A founder may privately message a group of prospective investors and assume the process is informal. Section 42 says otherwise: a private placement is a regulated offer to identified persons, with records, banking and allotment requirements.
The safer sequence is to decide the route before circulating terms or receiving subscriptions. A later PAS-3 filing cannot make an improperly solicited offer disappear.
Quick Answer
Section 42 of the Companies Act governs private placement to identified persons and restricts public solicitation. The process generally involves approvals, a PAS-4 private-placement offer, a PAS-5 record, subscription through prescribed banking channels, timely allotment and PAS-3 return of allotment. Preferential-issue rules may also apply to the instrument. Check current MCA forms and timelines before sending the offer.
1. Confirm the issue route
Not every share issue is a section 42 offer. Rights offers to existing holders, private placement and preferential allotment can have different and sometimes overlapping requirements. Identify investors, instrument and company articles before preparing forms.
Section 42 is directed to identified persons. A broad social-media invitation or publicly accessible “invest in us” page can conflict with the private-placement character. Keep a clear record of who was selected and how the offer was sent.
- Identify proposed subscribers by name.
- Check section 62 interaction.
- Avoid public advertising of the offer.
2. Approvals and PAS records
The board and, where required, shareholders should authorise the offer on the correct terms. PAS-4 is the private-placement offer-cum-application document; PAS-5 records the offer. The details must agree with valuation, securities terms and investor correspondence.
A preferential issue can invoke additional Share Capital and Debenture Rules, including explanatory-statement and valuation requirements. An old template may omit disclosures required for the current instrument or company.
- Prepare route-specific resolutions.
- Reconcile PAS-4, PAS-5 and cap table.
- Check current MCA portal form versions.
3. Receive money and allot
Subscription should come from the identified subscriber through the prescribed banking channel; avoid cash or unrelated third-party receipts. Maintain an application-money record and do not use funds contrary to the section’s restrictions before the permitted point.
Section 42 contains allotment and refund timelines and consequences for delay. Calendar them from the actual receipt date, not the term-sheet date. If the process cannot close, take advice on refund and reissue rather than silently holding money.
- Verify remitter against the offer.
- Maintain a receipt-by-investor schedule.
- Calendar allotment or refund deadlines.
4. File and update ownership records
After lawful allotment, file the return of allotment in PAS-3 within the applicable period, issue certificates and update statutory registers and cap table. Investor rights in agreements and articles should match the securities actually allotted.
A non-resident subscriber adds FDI entry-route, pricing, banking and FC-GPR considerations. Section 42 compliance does not replace FEMA reporting. Keep all offer, receipt, allotment and filing evidence in a single closing file.
- Check PAS-3 details before upload.
- Update registers and certificates.
- Calendar any FEMA reporting.
How to record the decision
A short decision note should explain why the chosen route fits the facts, which authority controls the point, what was checked and which assumptions remain open. For private placement for startups, the note should also identify the responsible person, the next filing or approval event and the evidence that supports each conclusion.
Keep the note with board materials, agreements, portal acknowledgements and professional advice. This simple record helps founders answer investor, lender and regulator questions without reconstructing the reasoning months later. Update it whenever the business model, ownership, money flow, instrument terms or scheme status changes.
Documents to keep in one working file
The exact set depends on the transaction, but the working file should make the facts easy to test. Start with these records and add authority-specific forms or declarations where required:
- Choose lawful issue and instrument route.
- Identify subscribers and pass approvals.
- Prepare PAS-4 and PAS-5 records.
- Receive subscription by prescribed banking channel.
- Allot or refund within current timelines.
Use dated versions and keep a clear approval trail. A missing email, valuation input or portal receipt can become a material due-diligence issue even when the commercial decision itself was sound.
Decision table
Use the facts of the proposed transaction to test each row before choosing a route.
| Stage | Record |
|---|---|
| Identified offer | Investor list and PAS-4 |
| Offer record | PAS-5 and approvals |
| Subscription | Bank receipt and application log |
| Allotment | Board action, PAS-3 and registers |
Practical checklist
Work through these steps using dated documents, not assumptions made in a pitch deck.
- Choose lawful issue and instrument route.
- Identify subscribers and pass approvals.
- Prepare PAS-4 and PAS-5 records.
- Receive subscription by prescribed banking channel.
- Allot or refund within current timelines.
- File PAS-3 and update ownership records.
Mistakes that create avoidable delay
The following shortcuts frequently create avoidable legal or filing work later.
- Publicly soliciting a “private” placement.
- Receiving funds from an unlisted third party.
- Treating PAS-3 as a cure for earlier process defects.
When professional review is useful
A fact-specific review should test the chosen route, evidence and filing sequence before money or customer commitments make a correction expensive.
For a fact-specific review, share the proposed activity, ownership, funding instrument and present stage with Sunny G And Co. at contact@cssunnygupta.com. The scope and professional fee should be agreed only after the facts and required filings are clear.
Related service paths
If the issue involves actual filings or structuring, these service pages describe the relevant scope of work. They do not change the eligibility and approval tests explained above; the right route still depends on the company’s documents and intended activity.
Official sources and last review
This article was last reviewed on 15 September 2026. Rules, portal status and filing practices can change, so check the current authority before acting.
