What is the Procedure and Forms Involved in Preferential Allotment?

What is the Procedure and Forms Involved in Preferential Allotment?
Japsanjam Kaur Wadhera
| Updated: Feb 11, 2021 | Category: Preferential Allotment, SEBI Advisory

The Companies Act, 2013, allows the company to raise funds via preferential allotment, sweat equity shares, employee stock option plan and right issue. When the shares are issued through preferential allotment, it helps the company to raise the capital much quickly. Section 62 i.e. Allotment of Shares and Section 42 i.e. Allotment of Securities of the Companies Act, 2013 provides the issue of shares through preferential allotment. This article will provide information regarding what is the procedure and forms involved in preferential allotment.

Understanding Preferential Allotment

A preferential allotment means issue of shares or convertible securities by unlisted or listed companies to any group of persons or select person on a preferential basis and does not include shares or other securities offered through rights issue, public issue, employee stock option scheme, issue of sweat equity shares, employee stock purchase scheme, bonus shares or depository receipts issued in a country outside India or foreign securities.

According to the Companies Act shares are covered under it. The expression other securities or shares means equity shares, fully or party convertible debentures or any other securities which can be converted into or exchanged with equity shares at later stage.

Section 62 along with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 and Section 42 along with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 lays down the procedure and provisions for preferential allotment of shares.

Any company can issue preferential allotment of shares such as Private company or Public Company, listed or unlisted or Section 8 companies and etc.

Preferential allotment of shares (PAS) is issued by the companies as it is the fastest way to increase the share capital and bring capital in the company. Also, when capital is raised by the company in this way, it becomes the asset of the company and results in increasing the existing share capital. The allottees become the members of the company and such fund is considered as owned fund.

Also, Read: Advantages and Disadvantages of Preferential Allotment

Persons not Eligible to Issue Preferential Allotment of Shares

Persons who are not eligible to issue preferential allotment of shares are:

  • A person belonging to a group or promoter who has sold his equity shares during 6 months preceding the relevant date.
  • A person belonging to a group or promoter who has earlier applied for a warrant but failed to exercise it.

What are the Reasons to Issue Shares through Preferential Allotment?

Some of the reasons to issue shares through preferential allotment are as follows:

  • To provide opportunity to those shareholders who were unable to purchase shares during the initial public offerings.
  • To help the companies to raise funds.
  • To support or assist the company in securing equity participation.
  • To help the company to increase its share capital.
  • To provide possibility to the financial institutions, promoters, suppliers, venture capitalists or buyers to increase their stake in the company.
  • Contributing towards the development of economy by increasing the flow of capital in it.

Procedure for Preferential Allotment

  • A notice is required to be sent to convene Board Meeting at least 7 days before the meeting.
  • Convene Board Meeting and consider the below given matters:
  1. Consider the valuation report as received.
  2. Deciding the list of allottees (not to exceed 50 at a time and 200 aggregate in the financial year excluding the qualified institutional buyer.
  3. Fix the time, venue and date of extra ordinary general meeting.
  4. Finalization of draft offer letter in the form PAS- 4.
  5. Finalization of notice for extra ordinary general meeting along with explanatory statement as stated in the law.
  6. Decide the offer period.
  7. Open a separate bank account to receive money in a scheduled bank.
  • Convene extra ordinary general meeting and passing of resolution for allotment.
  • File MGT- 14 and the private placement offer letter, that is, PAS- 4 cum application shall be dispatched to the proposed allottees along with the following attachments:
  1. A certified true copy of the special resolution.
  2. Explanatory statement.
  • Dispatch the private placement offer letter cum application to the proposed allottees within 13 days within an electronic form or in writing.
  • The shares shall be subscribed by the proposed allottees in the private placement offer letter cm application along with the subscription money paid either by demand draft, by cheque or other banking channel but not through cash.
  • The money received as it is shall be deposited in a separate bank account.
  • Within the 60 days of receipt of money, convene Board Meeting for allotment of shares.
  • Within the 15 days of allotment of shares file PAS- 3.

Forms Involved in Preferential Allotment

In case of E-form MGT-14, following attachments are required:

  • Certified true copy of special resolution.
  • Explanatory statement along with notice of general meeting.
  • Minutes of general meeting.

In case of E-form PAS- 3, following attachments are required:

  • List of Allottees.
  • Certified true copy of the special resolution.
  • Explanatory statement.
  • Valuation report.
  • In case the shares are issued for consideration other than cash then a copy of contract.
  • Complete copy of private placement offers and acceptances in Form PAS- 5.

Conclusion

The section 62 and section 42 of the Companies Act, 2013 comes into effect for the issue of shares through preferential allotment. A person holding the preferential shares has the right to be paid from the assets of the company before common stockholders, if the company goes into bankruptcy. The procedure and forms involved in preferential allotment is discussed above in the article. Through the preferential allotment of shares the company can issue various types of shares and securities such as issuance of fully or partly convertible debentures, issuance of equity shares and issuance of any other securities which are convertible into equity shares.

There must be an authority in Articles of Association (AOA) of the company to issue shares and securities though Preferential allotment of shares (PAS). If such power is not there then the clause of AOA is required to be amended to insert power to PAS.

Also, Read: Articles of Association (AOA) and Its Importance for the Company

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Japsanjam Kaur Wadhera

Japsanjam Kaur Wadhera is an Advocate and has completed her BA.LLB (Hons) and has experience of writing various research papers during her college time. Earlier she was working as an Associate Advocate in a reputed Law Firm. She has an extreme interest in writing legal content and her core area falls under legal enactments, tax and finance.

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