Tag: Financial Reporting

Management Notes

Preparation of Consignment Account

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Consignment account is prepared to ascertain the profit earned or loss incurred by the consignor on a specific consignment. This account can be viewed as a combined trading and profit and loss account prepared specifically for consignment business.

The nature of the consignment account is nominal which means it is drawn up to show the results of the consignment business for a specific period.

If consignor sends goods to more than one consignee working in different cities or areas, a separate consignment account is required for each consignment so that the profit or loss for each consignment can be determined separately. If consignor maintains more than one consignment accounts, he can distinguish them from each other by adding to the account title the name of the consignee or the name of the city or area to which the particular consignment belongs. For example, Consignment to David, Consignment to John, Consignment to Ottawa and consignment to New York etc.

Debit and credit entries in a consignment account

The entries in the consignment account are made on the basis of consignor’s own record as well as account sales sent by the consignee. The debit and credit entries are made as follows:

Debit entries

The common entries that appear on the debit side of a consignment account are listed below:

  • Opening stock of goods
  • Total cost of goods sent on consignment
  • All the expenses incurred by consignor such as loading, freight, insurance etc.
  • All the expenses paid by consignee such as unloading, freight, godwon rent, warehousing and storage, marketing expenses, packaging and selling expense etc.
  • Bad debts regarding consignment sales.
  • Consignee’s ordinary and del credere commission at agreed rate on sale proceeds.

Credit entries

The usual items that appear on the credit side of a consignment account are listed below:

  • Gross sale proceeds
  • Closing stock of goods
  • Abnormal loss of goods
  • Stock in transit

The balance of consignment account represents a profit or a loss on consignment and is transferred to “Profit and Loss on Consignment Account”. The consignment account is thus closed.

The Profit and Loss on Consignment Account is also a nominal account. If there are more than one consignment, the balances of all consignment accounts are transferred to this account.

The profit and loss on consignment account is closed at the end of the year by transferring its balance to the General Profit and Loss Account.

Management Notes

Proforma Invoice, Invoice Price, Account Sales, Non-recurring Expenses, Recurring Expenses, Ordinary Commission, Overriding Commission, Del Credere Commission, Normal Loss, Abnormal Loss

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Proforma Invoice

A proforma invoice (also written as pro forma invoice) is one of the documents used in consignment business which contains information regarding the description of goods sent on consignment and the price at which those goods can be sold by the consignee. This document is prepared by consignor and sent to the consignee along with the goods.

The proforma invoice and invoice are not the same and should not be confused with each other. An invoice is sent by a seller to the buyer to provide him the details of goods sold or services provided to him, price of those goods or services and the agreed terms of payment. It indicates seller’s demand for payment after a sale has taken place. A proforma invoice, on the other hand, is not a demand for payment rather it is a memorandum invoice which tells what the actual invoice would be.

Where goods are consigned abroad, the proforma invoice plays an important role in custom clearance. The custom officer uses the information from proforma invoice in conjunction with the general physical examination of the goods to determine the total value of goods and the amount of imposable duty. Many international traders use consignment model of business and attach proforma invoices to their across-the-border shipments.

Invoice Price

The Consignor, instead of sending the goods on consignment at cost price, may send it at a price higher than the cost price. This price is known as Invoice Price or Selling Price. The difference between the cost price and the invoice price of goods is known as loading or the higher price over the cost. This is done with a view to keep the profits on consignment secret.

As such, consignee could not know the actual profit made on consignment. Hence the consignor sends the Proforma invoice at a higher price than the cost price. When the consignor records the transaction in his book at invoice price, some additional entries have to be passed in order to eliminate the excess price and to arrive at the correct profit or loss on consignment.

Items on Which Excess Price is to be Calculated:

Excess Price or Loading is to be calculated on the following items:

  1. Consignment stock at the beginning
  2. Goods sent on consignment
  3. Goods returned by the consignee
  4. Consignment stock at the end of the period

(a) To Remove the Excess Price in the Opening Stock:

Consignment Stock Reserve A/c Dr.

  To Consignment Account

(Being the excess value of opening stock is brought down to cost price)

(b) To Remove the Excess Price in the Goods Sent on Consignment:

Goods sent on Consignment Account Dr.

  To Consignment Account

(Being the difference between the invoice price and cost price is adjusted)

(c) To Remove the Excess Price in Goods Return:

Consignment Account Dr.

  To Goods sent on Consignment A/c

(Being to bring down the value of goods to cost price)

(d) To Remove the Excess Price in Closing Stock:

Consignment Account Dr.

  To Consignment Stock Reserve A/c

(Being the excess value of stock is adjusted)

But these adjustments are not needed in consignee’s book. Invoice price does not affect the consignee. When the stock is shown in the Balance Sheet, in Consignor’s Book, the Consignment Stock Reserve is deducted.

Account Sales

Account sales is a statement specifying the price at which the goods are sold, the commission earned by the consignee, the expenses incurred by the consignee on behalf of the consignment and the net balance for which the consignee is liable. It is prepared by the consignee and does not have a fixed or specified format.

Non-recurring Expenses

Non-recurring expenses are incurred for bringing the goods from the place of the consignor to the place of the consignee. Hence, all the expenses incurred till the goods reach the godown of the consignee are non-recurring expenses. These expenses are incurred only once on a particular con­signment. It will increase the value of goods. These expenses are paid by the consignor or by the consignee on behalf of the consignor.

Non-recurring expenses of the consigner Non-recurring expenses of the consignee-
1.     Packaging

2.    Transport or carriage

3.    Forwading

4.    Dock dues

5.    Landing charges

6.    Freight

7.    Insurance

 1.     Unloading charges

2.    Railway dues

3.    Dock Dues

4.    Import Duty or Customs Duty

5.    Octroi

6.    Carriage to godown/shop

The abovementioned expenses do not occur again like the recurring expenses. These expenses are met on the whole consignment. These expenses are added to the cost of the consignment so as to arrive at the cost price of goods at the point of sale. Again these are taken into consideration when the value of closing stock and abnormal losses are calculated.

Recurring Expenses

These expenses are incurred after the goods have been received at consignee’s godown. These expenses are incurred quite often and of recurring in nature. These expenses occur regularly at fixed intervals. Generally these expenses are incurred after the goods have reached the place of business by consignee. They are met by the consignor or consignee. These expenses do not increase the value of goods.

Ordinary Commission

The ordinary commission is the fees payable by the consignor to the consignee for the sale of goods when there is no guarantee for the collection of money from the consumer. The percent (%) of the commission is lower in such a case.

Overriding Commission

Overriding commission is a type of commission which a consignor grants to the consignee who achieves a specific sales target or whose total sales revenue exceeds a specified amount. It encourages consignee to realize the best possible price for goods sold. Sometime it is given to consignee as an incentive for putting his efforts to introduce, promote and create market for a new product in certain areas.

Overriding commission is an extra commission which is awarded to the consignee in addition to his ordinary or regular commission.

Del Credere Commission

Del Credre Commission is the additional amount which the consignor pays to the consignee for taking the responsibility of collection of debt from the customers.

When the customers make default in payment, consignee charges the amount of loss of bad debts in his books. We calculate this commission on Total sales.

Normal Loss

  • It occurs due to the nature of goods shipped like leakage, evaporation, perishable goods etc.
  • We add the normal loss to the cost of goods and thus, it also impacts the gross profit.
  • Normal loss is not covered by insurance companies.
  • It is certain but it varies from time to time.

Abnormal Loss

  • Abnormal loss occurs due to unforeseen circumstances like an accident, natural calamity, fire damage etc.
  • The abnormal loss does not impact the gross profit of the entity.
  • Generally, insurance covers an abnormal loss.
  • The abnormal loss is not certain due to unforeseen circumstances and situations.
Management Notes

Valuation of Closing Stock

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A consignor may have some incomplete consignments at the end of his accounting year. An incomplete consignment means that there are some unsold units of goods with the consignee when the accounting period of the consignor comes to an end. These unsold units are termed as closing stock on consignment (or just stock on consignment for short) and need to be properly valued. After valuation, the stock on consignment must be brought into the books and credited to the consignment account so that the profit earned on consignment during the period can be computed correctly. The journal entry for this purpose is given below:

Stock on consignment A/C [Dr]

Consignment A/C [Cr]

The stock on consignment is an asset and is, therefore, shown on the year end balance sheet. In the next accounting period when consignment account is prepared, this stock appears as the first item on the debit side of this account. The following journal entry is made for this purpose:

Consignment A/C [Dr]

Stock on consignment A/C [Cr]

Valuation of stock on consignment

The stock on consignment, like in many other business situations, should be valued using lower of cost or market price principle. The major issue in this regard is the ascertainment of cost price and market price of goods in stock. The rest of this article talks about the procedures of determining these two prices.

Cost price

The total cost of goods is equal to the expenditures incurred by consignor to bring the goods in salable condition plus all the expenditures paid by consignor as well as consignee in the course of transferring those goods to the consignee’s place. These expenditures usually include carriage, freight, insurance, import and export duties, loading and unloading expenses etc. These expenditures are popularly referred to as non-recurring expenditures.

Any expenditures incurred after the goods have reached to the consignee’s place should be ignored for the purpose of computing the value of closing stock on consignment. Usual examples of such expenditures include warehouse rent, warehouse insurance, storage expenses, carriage paid for the delivery of goods to customers, marketing expenses or any other payment made for the sale of goods.

Net realizable value (NRV)/market price

Net realizable value (NRV) of stock is determined by deducting from the market price of stock the possible expenses required to complete the sale of stock including consignee’s commission. Suppose, for example, 100 units of product X are in stock with a consignee and the sales price of one unit of product is $20. The total sales or market price of this stock would be $2,000 (= 100 units × $20). Now if the estimated expenses required to sell this stock are $300 and consignee’s commission on sale is $200, the net realizable value of stock would be $2,000 (= $2,500 – $500).

After computing the cost price and net realizable value (NRV) in accordance with the procedures explained above, the smaller one should be used as the value of closing stock. If no indication regarding the market price or net realizable value is available in an examination problem or a homework assignment, the students should assume that the cost price is lower than the net realizable value. The valuation of stock on consignment should therefore be done on the basis of cost price.

Formula and format for computing closing stock on consignment

For cost price

If cost price method is applicable, the students should follow the following format for computing the value of closing stock:

After computing the total cost using above format, the following formula can be used to find the value of stock on consignment:

Cost of stock on consignment = (Total cost/Total number of units) × Units in stock

Alternatively, the value of stock can also be computed as follows:

For net realizable value (NRV)

If net realizable value method is applicable, the following formula should be used to compute the value of stock on consignment.

Net realizable value = Market price of stock – (Expected expenses to be incurred to sell the stock + Consignee’s commission)

Management Notes

Balance Sheet Adjustments

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Adjusting entries are made at the end of an accounting period after a trial balance is prepared to adjust the revenues and expenses for the period in which they occurred.

Adjusting entries must involve two or more accounts and one of those accounts will be a balance sheet account and the other account will be an income statement account. You must calculate the amounts for the adjusting entries and designate which account will be debited and which will be credited. Once you have completed the adjusting entries in all the appropriate accounts, you must enter it into your company’s general ledger.

These entries are posted into the general ledger in the same way as any other accounting journal entry. The purpose of adjusting entries is to show when money changed hands and to convert real-time entries to entries that reflect your accrual accounting.

5 Accounts That Need Adjusting Entries

Adjusting entries are a crucial part of the accounting process and are usually made on the last day of an accounting period. They are made so that financial statements reflect the revenues earned and expenses incurred during the accounting period.

Adjusting entries impact five main accounts.

1) Accrued Revenues

For any service performed in one month but billed in the next month would have adjusting entry showing the revenue in the month you performed the service.

You make the adjusting entry by debiting accounts receivable and crediting service revenue.

2) Accrued Expenses

Wages paid to an employee is a common accrued expense.

To make an adjusting entry for wages paid to an employee at the end of an accounting period, an adjusting journal entry will debit wages expense and credit wages payable.

3) Unearned Revenues

Payments for goods to be delivered in the future or services to be performed is considered an unearned revenue.

For example, if you place an online order in September and that item does not arrive until October, the company who you ordered from would record the cost of that item as unearned revenue. The company would make adjusting entry for September (the month you ordered) debiting unearned revenue and crediting revenue.

4) Prepaid Expenses

Prepaid expenses refer to assets that are paid for and that are gradually used up during the accounting period. A common example of a prepaid expense is a company buying and paying for office supplies.

During the accounting period, the office supplies are used up and as they are used they become an expense. When office supplies are bought and used, an adjusting entry is made to debit office supply expenses and credit prepaid office supplies.

5) Depreciation

Depreciation is the process of assigning a cost of an asset, such as a building or piece of equipment over the economic or serviceable life of that asset.

Adjusting entries for depreciation are a little bit different than with other accounts. A company has to consider accumulated depreciation.

Accumulated depreciation refers to the accumulated depreciation of a company’s asset over the life of the company. On a company’s balance sheet, accumulated depreciation is called a contra-asset account and it is used to track depreciation expenses.

Adjusting journal entries are accounting journal entries that update the accounts at the end of an accounting period. Each entry impacts at least one income statement account (a revenue or expense account) and one balance sheet account (an asset-liability account) but never impacts cash.

Osmania University B.com Notes

Accounting Standards Osmania University B.com 6th Semester Notes

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Unit 1 Introduction: {Book}
Introduction to Accounting, Concept of Accounting Theory VIEW VIEW VIEW
Role of Accounting theory VIEW
Classification of Accounting Theory VIEW
Deductive and inductive approach in theory formulation VIEW
Accounting Principles VIEW
Accounting Concepts and Conventions VIEW
Accounting Standard: Concept, Evolution VIEW VIEW

 

Unit 2 Standards Relating to Financial Reporting & Disclosure {Book}
Ind AS-101: First time adoption of Indian Accounting Standards VIEW
Ind AS-1: Presentation of Financial Statements VIEW
Ind AS-7: Cash Flow Statements VIEW VIEW
Ind AS-8: Accounting Policies, Changes in Accounting Estimates and Errors VIEW
Ind AS-10: Events after the Balance Sheet Date VIEW
Ind AS-24: Related Party Disclosures VIEW
Ind AS- 34: Interim Financial Reporting VIEW
Ind AS-105: Non-Current assets held for sale and discontinued operations VIEW
Ind AS- 108: Operating Segments VIEW

 

Unit 3 Standards Providing Guidance on Financial Statement Items {Book}
Ind AS-2: Inventories VIEW
Ind AS-11: Construction contracts VIEW
Ind AS-12: Income taxes VIEW
Ind AS-16: Property, Plant and Equipment VIEW
Ind AS-17: Leases VIEW
Ind AS-18: Revenue VIEW
Ind AS-20: Accounting for Government Grants and Disclosure of Government Assistance VIEW
Ind AS-23: Borrowing Costs VIEW
Ind AS-38: Intangible Assets VIEW

 

Unit 4 Standards Relating to Business Acquisitions and Consolidations {Book}
Ind AS-28: Investments in Associate and Joint Ventures VIEW
Ind AS-103: Business Combinations VIEW
Ind AS-110: Consolidated Financial Statements VIEW
Ind AS-111: Joint Arrangements VIEW
Ind AS-112: Disclosure of interest in other entities VIEW

 

Unit 5 Financial Reporting {Book}
Financial reporting Concept VIEW
Development in Financial reporting objectives VIEW
True Blood Report (USA) VIEW
The Corporate Report (UK) VIEW
Stamp Report (Canada) VIEW
Objectives of Financial Reporting VIEW
Qualities of Financial Reporting VIEW
Recent trends in Corporate Reporting in India VIEW

 

Osmania University B.com Notes

Financial Accounting-2 Osmania University B.com 2nd Semester Notes

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Unit 1 Bills of Exchange {Book}
Bills of Exchange Definition VIEW
Distinction between Promissory note and Bill of exchange VIEW
Accounting Treatment of Trade Bills VIEW
Books of Drawer and Acceptor VIEW
Honor and Dishonor of Bills VIEW
Renewal of Bills VIEW
Retiring of Bills under Rebate VIEW
Accommodation Bills VIEW
Unit 2 Consignment Accounts {Book}
Consignment Meaning, Features VIEW
Proforma invoice, Account sales, Del credere commission VIEW
Accounting treatment in the Books of the Consignor and the Consignee VIEW
Valuation of Consignment stock VIEW
Treatment of Normal and Abnormal Loss VIEW
Invoice of Goods at a Price higher than the cost price VIEW
Unit 3 Joint Venture Accounts {Book}
Joint Venture, Meaning, Features VIEW
Difference between Joint Venture and Consignment VIEW
Accounting Procedure VIEW
Methods of Keeping Records for Joint Venture Accounts VIEW
Method of Recording in co-ventures books VIEW
Separate Set of Books Method VIEW
Joint Bank Account VIEW
Memorandum Joint Venture Account VIEW
Unit 4 Accounts from Incomplete Records {Book}
Single Entry System Meaning, Features, Defects VIEW VIEW
Difference between Single Entry and Double Entry Systems VIEW
Books and Accounts maintained VIEW
Ascertainment of Profit VIEW
Statement of Affairs VIEW
Conversion method VIEW
Unit 5 Accounting for Non-Profit Organizations {Book}
Non-Profit Organization Meaning, Features VIEW
Receipts and Payments Account VIEW
Income and Expenditure Account VIEW
Balance Sheet VIEW

Osmania University B.com Notes

Financial Accounting-1 Osmania University B.com 1st Semester Notes

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Unit 1 Accounting process {Book}
Financial Accounting: Introduction, Definition, Evolution VIEW
Financial Accounting Scope VIEW
Financial Accounting Functions VIEW
Financial Accounting Advantages and Limitations VIEW
Users of Accounting Information VIEW
Branches of Accounting VIEW
Accounting Principles, Concepts and Conventions VIEW VIEW
Accounting Standards Meaning, Importance VIEW
List of Accounting Standards issued by ASB VIEW
Accounting System, Types of Accounts VIEW
Accounting Cycle VIEW
Journal VIEW VIEW
Ledger VIEW
Trial Balance VIEW VIEW

 

Unit 2 Subsidiary Books {Book}
Subsidiary Books Meaning, Types VIEW
Purchases Book, Purchases Returns Book, Sales Book, Sales Returns Book VIEW
Bills Receivable Book, Bills Payable Book VIEW
Cash Book: Single Column, Two Column, Three Column VIEW
Petty Cash Book VIEW
Journal Proper VIEW

 

Unit 3 Bank Reconciliation Statement {Book}
Bank Reconciliation Statement Meaning, Need VIEW
Reasons for differences between Cash book and Pass book balances VIEW
Favourable and over Draft balances VIEW
Ascertainment of correct cash book balance VIEW
Preparation of Bank Reconciliation Statement VIEW

 

Unit 4 Rectification of Errors and Depreciation {Book}
Capital and Revenue Expenditure VIEW
Capital and Revenue Receipts Meaning and Differences VIEW VIEW
Differed Revenue Expenditure VIEW
Errors and their Rectification VIEW
Types of Errors VIEW
Suspense Account VIEW
Effect of Errors on Profit VIEW
Depreciation (AS-6): Meaning Causes VIEW
Difference between Depreciation, Amortization and Depletion VIEW
Objectives of providing for depreciation VIEW
Factors affecting depreciation VIEW
Accounting Treatment of depreciation VIEW VIEW
Methods of depreciation:
Straight Line Method VEW
Diminishing Balance Method VIEW

 

Unit 5 Final Accounts {Book}
Final Accounts of Sole Trader: Meaning, Uses VIEW
Preparation of Manufacturing Account VIEW
Preparation of Trading Account VIEW
Preparation of Profit & Loss Account VIEW
Balance Sheet Adjustments VIEW VIEW
Closing Entries VIEW
Management Notes

Private placements of Shares

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Private placement, the issue is placed directly with a few selected small number of investors. This is also known as non-public offering. Typical investors include large banks, mutual funds, insurance companies and pension funds. The private placement does not have to be registered with the Securities and Exchange Commission.

Private placements are much cheaper than IPOs. However, this method cannot be used for large issues because a small group of investors will have limited risk appetite. Also, these issues are not traded in the secondary market, as opposed to IPO securities, which once listed are traded in the secondary market. This makes it difficult for investors to liquidate these securities.

The term private placement refers to the sale of securities to a small number of private investors to raise capital. These private investors include mutual fund investors, banks, insurance companies and etc. Private placements are different from public issue since in the latter one the shares are sold in the open market to anyone willing to buy them whereas in private placements of shares the shares are sold to specific investors.

Private placement is a method of raising capital in which securities are sold directly to a selected group of investors rather than through a public offering. This targeted approach allows companies to raise funds from a specific set of investors, often institutions or high-net-worth individuals, without the need for public registration. Private placements are regulated by securities laws, and the process involves meticulous planning, compliance, and negotiations between issuers and investors.

Private placement is a valuable tool for companies seeking to raise capital efficiently while maintaining a degree of confidentiality. It provides flexibility in structuring deals, selecting investors, and tailoring terms to meet specific needs. While private placements may not be suitable for all companies, they offer a strategic avenue for raising capital, attracting strategic partners, and fueling growth in a controlled and efficient manner. Companies considering private placements should carefully assess their capital needs, regulatory obligations, and strategic goals before engaging in this form of capital raising.

Features of Private Placement:

  1. Limited Investor Pool:

Private placements involve a restricted number of investors. This targeted approach allows issuers to negotiate terms with a select group, often chosen based on their strategic alignment with the company’s goals.

  1. Exemption from Public Registration:

Unlike public offerings, private placements are exempt from the rigorous public registration process. This exemption is provided under various securities regulations, such as Regulation D in the United States or the SEBI (Securities and Exchange Board of India) guidelines in India.

  1. Negotiable Terms:

Issuers and investors have more flexibility in negotiating the terms of the private placement. This includes aspects such as pricing, the structure of securities, and any covenants or conditions attached to the investment.

  1. Diverse Securities:

Private placements can involve a variety of securities, including equity, debt, convertible securities, or preferred shares. The choice of security depends on the company’s capital needs and the preferences of investors.

  1. Customized Agreements:

The terms and conditions of private placement agreements are often customized to suit the specific needs of both parties. This flexibility allows for tailoring the investment structure to align with the company’s strategy.

  1. Confidentiality:

Private placements offer a level of confidentiality that is not present in public offerings. Companies can raise capital without disclosing sensitive information to competitors or the broader market.

Regulatory Framework for Private Placement:

While private placements offer flexibility, they are subject to regulatory oversight to protect the interests of investors. The regulatory framework varies by jurisdiction, but common elements:

  1. Accredited Investors:

Many jurisdictions restrict private placements to accredited investors, who are deemed to have the financial sophistication to understand and assess the risks associated with these investments.

  1. Exemptions from Registration:

Private placements are exempt from the full registration requirements that public offerings must undergo. However, issuers must comply with specific regulations governing private placements.

  1. Disclosure Requirements:

While private placements provide confidentiality, issuers are still required to provide certain disclosures to investors. These disclosures may include financial statements, risk factors, and other relevant information.

  1. Limited Marketing and Solicitation:

The solicitation of investors in a private placement is limited compared to public offerings. Issuers must be cautious in their approach to avoid violating regulations related to marketing and advertising.

  1. Resale Restrictions:

Investors in private placements may face restrictions on selling their securities in the secondary market. These restrictions help maintain the private nature of the placement.

Advantages of Private Placement:

  1. Efficiency and Speed:

Private placements are generally faster and more cost-effective than public offerings. The absence of extensive regulatory reviews and public registration processes accelerates the capital-raising timeline.

  1. Selective Investor Engagement:

Issuers can choose investors strategically, targeting those with industry expertise, strategic alignment, or specific financial capabilities.

  1. Flexibility in Terms:

The negotiated nature of private placements allows issuers to tailor terms and conditions to meet the specific needs and goals of both the company and investors.

  1. Confidentiality:

Private placements offer a level of confidentiality, allowing companies to raise capital without divulging sensitive information to the public.

  1. Strategic Alignment:

By selectively choosing investors, companies can attract strategic partners who bring not just capital but also industry knowledge, networks, and expertise.

  1. Lower Costs:

The costs associated with private placements are generally lower than those of public offerings due to reduced regulatory requirements and marketing expenses.

Challenges and Considerations:

  1. Limited Capital:

Private placements may not be suitable for companies seeking significant amounts of capital, as the investor pool is restricted.

  1. illiquidity for Investors:

Investors in private placements may face challenges in selling their securities, as these transactions are often subject to restrictions.

  1. Regulatory Compliance:

Companies must navigate complex regulatory requirements to ensure compliance with securities laws. Failure to comply can result in legal consequences.

  1. Market Perception:

Companies choosing private placements may miss out on the visibility and market perception that comes with a public offering.

  1. Negotiation Complexity:

Negotiating terms with a select group of investors can be complex, requiring skilled negotiation and legal expertise to strike a mutually beneficial deal.

Provisions as per Companies Act

(1) A company may, subject to the provisions of this section, make a private placement of securities.

(2)  A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed fifty or such higher number as may be prescribed [excluding the qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be prescribed.

(3) A company making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed.

Statutory Provisions for Private Placement of Securities:

Private Placement of Securities is covered under Section 42 of the Companies Act, 2013 and Companies (Prospectus and Allotment of Securities) Rules, 2014. Private Placement is defined as any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through Private Placement Offer-cum-Application.

To whom can a Private Placement offer be made:

Private Placement Offer can be made to a prospective investor or any person who intends to invest a specific amount of funds in the Company against issue of securities. Offer to subscribe for the securities of a Company under Private Placement cannot be made to more than 200 persons in a Financial Year. If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, same shall be deemed to be an offer to the public.

Advertisement:

No advertisements, media marketing or distribution channels or agents to be used by the company to inform the public at large about such an issue.

Procedure:

Following procedure should be followed by the Company intending to issue securities under Private Placement:

  • Calling for the meeting of the Board of Directors of the Company to offer securities on Private Placement Basis.
  • Passing of Board Resolution for issue of shares under Private Placement to specified persons and calling for Extra-Ordinary General Meeting of the Company to take members approval.
  • Filing form MGT-14- Board Resolution for issue of shares under Private Placement.
  • Issuing notices to the shareholders for Extra-Ordinary General Meeting of the Company as per timelines or with shorter consents.
  • Passing Special Resolution in the Shareholders meeting for issue and allotment of shares under Private Placement.
  • Sending Offer cum Application Letters in form PAS-4 to identified persons within 30 days of recording the names of the identified persons. Such Offer cum Application Letters can be sent in electronic mode (emails) or by post.
  • Receiving allotment amount in a separate bank account within the offer period as mentioned in the Offer cum Application Letter.
  • The Company shall allot shares to the applicants who has subscribed for the same through application letter and deposited the subscription amount within the offer period.
  • After Closure of Offer Period call a Board Meeting and pass Resolution for Allotment of Securities to the entitled subscribers.
  • Filing of return of allotment in Form PAS-3 within 15 days from the date of the allotment i.e. After passing Board Resolution for allotment
  • Make sure the securities are allotted within 60 days of the receipt of Application amount by the Company.
  • Stamp Duty on allotment shall be paid @ 0.10% through channels as available in respective states. e.g. In Mumbai it can be paid to ESBTR or GRASS MAHAKOSH site
  • The Company will be allowed to utilize the money raised through Private Placement only after Return of Allotment in Form PAS-3 is filed with the Registrar of Companies.
  • Record of Private Placement should be maintained by the Company in prescribed Form PAS-5.
  • The Company should update its Registrar of Members in a proper manner upon completion of allotment.
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