Last reviewed: 25 September 2026. Section 42 of the Companies Act, 2013 is the route almost every private company uses to raise equity or debt from a defined set of investors. A founder's friends-and-family round, an angel cheque, or an institutional Series A tranche all run through the same statutory sequence. It is a demanding sequence: skip a step, or drift past a deadline, and the consequence is not a warning letter but a mandatory refund with interest, or a penalty pegged to the amount raised. This guide walks through the process end to end.
The full sequence, step by step
| Step | Action | Timeline |
|---|---|---|
| 1 | Board meeting: approve the private placement, pricing (per valuation), draft offer letter (PAS-4), and call the general meeting | — |
| 2 | File MGT-14 for the board resolution. Not required for private companies (they are exempt from filing section 179(3) board resolutions); required for public companies | Within 30 days (public companies) |
| 3 | General meeting notice with the prescribed explanatory statement (offer terms, valuation basis, amount to be raised) | 21 days' notice |
| 4 | Special resolution passed authorising the private placement | — |
| 5 | File MGT-14 for the special resolution | Within 30 days |
| 6 | Maintain PAS-5, the internal record of the offer and offerees (not filed with ROC) | — |
| 7 | Issue the PAS-4 offer letter to identified persons | Within 30 days of PAS-5 |
| 8 | Open a separate bank account in a scheduled bank for application money; no cash accepted | Before money is received |
| 9 | Board meeting to approve allotment | — |
| 10 | Complete allotment | Within 60 days of receipt of money |
| 11 | File PAS-3, the return of allotment, with the complete list of allottees | Within 15 days of allotment |
| 12 | File FC-GPR if any allottee is a foreign investor | Within 30 days of allotment |
Worked example: an ₹80 lakh angel round
A Nashik-based private limited company decides to raise ₹80 lakh from five angel investors at a price backed by a fresh valuation. The board approves the private placement and the draft PAS-4 on 1 September. As a private company, it does not file MGT-14 for this board resolution. A general meeting is called on 21 days' notice for 25 September, where the special resolution passes; MGT-14 for that follows within 30 days. PAS-5 is completed the same week, and the PAS-4 offer letter goes out to all five investors on 5 October, within the 30-day window from PAS-5. The dedicated bank account, opened in early September, receives all five cheques by 20 October. The board allots shares on 10 November, 21 days after the last money was received and comfortably inside the 60-day window, and PAS-3 is filed on 20 November, well within the 15-day deadline. Total time from the first board meeting to a filed PAS-3: roughly eleven weeks, with the 21-day notice period and the coordination across five investors' KYC being the two stretches that took the longest.
Where this connects to ISIN and demat
If your company is separately covered by Rule 9B, the shares allotted in this round must be issued directly in dematerialised form, which means the RTA and depository relationship needs to be live before the allotment, not arranged afterwards. Our ISIN generation and corporate action guide covers that setup, and it is worth sequencing the two processes together rather than discovering the demat requirement at the allotment stage. If you are still setting up the company itself, our private limited company registration documents guide is the natural starting point.
Getting the price right
The offer price is not a number the board can pick freely. Three separate rules can apply, and each asks a different question:
- Companies Act: a preferential issue needs a price backed by a registered valuer's report under the allotment rules.
- Income tax, investor side: an investor who receives shares below fair market value is taxed on the shortfall under section 92(2)(m) of the Income-tax Act, 2025 (old section 56(2)(x)), using the valuation rule that replaces Rule 11UA under the Income-tax Rules, 2026. The issuer-side "angel tax" (old section 56(2)(viib)) has been omitted and has no equivalent in the 2025 Act.
- FEMA, non-resident investors: shares issued to a non-resident must be priced at not less than fair value under the FEMA (Non-Debt Instruments) Rules, determined by an internationally accepted pricing method and certified by a chartered accountant, SEBI-registered merchant banker or practising cost accountant. This is a separate valuation, not the income-tax one.
Building the valuation timeline into the Section 42 sequence above, rather than treating it as a parallel, disconnected exercise, avoids the price being questioned after the fact, when it is far harder to fix. Where a foreign or NRI angel is joining the round, the application money must come through banking channels with KYC from the AD bank, and FC-GPR follows the allotment; our FEMA and foreign subsidiary compliance service runs that reporting alongside the Section 42 steps.
What documents you will be asked for
At minimum: the term sheet or share subscription agreement, investor KYC (PAN, address proof, and for corporate investors their own incorporation documents and board authorisation), bank credit proofs for the application money, the current cap table, and a record of the company's prior allotment history. Our consolidated documents checklist lists the full set alongside what is needed for ISIN and demat setup.
Frequently asked questions
Can we accept the investment cheque before passing the special resolution?
You can open the dedicated bank account and be ready to receive funds, but application money should follow the approvals, not precede them. The offer letter (PAS-4) is what authorises an identified person to apply, and that in turn follows the special resolution. Money received before the paperwork is a common 'cure' situation we are asked to fix after the fact; it is far cheaper to sequence it correctly the first time.
What happens if we cannot complete allotment within 60 days of receiving the money?
The company must repay the application money within 15 days of the 60-day period expiring. If it fails to repay within that window, the amount becomes repayable with interest at 12% per annum from the day after the 60th day. This is a hard statutory consequence, not a negotiable extension.
Is there a cap on how many investors we can offer to in a year?
Yes. Private placement offers can go to a maximum of 200 people in a financial year per kind of security, excluding qualified institutional buyers and employees receiving shares under an ESOP scheme. Crossing this limit turns the offer into a deemed public issue, with its own compliance track and consequences.
Do PAS-4 and PAS-5 need to be filed with the ROC?
No. Following the 2017 amendments, PAS-4 (the offer letter) and PAS-5 (the record of the offer) are maintained by the company as internal records, not filed with the Registrar. What is filed is PAS-3, the return of allotment, within 15 days of the allotment being made.
What is the penalty if we get the process wrong?
Two distinct exposures. A late or unfiled PAS-3 attracts a penalty of Rs 1,000 per day of default for the company, its promoters and directors, up to a maximum of Rs 25 lakh. Contravention of Section 42 more broadly (offering to more than the permitted number of persons, or failing the process itself) makes the company, promoters and directors liable to a penalty which may extend to the amount raised through the private placement or Rs 2 crore, whichever is lower, along with an obligation to refund the money to subscribers within 30 days.
Does the issue price need a valuation report?
For a preferential issue, yes: the Companies Act requires a price backed by a registered valuer's report. Separately, the investor is taxed under section 92(2)(m) of the Income-tax Act, 2025 (old section 56(2)(x)) if shares are received below fair market value, and a non-resident allotment must meet the FEMA pricing guidelines, certified by a chartered accountant, SEBI-registered merchant banker or practising cost accountant. These are three separate valuation questions and are best run together.
Somesh Chandak & Associates, Thane, manages the Section 42 route end to end: resolutions, offer letters, valuation coordination, allotment timing and PAS-3, including cure projects for allotments that were never properly papered.
Share Allotment & ROC Funding Compliance Rule 11UA Valuation Book a consultationThis article is for general information and education only and is not professional advice. It reflects Section 42 of the Companies Act, 2013 and the Companies (Prospectus and Allotment of Securities) Rules, 2014 as in force on 25 September 2026. Please confirm your specific facts, timelines and current form requirements with us before proceeding.