Private placement
An issue of securities to a select group of identified investors — institutions, banks, mutual funds — rather than to the public, with fewer formalities and no advertising.
In plain language
A public issue invites anyone. A private placement is an invitation by name. The company approaches a handful of investors — typically financial institutions, banks and mutual funds — and issues securities to them directly.
The workbook gives the reasons companies like it: these investors are better informed, so there is less regulatory compliance; and with fewer procedures the issue is faster and cheaper. That is why Indian companies prefer private placement to public issues for debt.
How it works
The Companies Act rules as the workbook states them (section 3.17): an offer to subscribe to securities made to not more than 50 persons is a private placement. The offer must be made by name to identified persons, and details filed with the Registrar of Companies. Payment only through banking channels, not cash. The company may not advertise or use marketing or distribution channels to inform the public. SEBI's public issue requirements do not apply. The security can seek listing if it meets SEBI and exchange requirements, and any company can do a private placement, listed or not.
Variants in the same section:
- Preferential allotment — a private placement of shares, or of instruments convertible into shares, by a listed company. Needs a shareholders' resolution; priced by SEBI's formula; allotments to promoters locked in.
- Qualified Institutions Placement — a listed issuer placing securities privately with QIBs only.
- Private placement of debt on the Electronic Book Provider platform — compulsory for issues of Rs 50 crore or more (including green shoe), for issuers in existence less than three years, and for bank and NBFC regulatory capital instruments.
At the start of a company's life, the workbook adds, equity issued to promoters, venture capitalists and private equity investors is also a primary issue made privately.
A worked example
Illustrative figures. An NBFC in existence for eight years wants Rs 300 crore of three-year debentures.
As a public issue it would need an offer document filed through the exchanges, a credit rating, a debenture trustee, a debenture redemption reserve, mandatory listing, advertisements and at least 75 per cent minimum subscription.
As a private placement it offers the debentures by name to twelve insurance companies, mutual funds and banks.
Issue size Rs 300 crore ≥ Rs 50 crore → bidding must be on the EBP
Per-participant cap through arrangers = lower of Rs 100 crore and 5% of base issue
= lower of Rs 100 crore and Rs 15 crore = Rs 15 crore
Issue documents go up on the EBP at least 2 working days before opening, bids are ranked by price-time or yield-time priority, and the money arrives through banking channels. A process that would take weeks as a public issue can be done far faster, which is the workbook's whole point about why companies prefer it for debt.
Why NISM asks about it
Chapter 3 (Primary Markets) lists private placement as one of the four types of issue (section 3.4) and covers it in section 3.17 with preferential allotment, QIPs and the electronic book-building system for debt. Questions test the definition, the no-advertising and banking-channel conditions, and which variant applies to which issuer.
Common exam traps
- Stale figure — the 50-person limit. The workbook states an offer to not more than 50 persons. Under the Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended, a private placement may be made to up to 200 persons in aggregate in a financial year, excluding QIBs and employees under ESOPs. Learn the workbook figure for the exam and know the current rule.
- No advertising, no cash. Both are explicit conditions.
- Preferential allotment is the listed-company version and needs shareholder approval and SEBI pricing.
- Any company can make a private placement, whether or not it has made a public offer.
- Private placement of debt is not unregulated — above the thresholds it must go through the EBP.
Where this is taught
- Series XXI-B · Chapter 2: Introduction to Securities Marketsintroduced here
- Series II-A · Chapter 8: Modes of allotment of shares other than Public Offersintroduced here
- Series XXI-A · Chapter 2: Introduction to Securities Marketsintroduced here
- Series VII · Chapter 1: Introduction to Securities Marketintroduced here
- Series X-A · Chapter 6: Securities Market Segmentsintroduced here
- Series XII · Chapter 3: Primary Marketsintroduced here
Related terms
- Preferential issueAn issue of specified securities by a listed issuer to a select person or group on a private placement basis — excluding public, rights, bonus and ESOP issues, QIPs, sweat equity and overseas depository receipts.
- Further Public OfferA fresh public offer of securities by a company that has already made an IPO — used to raise more capital or, as an offer for sale, to widen public shareholding.
- Initial Public OfferThe first offer of a company's shares to the public — by fresh issue, by existing shareholders selling through an offer for sale, or both — after which the shares must be listed.
- Qualified Institutions PlacementA fast route by which an already-listed company places eligible securities privately with Qualified Institutional Buyers, without the prospectus and timetable of a public issue.
- Electronic Book ProviderThe stock exchange platform on which privately placed debt securities above SEBI's thresholds must be bid for electronically, with published issue details and system-computed cut-offs.
- Alternative Investment FundA privately pooled investment vehicle registered with SEBI that raises money from select Indian or foreign investors under a defined investment policy — never from the public at large.
- Primary marketThe market where an issuer sells securities to investors for the first time and receives the money itself — the "new issue market", as against the secondary market where investors trade among themselves.
- Offer for SaleAn offer of securities by existing shareholders — promoters, institutions, the government — to the public through an offer document. The sellers get the money; the company issues no new shares.
- Financial disintermediationThe shift of borrowing away from banks and towards the securities markets, where a company raises money directly from investors by issuing paper instead of taking a bank loan.