Companies Act 2013 Section 42: Private Placement (2026)

Explainer · Company Law · Companies Act 2013

Updated for 2026 · Claw Editorial

Section 42 of the Companies Act, 2013 is the law a company uses to raise money quietly, by offering shares or other securities to a small, chosen group of investors rather than to the public at large. This is called a private placement. It is faster than a public issue, but the law keeps it tightly fenced so it cannot become a backdoor public offer. This explainer sets out who can be offered securities, the 200 person cap, the offer letter, the separate bank account rule, and the return of allotment the company must file. Last verified October 2026.

01The short answer

Section 42 of the Companies Act, 2013 is titled "Issue of shares on private placement". It lets a company offer and allot securities, such as shares or debentures, to a select group of identified persons, through a document called a private placement offer letter in Form PAS-4, backed by a special resolution.

The offer cannot be advertised to the public, the money must be kept in a separate bank account until allotment, and the company must file a return of allotment with the Registrar in Form PAS-3. Break these rules and the whole offer can be treated as a public offer, with much heavier consequences.

02What a private placement is

A private placement is an offer or invitation to subscribe to securities, made to a select group of persons the company has identified in advance, and not to the general public. It is different from:

• a public issue, where securities are offered to the public through a prospectus;
• a rights issue under Section 62, where shares are offered first to existing shareholders.

03The 200 person cap

The central limit under Section 42, read with the rules, is on how many people can be offered securities. A company can make a private placement offer to not more than 200 persons in the aggregate in a financial year, counted separately for each kind of security.

Certain investors do not count towards the 200, broadly qualified institutional buyers and employees being offered securities under an employee stock option scheme. If the offer crosses the cap, it is deemed to be a public offer, and the company must then follow the full public issue rules, which is a serious consequence.

04The offer letter and the money

The process is tightly controlled:

• the company passes a special resolution approving the private placement;
• it issues a private placement offer letter in Form PAS-4 to the identified persons, and keeps a complete record of the offer;
• there must be no public advertisement and no use of media, marketing or distribution channels to inform the public;
• the application money must be received only by banking channel, not cash, and must be kept in a separate bank account;
• the money in that account cannot be used by the company until allotment is made and the return of allotment is filed.

These rules make sure the money is ring fenced and the offer stays within the chosen group.

05Allotment and the PAS-3 return

After receiving the money, the company must allot the securities within 60 days. If it cannot, it must refund the money within 15 days, and after that with interest. Once allotment is made, the company must file a return of allotment with the Registrar.

The company cannot use the money raised until the PAS-3 return of allotment is filed. Missing these steps draws penalties under Section 42.

06Why it matters

Private placement is the most common way unlisted companies and startups raise capital, so Section 42 compliance is a routine but high stakes exercise. A slip, crossing the 200 person cap, advertising the offer, or using the money before filing PAS-3, can turn a private placement into a deemed public offer, with refunds, penalties and regulatory action.

It sits alongside Section 62 on further issue of share capital, which governs the rights issue, ESOP and preferential allotment routes. For an investor or acquirer, past private placements and any PAS-3 defaults are part of company due diligence.

07Where Claw fits

Claw is an all-in-one legaltech platform for Indian advocates, law firms, and corporate legal teams, combining AI-based case search, an AI legal assistant (Legal GPT), case management, and compliance automation across all Indian courts and tribunals.

Section 42 disputes, over whether an offer crossed into a public offer, whether the PAS-3 was filed, or whether the money was misused, surface in SEBI orders, Registrar adjudication, NCLT petitions and High Court appeals. Claw lets you search more than 30 crore judgments, with Supreme Court decisions from 1950 and High Court decisions from 1990, to see how courts have read private placement and the deemed public offer rule, with results in under 5 seconds. You can also track a live matter, with its orders and hearings, by company or party name across 9,102 courts, benches and forums. Claw does not use the documents you upload to train its AI models.

Create a FREE Claw account to track any Section 42 matter by party name and follow every hearing, and use case search across Indian courts to find how courts have applied the private placement rules.

08Sources and further reading

• India Code (Companies Act, 2013, bare text): indiacode.nic.in
• Ministry of Corporate Affairs (Prospectus and Allotment Rules): mca.gov.in
• PRS Legislative Research: prsindia.org
• Claw: clawlaw.in

This explainer is general information, not legal advice. The cap, forms, time limits and penalties under Section 42 and the rules can change, so check the current text and take advice from a company secretary or counsel before you act.

09Frequently asked questions