What is Private Placement?

When a company issues financial securities such as shares and convertible securities to a particular group of investors (not more than 49 in numbers) it is known as private placement.


What are the different kinds of private placement?


There are mainly two kinds - preferential allotment and qualified institutional placement. Under the preferential allotment, a listed company issues securities to a select group of entities, which may be institutions or promoters, at a particular price. The eligibility of investors is as per Chapter XIII of SEBI (DIP) guidelines. Investors may have a lock-in period. Recently, the Sebi eased the norms of preferential allotment to help revive Satyam Computers. Usually for a preferential allotment, companies are required to take permission of shareholders. However, this norm was relaxed for Satyam Computers. Qualified institutional placement is another way to go for private placement under which a listed company issues shares or convertibles to institutional buyers only, as per the provisions mentioned in Chapter XIIIA of SEBI (DIP) guidelines. This process was introduced in 2006 to provide listed companies a new window to raise funds from the domestic market rather than going to foreign markets.

How is it different from a public offer?


While in case of private placement the number of investors can go up to 49 only, in a public issue there is no limit. The public issue can be of two types - initial public offer and follow-on public offer. When an unlisted company issues financial securities for the first time to public it is called as initial public offer, whereas, if a listed company comes out with new offer or offer for sale to be subscribed by public it is called a follow-on public offer.

What are the regulatory requirements for private placement?


To go for private placement, there are certain regulations and criteria that a company has to follow. The first thing is that the company has to be listed on a stock exchange. It must meet the requirement of minimum public shareholding as per the listing agreement. To come out with qualified institutional placement, the issuing company is required to issue at least 10% of the total issue to mutual funds.