OPENING SEPARATE BANK ACCOUNTS IN M&A

In the world of finance and investment, the concept of private placement has become a preferred choice for companies seeking infusion of funds without going through the complexities of listing the securities through a public offering. A company is able to make a private placement offer to a select group of persons. In India, the Companies Act, 2013 ("Act") deals with the procedure for issue of securities through ‘Private Placement’ as per Section 42 of the Act being the operative provision.

The Act provides for the mandatory opening of a separate bank account dedicated exclusively to a company’s private placement offers which evokes a sense of transparency and security. In this article, we explore the significance of a separate bank account for private placement and the plausible benefits it brings to both issuers and investors.

The proviso to Section 42(6) of the Act reads,

“Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose other than-

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.”

It is evident from a prima-facie reading that the monies received are to be remitted into a separate bank account which can only be utilized for specific purposes. Mind you, section 42(4) provides that every identified person willing to subscribe to the private placement shall pay the subscription money either by cheque or demand draft or other banking channel and not by cash.

Enhanced Transparency: By establishing a separate bank account for private placements, investors can ensure greater transparency in managing funds associated with the offering. This segregated account allows for clear visibility of funds received from investors and facilitates smooth monitoring of the capital raised. Offering a separate bank account to investors reinforces trust and confidence in the private placement process. It signifies a commitment in ensuring that their investments are handled professionally and responsibly.

Legal Compliance: The Act mandates the opening of a separate bank account for private placement transactions to ensure that funds raised through this process are appropriately managed and accounted for. This regulatory requirement emphasizes transparency and adherence to sound financial practices.

Startups may especially note that MCA has been vigilant in matters in relation to Private Placements. We had also recently tweeted about non-compliances in the matter of Cookiejar Technologies Private Limited where ROC – Pune has levied penalty on the private limited company for not having opened a separate bank account for the private placement offer. By prioritizing the proper handling of investors' funds, the belief is that companies can foster trust, attracting more potential investors and paving the way for growth and financial success.

The author is a consultant with HS Law & Associates, views expressed herein are his own.