{"id":10222,"date":"2020-04-27T14:10:10","date_gmt":"2020-04-27T08:40:10","guid":{"rendered":"https:\/\/swaritadvisors.com\/learning\/?p=10222"},"modified":"2020-11-25T15:24:45","modified_gmt":"2020-11-25T09:54:45","slug":"advantages-and-disadvantages-of-preferential-allotment","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/learning\/advantages-and-disadvantages-of-preferential-allotment\/","title":{"rendered":"Advantages and Disadvantages of Preferential Allotment"},"content":{"rendered":"\n<p class=\"has-drop-cap\">A shortage of finances is inevitable while running a business that compels an entrepreneur to explore fundraising methods. The Company Act 2013 prescribes various ways to raise the company\u2019s capital, which entail the right issue, sweat equity shares, employee stock ownership plan, IPOs, and preferential allotment. Amongst all the stated methods, preferential allotment seems to be the best source of fundraising for the companies listed on the stock exchange. The <strong><a href=\"https:\/\/swaritadvisors.com\/preferential-allotment\"><em>preferential allotment<\/em><\/a><\/strong> is considered as a hybrid financing instrument since it has attributes of both debt and equity. Prior to raising capital from this mode, it is essential to perceive the advantages and disadvantages of preferential allotment.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_65 counter-hierarchy ez-toc-counter ez-toc-light-blue ez-toc-container-direction\">\n<p class=\"ez-toc-title\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6a3a35d016755\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6a3a35d016755\"  aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/swaritadvisors.com\/learning\/advantages-and-disadvantages-of-preferential-allotment\/#An_Insight_of_Preferential_Allotment\" title=\"An Insight of Preferential Allotment\">An Insight of Preferential Allotment<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/swaritadvisors.com\/learning\/advantages-and-disadvantages-of-preferential-allotment\/#Regulatory_Framework_that_governs_Preferential_Allotment\" title=\"Regulatory Framework that governs Preferential Allotment\">Regulatory Framework that governs Preferential Allotment<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/swaritadvisors.com\/learning\/advantages-and-disadvantages-of-preferential-allotment\/#Advantages_and_Disadvantages_of_Preferential_Allotment\" title=\"Advantages and Disadvantages of Preferential Allotment\">Advantages and Disadvantages of Preferential Allotment<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/swaritadvisors.com\/learning\/advantages-and-disadvantages-of-preferential-allotment\/#Disadvantages_of_Preferential_Allotment\" title=\"Disadvantages of Preferential Allotment\">Disadvantages of Preferential Allotment<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/swaritadvisors.com\/learning\/advantages-and-disadvantages-of-preferential-allotment\/#Preconditions_on_Preferential_Allotment\" title=\"Preconditions on Preferential Allotment\">Preconditions on Preferential Allotment<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/swaritadvisors.com\/learning\/advantages-and-disadvantages-of-preferential-allotment\/#Conclusion\" title=\"Conclusion\">Conclusion<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"An_Insight_of_Preferential_Allotment\"><\/span>An Insight of Preferential Allotment<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The preferential allotment is the process of allotting shares to a selected group of individuals or companies based on preferences. All the listed companies gain the authority to allot their shares on a preferential basis. For the issue of preference shares, the listed companies need to comply with the stringent provisions of SEBI. However, in the case of unlisted companies, the norms of Companies Act, 2013, are applicable.<\/p>\n\n\n\n<p>The concept of preferential allotment forms\na win-win situation for the company and shareholders as it helps the company to\nraises its funds while the shareholders get the dividend according to their\npriority. <\/p>\n\n\n\n<p>Moreover, the company gets the power to\nmeet its financial requirements by raising funds from the general public. On\nthe downside, the procedure of share allotment is a time-consuming and complex\nmethod, but by shortlisting shareholders beforehand, the companies can save much\ntime.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Regulatory_Framework_that_governs_Preferential_Allotment\"><\/span>Regulatory Framework that governs Preferential Allotment<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Following are the regulatory frameworks which monitor the process of preferential allotment: <\/p>\n\n\n\n<ul><li>Section 62 (allocation of\nshares) and Section 42 (allotment of securities) of the Companies Act 2013\nregulates the allotment of private shares. A\ncompany that seeks to issue the shares must adhere to both the Sections; however,\nfor the issue of securities, the company just needs to comply with the\nprovisions of Section 42 only.&nbsp;<\/li><li>Provisions of SEBI (ICDR)\nRegulations, 2009.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Advantages_and_Disadvantages_of_Preferential_Allotment\"><\/span>Advantages and Disadvantages of Preferential Allotment<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>By the issue of share on preferential\nbases, a company can avail several benefits, but it also has some drawbacks. So\nlet\u2019s comprehend the advantages and disadvantages of preferential allotment one\nby one:<\/p>\n\n\n\n<ul><li><strong>No charges on assets- <\/strong>When a company takes a loan from the bank, it is mandatory to deposit collateral security. Besides, there is no such requisite in the allotment of preferential shares; the company raises the needed amount without putting its assets on risk. \u00a0Further, no charges are levied on the company\u2019s assets, unlike in the case of debentures.<\/li><li><strong>An additional benefit to investors- <\/strong>Preferential allotment facilitates investors to trade in convertible shares for a fixed no. of common stocks that can be lucrative if the value of common shares rises. Thus, the investors gain additional dividends, which are more than the fixed-rate if the company <strong><a href=\"https:\/\/swaritadvisors.com\/learning\/how-preferential-allotment-can-increase-your-profit\/\"><em>achieves certain predetermined profit<\/em><\/a><\/strong>  targets. It also provides an opportunity to buy shares in bulk to those shareholders who can\u2019t afford to purchase shares from the market.<\/li><li><strong>No dilution of power<\/strong>&#8211; Issuance of preference share does not dilute the powers of existing equity shareholders as the company does not give any voting rights to the preference shareholders. In simple terms, the preference shareholders invest their capital with a fixed dividend percentage, yet they do not get control rights.<\/li><li><strong>Reform the company\u2019s borrowing capacity<\/strong>&#8211; Once allotted; the preference shares become the part of the company\u2019s net worth, which reduces the debt to equity ratio.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Disadvantages_of_Preferential_Allotment\"><\/span>Disadvantages of Preferential Allotment<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Every blessing is accompanied by a\ndisguised curse; likewise, there are both advantages and disadvantages of\npreferential allotment. Now that we have apprehended the benefits, it\u2019s time to\nlook at the limitations:<\/p>\n\n\n\n<ul><li>&nbsp;<strong>Defames\nthe image of the company<\/strong>&#8211; Not making dividend payments may not be harmful\nfor the company in legal terms, but it can affect its image in the eyes of\ninvestors. When the company applies for any other finance, the lender shall\nhave this as a major concern.<\/li><li><strong>Lack of voting rights- <\/strong>The preference\nshareholders do not relish the same voting rights which the company provides to\nthe common shareholders. <\/li><li><strong>Impact credit worthiness- <\/strong>Preferential\nallotment reduces the creditworthiness of a company as the preference\nshareholders get the right over the company\u2019s personal assets.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Preconditions_on_Preferential_Allotment\"><\/span>Preconditions on Preferential Allotment<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>After\ngoing through the advantages and disadvantages of preferential allotment, you\nmust be eager to issue the shares. Besides, there are some conditions which you\nmust fulfil before the issue of preferential allotment:<\/p>\n\n\n\n<ul><li>Firstly, the company must acquire\napproval from shareholders<strong> through the Extraordinary General Meeting,<\/strong> Postal Ballot, or AGM.<\/li><li>Obtain the application letter\nfrom the proposed shareholders prior to the Board Meeting.<\/li><li>Get the issue\nauthorized under the Article of Association<strong>.<\/strong><strong><\/strong><\/li><li>Make a list of people with&nbsp;the\nmaximum limit of 200 to whom you will propose to offer preference shares in a\nfinancial year for each type of security.<\/li><li>Prepare the offer letter in\nform PAS-4 and open a separate bank account that a shareholder can utilize to\nsubscribe to its share. The money in the bank shall only be used for the\nallotment or return.<\/li><li>Set a value for the offer that\nmust not be less than&nbsp;INR 20,000 per person. <\/li><li>The company cannot issue the\npreference shares to a person who has sold its equity shares during the 6\nmonths before the relevant date. Relevant date implies to 30 days before the\ndate of the EGM of the company.<\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conclusion\"><\/span>Conclusion<span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>There are both advantages and disadvantages\nof preferential allotment, yet one can determine that it the best source of\nraising capital for a company. <\/p>\n\n\n\n<p>If you also strive to issue the preference\nshares of your company, take the guidance of a legal consultancy like Swarit\nAdvisors. Our team can help you prepare the offer letter, valuation report, and\nhelp you file several forms to the regulatory authority of SEBI. <\/p>\n\n\n\n<div class=\"read\"><p><b>Read, Also:<\/b> <mark><a href=\"https:\/\/swaritadvisors.com\/learning\/how-a-company-raise-capital-via-preferential-allotment\/\">How a Company Raise Capital via Preferential Allotment?<\/a><\/mark>.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>A shortage of finances is inevitable while running a business that compels an entrepreneur to explore fundraising methods. The Company Act 2013 prescribes various ways to raise the company\u2019s capital, which entail the right issue, sweat equity shares, employee stock ownership plan, IPOs, and preferential allotment. Amongst all the stated methods, preferential allotment seems to [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":10226,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[546],"tags":[607],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10222"}],"collection":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/comments?post=10222"}],"version-history":[{"count":9,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10222\/revisions"}],"predecessor-version":[{"id":16701,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/10222\/revisions\/16701"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media\/10226"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media?parent=10222"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/categories?post=10222"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/tags?post=10222"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}