What Is Section 42 of Companies Act 2013? Private Placement Explained

Section 42 of the Companies Act 2013 

If you have ever searched Section 42 of the Companies Act 2013, chances are you are either a startup founder, a private company director, or someone trying to raise funds without going public. And honestly, that’s exactly who this section is meant for.

Section 42 is not a random compliance provision. It governs private placement of securities, which is one of the most common and practical ways Indian companies raise capital—quietly, legally, and without involving the general public.

What Is Section 42 of the Companies Act 2013?

Section 42 of the Companies Act 2013 governs the private placement of securities by a company.

In simple terms:

It allows a company to raise money by offering shares, debentures, or other securities to a selected group of persons, instead of making a public offer.

This means:

• No IPO
• No public advertising
• No open invitation

Only identified investors can participate.

What Is Private Placement of Securities?

Before going deeper into Section 42, let’s understand private placement properly.

Private placement of securities means:

• Securities are offered privately
• To a limited number of persons
• Identified in advance
• Through a formal offer letter

This method is commonly used by:

• Startups raising early funding
• Private companies bringing in strategic investors
• Companies issuing debentures to known lenders

And yes—private placement of securities is regulated through Section 42 of the Companies Act 2013.

Why Section 42 Exists

Without regulation, companies could misuse “private placement” to:

• Raise money from hundreds of people
• Avoid public disclosure
• Bypass SEBI rules

So Section 42 ensures:

• Transparency
• Controlled fundraising
• Investor protection
• Traceable money flow

Who Can Use Section 42?

Section 42 applies to:

• Private companies
• Public companies (for private placement only)

It does not apply to:

• Public offers
• Rights issues
• Bonus issues

If securities are being offered privately, Section 42 compliance is mandatory.

Issue Private Placement Offer and Application—The Core of Section 42

One of the most searched phrases under this topic is "issue private placement offer and application," because this is where most mistakes happen.

Under Section 42:

• A company must issue a private placement offer letter.
• In a prescribed format (PAS-4)
• Along with an application form
• To identified persons only

No open links. No forwarding. No WhatsApp circulation.

Key Rule: Limited Number of Persons

Section 42 strictly provides that:

A company can make a private placement to a selected group of persons.

The limit is

• Maximum 200 persons in a financial year
• Excluding:
  • Qualified Institutional Buyers (QIBs)
  • Employees under ESOP

Crossing this limit automatically converts the offer into a public offer, which is a serious violation.

Types of Securities Allowed Under Section 42

Section 42 allows companies to issue securities through private placement, including:

• Equity shares
• Preference shares
• Debentures
• Convertible instruments

As long as:

• The offer is private
• Compliance is followed
• Money is traceable

Procedure Under Section 42 (Step-by-Step)

Here’s how Section 42 works in real life:

Step 1: Board Approval

The board must approve:

• Private placement proposal
• List of identified investors
• Offer size and pricing

Step 2: Shareholders’ Approval

A special resolution is mandatory.

Without shareholder approval:

• The issue is invalid

Step 3: Issue Offer Letter (PAS-4)

This is the private placement offer and application stage.

Important rules:

• The offer must be addressed personally
• Cannot be renounced
• Cannot be advertised

Step 4: Receive Money Through Banking Channels

Cash is strictly prohibited.

Money must come via:

• Bank transfer
• Cheque
• Demand draft

And must be credited to a separate bank account.

Step 5: Allotment Within 60 Days

Securities must be allotted within:

• 60 days of receiving money

Failure triggers refund obligations.

Step 6: Filing With MCA

Companies must file:

• PAS-3 (Return of Allotment)
• Within prescribed timelines

This is where MCA tracking comes in.

Rules for Section 42 of Companies Act 2013

The rules for section 42 of the Companies Act 2013 are detailed and strict.

Some critical rules include:

• No public advertisements
• No utilisation of funds before allotment
• Separate bank account mandatory
• Complete investor records required

Non-compliance invites heavy penalties.

Penalty Under Section 42 of Companies Act 2013

This is where founders often get shocked.

The penalty under section 42 of the Companies Act 2013 can be severe.

If a company violates Section 42:

• The penalty can extend to:
  • Amount raised
  • Or ₹2 crore
  • Whichever is lower
• Plus refund of money
• Plus interest

And yes—officers in default can also be penalized.

Section 42(6) of Companies Act 2013 – Refund Rule

Section 426 of the Companies Act 2013 deals with failure to allot.

If:

• Securities are not allotted within 60 days

Then:

• Money must be refunded within 15 days
• With interest if delayed

This provision protects investors from indefinite fund blockage.

Section 42(10) of Companies Act 2013 – Punishment Clause

Section 4210 of the Companies Act 2013 specifies penalties for contravention.

It empowers regulators to:

• Penalise the company
• Penalise promoters and directors
• Order refund with interest

This subsection makes Section 42 a serious compliance obligation, not a formality.

Relation With Section 39 and Section 62 of Companies Act 2013

Many people also search:

• section 39 of the Companies Act, 2013
• section 62 of the Companies Act 2013

Here’s how they differ:

Section	Purpose
Section 39	Allotment rules
Section 42	Private placement
Section 62	Rights issue

Each serves a different capital-raising method.

Common Mistakes Companies Make Under Section 42

From experience, the most common errors are:

• Issuing offers to more than 200 persons
• Using cash
• Delayed MCA filings
• Treating private placement casually
• Sharing offer links publicly

These mistakes convert legal fundraising into a regulatory nightmare.

Why MCA Takes Section 42 Very Seriously

The Ministry of Corporate Affairs (MCA) closely tracks:

• PAS-3 filings
• Fund movements
• Shareholder records

Section 42 is often checked during:

• Due diligence
• Startup funding rounds
• Compliance audits

Is Section 42 Mandatory for Startups?

Yes.

Whether you are:

• A bootstrapped startup
• A funded private company
• Raising from friends or angels

If securities are issued privately:

• Section 42 applies fully

There is no exemption just because it’s a startup.

Practical Advice for Founders and Directors

If you plan to use Section 42:

1. Decide investor list carefully
2. Never exceed limits
3. Maintain clean documentation
4. File MCA forms on time
5. Use professional guidance

Section 42 mistakes are expensive—but avoidable.

Final Thoughts: Why Section 42 Matters

Section 42 of the Companies Act 2013 is not just a compliance provision. It is the legal backbone of private fundraising in India.

It:

• Enables capital raising
• Protects investors
• Prevents misuse
• Ensures transparency

Understanding it properly can save companies from penalties, delays, and future litigation.

Looking for expert help with private placement or MCA compliance?

Visit callmyca.com for clear, practical guidance on company law, funding, and compliance—without confusing jargon.