How Preferential Allotment can Increase your Profit?
Monisha Chaudhary | Updated: Oct 03, 2019 | Category: SEBI Advisory
The company resorts to several alternates to raise funds to meet its day to day needs as well to meet its financial needs for funding its big projects. There are many ways a company can raise funds, such as:
- Debenture issue
- Loans & Advances from banks and Financial Institutions
- Right issue of shares
- Bonus issue
- Public Issue
- Private Placement
- Employee Stock Option Scheme
- Sweat equity shares
- Preferential Allotment of shares
Preferential Allotment of shares means the issue of shares or securities by a company to a group of selected people or any person on a preferred basis. But it does not include any shares issued through the rights issue, public issue, etc.
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Following types of shares or securities are issued through Preferential Allotment:
- Equity shares
- Fully convertible debentures
- Partly convertible debentures
- Any form of a security convertible into equity shares
Pre-Requisite for Preferential Allotment
Following is the list of elements that are essential beforePreferential Allotment:
- Approval through Special Resolution (SR): shareholders shall previously approve the proposed offer and invitation to subscribe to the shares by passing Special Resolution for every offer or invitation.
- MOA & AOA authorization: The company shall be authorized to issue shares through preferential allotment through its Article of Association. In case of the absence of the power in AOA, the company has to first amend its AOA to insert the power to issue securities through Preferential Allotment.
- Maximum allottees: Preferential Allotment cannot be executed more than 200 allottees in one financial year. But this limit does not include Qualified Institutional Buyer and Employees of the Company. Also, the restriction of 200 Allottees (no limit in case of a listed company) would be reckoned individually for each kind of security such as Equity shares, preference shares, or debentures.
- Finalize the name of Allottees: The company shall finalize the list of all the Allottees along with their post-issue holding that shall be mentioned in the explanatory statement to be issued for General meeting.
- Completion of Allotment: company shall complete the allotment before the following specifications:
Twelve Months from passing Special Resolution
Sixty Days of receipt of application money.
- Valuation Report: the share price at which the securities are issued should not be less than the price determined based on the valuation report of a registered valuer.
- Application form: Application form accompanied along with offer letter shall be sent to every allottee on their registered address through electronic mode or speed post within 30 days of EGM.
- A further issue: Company cannot make an additional issue of any new securities or share until and unless the allotment is completed concerning a previous offer or invitation.
- Value of Offer: Company cannot make an offer of more than INR 20000 of the face value of security to per person.
- Separate bank account: the opening of a separate bank account is mandatory in case of Preferential Allotment. Application money received for the subscription of shares shall be kept in a separate bank account.Moreover, it should not be used for any other purpose except Allotment.
Procedure for Preferential Allotment
Following is the step by step procedure for the company to conduct Preferential Allotment:
- Call board meeting: Company shall call the board meeting by sending 7 days’ notice to the directors. Attach the agenda, notes to agendas and draft resolution which has to be passed in Board Meeting with the notice.
- Hold the board meeting: a quorum of the meeting should be check before conducting the meeting. In a board meeting pass the Board resolution for the approval of the offer letter and issue the notice of General Meeting. And with that list of Allottees & draft offer letter in PAS-4 shall be prepared for the approval in general meeting.
- Hold EGM: Call and convene the extraordinary general meeting and pass the necessary special resolution for the approval of the following:
- Offer Letter in form PAS-4
- Preferential allotment of shares
- Circulate offer letter: offer letter in form PAS-4 along with application number shall be circulate to Allottees within 30 days of passing SR either in an electronic mode or through registered/speed post.
- E-filing: File the necessary form MGT-14 for the approval of ROC within 30 days of passing a special resolution. Along with the filing of GNL-2 with two necessary attachment of PAS-4 (For offer letter) and PAS-5 (Complete details of Private Placement) as a part of this form GNL-2
- Call last board meeting: after receiving the application money, call the board meeting for passing the necessary resolutions for the approval of the following agendas:
- Allotment of shares
- Issue of share certificate
- Authorization to 2 people for signing the share certificate
- PAS-3: File the necessary form PAS-3 with the registrar of the company and attach the necessary attachment such as a list of the allottee and board resolution for allotment of shares.
- Issue share certificate: issue the share certificates in form SH-1 to the subscriber within 2 months of the date of allotment.
What is the Lock-in requirement for the shares issued preferential allotment?
As per the guidelines of SEBI, lock-in requirement for listed entities are:
- Securities of the promoter or group of promoters shall be locked in for 3 years from the date of trading approval, provided not more than 20% of the entire paid-up capital of the issuer can be locked up for 3 years.
- Equity shares above 20% can be locked in for 1 year.
- Securities of holder other than promoter shall be locked in for 1 year from the date of trading approval.
Why do companies opt for Preferential Allotment?
The company can enlarge its share capital through the following ways:
- Allotment of new shares to existing shareholders
- Through an open offer
- Bulk allotment to companies or groups of individuals.
The primary motive behind Preferential Allotment is to provide the route to buy the shares of a company to those investors who find it expensive and costly to buy such a large chunk of shares from the market. But these shareholders do not get any voting rights and are paid only in case the company incurs some profit.
Also, the existing shareholders, venture capitalists & financial institutions earn an option to increase their stake in the company.
What are the benefits enjoyed by the preference shareholders?
- During Preferential Allotment, the company pay directly to these preference shareholders with zero brokerage cost.
- The dividend is payable to the preference shareholder in the subsequent year in case the company incurred an insufficient profit.
- Preference shareholders are the safest of all. If the company goes liquidated, they are paid off on a priority basis.
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