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What is the Difference Between Right Issue and Preferential Allotment?

Savvy Midha

| Updated: Dec 26, 2019 | Category: SEBI Advisory

For a better understanding of the difference between Right Issue and Preferential Allotment, one should know about these two kinds of share issues in detail. The main difference between Right Issue and Preferential Allotment is that the Rights Issue is an offer to existing shareholders. In contrast, Preferential Allotment is the offer under which shares are allotted to a specified group of people.

Let us discuss in detail each kind of share issue as per Companies Act 2013 before learning in brief about the difference between Right Issue and Preferential Allotment henceforth.

Understanding about Right Issue and Preferential Allotment

Right Issue:

It is an offer provided to the existing shareholders in proportion to their shareholding by allowing them to buy additional shares from the company on a discounted price in spite of buying them in the secondary market.

Preferential Allotment:

Company offers the shares to a specified group of public on a preferential basis. Preference shareholders are paid first whenever the company declares or pays a dividend. This option facilitates those shareholders who are unable to buy a large chunk of shares due to high-cost availability on the market. 

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Benefits of Preferential Allotment & Right Issue

Preferential Allotment has the following benefits:

  • There is no brokerage cost involved, and the preference shareholders get priority over dividend
  • Preference shareholders have the right to claim unpaid dividend on succeeding year
  • The investment made by shareholders through preferential allotment is always safe as they are paid first in case the company goes bankrupt or insolvent.

Right Issue is preferred for the following reasons:

  • Company planning to raise fund for its project prefer right issue as it is the fastest method to achieve the objective
  • Project for which the option of debt funding is not available, the company prefer choosing the rights issue to raise capital
  • To pay off the debt and the company’s liability, the company usually issues the shares to recover the debt.

Step by step procedure for Preferential Allotment

Following are the brief procedure for Preferential Allotment:

  • Convene the Board Meeting by sending 7 days notice and discuss the following agendas such as:
  • Consideration of valuation report
  • Finalize the list of allottees not exceeding 200 in a year and 50 at a time
  • Fix and decide the day, date, time and venue for conducting EGM
  • Approve the draft of PAS-4 for private placement offer letter
  • Decide the offer period
  • Call and hold EGM on a date decided to conduct EGM by sending 21 clear days notice and approve preferential allotment
  • Within 30 days of conducting EGM, the company shall file MGT-14 with ROC as the mandatory attachment of:
  • CTC of EGM
  • PAS-4 for offer letter
  • Dispatch offer letter within 30 days to proposed allottees as per the list through any mode such as electronic or manual
  • Money received shall be compulsorily be deposited to separate bank account
  • Within 60 days of receipt of money, convene another board meeting for the allotment of shares
  • Within 15 days of allotting the shares, the company shall file PAS-3 to ROC along with following attachments:
  • List of allottees
  • Valuation report
  • CTC of a special resolution passed
  • A complete record of private placement and acceptance in form PAS-5
  • Company shall issue the Share Certificate to Allottees within 2 months of allotment.

Step by step procedure for Right Issue

Following are the brief procedure for Right Issue:

  • Convene the Board Meeting by sending 7 days’ notice and discuss the following agendas such as fixing the right issue ratio, fixing a record date, the time period for which the offer remains open, etc.
  • File Board Resolution to ROC through MGT-14 within 30 days of passing resolution
  • Receive the subscription money from shareholders
  • Once the offer is concluded, held the board meeting again for allotment of shares and issue of share certificate to the allottees
  • Within 2 months allot share certificates duly signed and stamped
  • Within 30 days of concluding allotment, file PAS-3 and board resolution with ROC

Difference between the Right Issue and Preferential Allotment

As we have understood in detail about each kind of issue offer, let’s discuss the following difference between Right Issue and Preferential Allotment:

Right Issue

Preferential Allotment

The right issue is governed through Section 62(1)(a) of Companies Act 2013

 

Preferential Allotment is governed through Section 62(1)(c) of Companies Act 2013

Through this offer, the company issue the shares to existing shareholders in proportion of their holding

Company issue the shares to both existing shareholders and even outsiders

Only board approval through board meeting is required

Both board resolution and special resolution is needed to approve preferential allotment

Offer period remains open for the minimum period 15 days and maximum 30 days

No as such specific provision for offer period is specified

Offer letter can be in any format

Letter offer shall be as per the prescribed format of PAS-4 and PAS-5

Necessary forms to be filed are PAS-3 with ROC

Necessary forms to be filed with ROC are:

  • PAS-3
  • GNL-2
  • MGT-14

Company shall allot the shares within 60 days of receipt of application money

The allotment shall be made of the earlier of these two:

  • 12 months of Special Resolution 
  • 60 days from receipt of application money

No separate bank is needed for the right issue

Separate schedule bank is needed for preferential allotment

No need for a valuation report

The valuation report is mandatory in case of preferential allotment

Shareholders under this option have right to renounce, reject or approve the offer letter

No such right is provided to shareholders under this offer

Final Thought

Through this, we have discussed in brief about the Rights Issue and Preferential Allotment along with the difference between Right Issue and Preferential Allotment. There are certain other modes of raising capital, such as Private Placement, Debentures issue, etc. To know about the various methods of raising funds in companies, contact us.
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Savvy Midha

Savvy Midha holds the degrees of B.Com(honors), LL.B and Company Secretary. She is an experienced Legal and Financial writer with expertise in research, drafting, and copy-writing.

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