to its national, without approval under the NDI Rules. The approval must be attached to the PAS-4.

### What is the difference between a private placement and a rights issue?

A rights issue under section 62(1)(a) offers shares pro rata to existing equity holders, with a right to renounce and no registered valuer. A private placement under section 62(1)(c) and section 42 offers shares to named persons by PAS-4. It needs a special resolution, a separate bank account and PAS-3 within 15 days.

### Can a private company raise money from the public?

No. Section 2(68) of the Companies Act, 2013 requires a private company's articles to prohibit any invitation to the public to subscribe for its securities. It also caps members at 200, excluding employees. A Private Limited company raises equity by private placement, rights issue or bonus issue.

## Sources

- Income Tax Department (text of the Companies Act, 2013), section 42, https://www.incometaxindia.gov.in/w/section-42-118
- Income Tax Department (text of the Companies Act, 2013), section 62, https://www.incometaxindia.gov.in/w/section-62-101
- Income Tax Department (text of the Companies Act, 2013), section 2, https://www.incometaxindia.gov.in/w/section-2-148
- Legislative Department, India Code, Companies Act, 2013 with subordinate legislation, including the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 of 7 Aug 2018, the Amendment Rules, 2020 of 16 Oct 2020 and the Amendment Rules, 2022 of 5 May 2022, https://www.indiacode.nic.in/handle/123456789/2114
- Securities and Exchange Board of India (hosted copy), Companies (Share Capital and Debentures) Rules, 2014, rule 13, https://www.sebi.gov.in/sebi_data/attachdocs/apr-2017/1492085873402.pdf
- Reserve Bank of India, Foreign Exchange Management (Non Debt Instruments) Rules, 2019, updated up to 2 Sep 2026, https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083
- Reserve Bank of India, Master Direction on Foreign Investment in India, updated up to 15 Jun 2026, https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200
- Reserve Bank of India, Foreign Exchange Management (Mode of Payment and Reporting of Non Debt Instruments) Regulations, 2019, amended up to 13 Jun 2026, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0
- Press Information Bureau, Cabinet approves changes in guidelines on investments from countries sharing land border with India, 10 Mar 2026, https://www.pib.gov.in/PressReleseDetailm.aspx?PRID=2237806&reg=3&lang=2
- Department for Promotion of Industry and Internal Trade, Press Note No. 2 (2026 Series), 15 Mar 2026, https://www.dpiit.gov.in/static/uploads/2026/03/b9da5830b052c2f2d788593e97d07c63.pdf
- Press Information Bureau, Stamp duty collection on securities from 1 July 2020, 30 Jun 2020, https://pib.gov.in/PressReleasePage.aspx?PRID=1635399
- Income Tax Department, Income Tax Act, 2025, section 92, https://www.incometaxindia.gov.in/w/section-92-92
- Ministry of Finance, Foreign Exchange Management (Non Debt Instruments) (Third Amendment) Rules, 2026, S.O. 3030(E), 12 Jun 2026, https://egazette.gov.in/WriteReadData/2026/273406.pdf
- Gazette of India, Corporate Laws (Amendment) Bill, 2026, Bill No. 85 of 2026, as introduced in the Lok Sabha on 23 Mar 2026, https://egazette.gov.in/WriteReadData/2026/271201.pdf

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