{"id":7099,"date":"2019-11-12T09:00:38","date_gmt":"2019-11-12T03:30:38","guid":{"rendered":"https:\/\/swaritadvisors.com\/learning\/?p=7099"},"modified":"2020-06-24T11:46:20","modified_gmt":"2020-06-24T06:16:20","slug":"how-a-company-raise-capital-via-preferential-allotment","status":"publish","type":"post","link":"https:\/\/swaritadvisors.com\/learning\/how-a-company-raise-capital-via-preferential-allotment\/","title":{"rendered":"How a Company Raise Capital via Preferential Allotment?"},"content":{"rendered":"\n<p class=\"has-drop-cap\">The Company Act 2013, has prescribed several methods to raise the capital of a company, which include right issue of shares, employee stock ownership plan (ESOP), preferential allotment, sweat equity shares, and IPOs. Among all the stated methods, it seems that the <strong><a href=\"https:\/\/swaritadvisors.com\/preferential-allotment\"><em>preferential allotment<\/em><\/a><\/strong> is the best fundraising source for unlisted companies.<\/p>\n\n\n\n<p> The provisions and procedure of preferential allotment of shares fall under <strong><em>Section 62 (allocation of shares) and Second 42 (allotment of securities)<\/em><\/strong>. For the issue of shares, a company must comply with both the Sections, whereas, for the issue of securities, it requires to comply with the <strong>provisions of Section 42<\/strong> only. If you also want to raise your company\u2019s fund via preferential allotment, then it\u2019s essential to perceive the knowledge of this method and how it functions. \u00a0<\/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-6a3a5ea2f3667\" 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-6a3a5ea2f3667\"  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\/how-a-company-raise-capital-via-preferential-allotment\/#What_is_the_Concept_of_Preferential_Allotment\" title=\"What is the Concept of Preferential Allotment? \">What is the Concept 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\/how-a-company-raise-capital-via-preferential-allotment\/#Reasons_to_choose_this_option_of_Raising_Capital\" title=\"Reasons to choose this option of Raising Capital \">Reasons to choose this option of Raising Capital <\/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\/how-a-company-raise-capital-via-preferential-allotment\/#Conditions_Applied_on_Preferential_Allotment\" title=\"Conditions Applied on Preferential Allotment \">Conditions Applied on 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\/how-a-company-raise-capital-via-preferential-allotment\/#Eligibility_Criteria\" title=\"Eligibility Criteria\">Eligibility Criteria<\/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\/how-a-company-raise-capital-via-preferential-allotment\/#A_detailed_procedure_for_Preferential_Allotment_of_Shares\" title=\"A detailed procedure for Preferential Allotment of Shares\">A detailed procedure for Preferential Allotment of Shares<\/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\/how-a-company-raise-capital-via-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=\"What_is_the_Concept_of_Preferential_Allotment\"><\/span>What is the Concept of Preferential Allotment? <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Preferential allotment refers to the process of <strong>allotting shares<\/strong> to a selected group of people or companies on a preferred basis. It is the most effective way of raising funds. Any listed company on a <strong>stock exchange<\/strong> has the right to allot shares on a preferential basis. It is indispensable for the listed companies to follow the rules &amp; provisions of <strong>SEBI<\/strong> during the process of <strong>preferential allotment<\/strong>. While in the case of unlisted companies, the norms of <em>Companies Act, 2013<\/em>, will be applicable. <\/p>\n\n\n\n<p>\u00a0It creates a win-win situation for both, wherein the company raises its funds, and the preference shareholders get the dividend as per their priority. Also, the company receives the authority to meet its financial needs by raising funds from the public. Generally, the allotment of shares is a time-consuming and complicated procedure. However, the concept of <strong>shortlisting shareholders<\/strong> saves much time and becomes more feasible for companies to raise funds.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Reasons_to_choose_this_option_of_Raising_Capital\"><\/span>Reasons to choose this option of Raising Capital <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>The main reason to choose preferential allotment over other methods is that it is a faster way for a company to raise capital. When a company needs funds, then it can issue new shares to the public or allot shares in bulk. This method <strong>facilitates an opportunity<\/strong> to buy a large chunk of shares to those shareholders who cannot afford to <strong>buy shares from the market<\/strong>. Besides that, such shareholders do not get any voting rights, and they are liable for payment only when the company incurs a profit.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Conditions_Applied_on_Preferential_Allotment\"><\/span>Conditions Applied on Preferential Allotment <span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>These are the conditions which a company has to comply before the issue of preferential allotment: <\/p>\n\n\n\n<ul><li>The first thing that any company has to do before the issuance of shares is to obtain approval from shareholders<strong>,\u00a0<\/strong>\u00a0via <strong>EGM<\/strong> <a href=\"https:\/\/en.wikipedia.org\/wiki\/Extraordinary_general_meeting\">[1]<\/a> , AGM, or Postal Ballot.<\/li><li>Ensure that the issue got authorized by the <strong><a href=\"https:\/\/swaritadvisors.com\/learning\/articles-of-association-aoa-and-its-importance\/\">Article of Association<\/a>.<\/strong><\/li><li>Create a list of persons (not exceeding\u00a0the limit of 200\u00a0in a financial year for each type of security ) to whom you propose to offer. <\/li><li>Frame the <strong>offer letter in form PAS-4<\/strong> and maintain a record of PAS in <strong>form PAS-5<\/strong>.\u00a0<\/li><li>Acquire the consent\u00a0and application letter from the proposed shareholders before the board meeting.<\/li><li>The company shall <strong>open a separate bank account<\/strong> that a subscriber can utilize to subscribe to its share. The account\u2019s money shall only get used for the <em>allotment or return<\/em> only.<\/li><li>The company must set the value of the offer, which should not be not less than\u00a0<strong>20,000\/ per person<\/strong>. Also, only fully paid up securities are issuable.<\/li><li>The existing <strong>proposed allottees<\/strong> of the listed companies shall have shares in dematerialized form. The listed companies shall not make a preferential allotment unless:<br>a) It complies with the conditions of continuous listing<br>b) It has <strong>obtained PAN<\/strong> of all the <em>proposed allottees<\/em>.<\/li><li>The company cannot make an issue to a person who has sold any equity shares during the six months preceding the &#8216;<strong>Relevant date<\/strong>.&#8217; Here the Relevant date refers to 30 days before the date of the general meeting of the company.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Eligibility_Criteria\"><\/span>Eligibility Criteria<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>A person has to pass the <strong>eligibility criteria under the Companies Act<\/strong> to get the issue of shares:<\/p>\n\n\n\n<ul><li>The person  who belongs to the promoter or promoter group and sold his equity shares six months preceding the relevant date<\/li><li>The person belongs to the promoter or promoter group who has earlier <strong>applied for the warrant<\/strong> but failed to exercise it.<\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"A_detailed_procedure_for_Preferential_Allotment_of_Shares\"><\/span>A detailed procedure for Preferential Allotment of Shares<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><em>Following is the step by step procedure for allotment of preferential shares: <\/em><\/p>\n\n\n\n<ul><li>Summon a board meeting by sending a notice at least 7 days from the commencement of the meeting.<\/li><li>Discuss the agendas of the board meeting: <ul><li>Evaluation of the <strong>valuation report<\/strong><\/li><li>Agree upon the number of allottees which cannot be more than 50 at one time and <strong>200 aggregate<\/strong> for a particular financial year.<\/li><li>Fix the day, date, and time for holding Extraordinary General Meeting.<\/li><li>Draft the finalization<\/li><li>Finalize the notice for <strong>Extraordinary General Meeting<\/strong> (EGM) along with an explanatory statement<\/li><li>Decide on the final offer letter.<\/li><\/ul><\/li><\/ul>\n\n\n\n<ul><li>Open a pre-decided separate bank account for the preferential allotment of shares.<\/li><li>Send a <strong>notice of EGM<\/strong> of clear 21 days before the date of Extraordinary General Meeting.<\/li><li>Conduct the EGM &amp; pass the special resolution to take the <strong>approval for making preferential allotment<\/strong>.<\/li><li>File <strong>MGT-14<\/strong> and send <strong>PAS-4 application<\/strong> to the allottees with the documents of:<ul><li> Explanatory Statement <\/li><li> A certified copy of the Special Resolution <\/li><\/ul><\/li><\/ul>\n\n\n\n<ul><li>The allottees have to pay for their <strong>allotment via cheque<\/strong> or demand draft where the received money will get deposited to the separate bank account<\/li><li>Conduct another board meeting from 60 days of receiving money receipt of allotment.<\/li><li><strong>File PAS-3<\/strong> within 15 days, which include documents like:<ul><li>Copy of contract<\/li><li>Allottees list<\/li><li>A certified copy of the Special Resolution passed along with an explanatory statement.<\/li><li>A detailed record of all the private placement offers and acceptance letter in <strong>form PAS-5<\/strong>.<\/li><\/ul><\/li><\/ul>\n\n\n\n<ul><li>Issue the <strong>Share Certificates<\/strong> to all the devoted allottees within 2 months of allotment.<\/li><li>Pay the Stamp duty under the provisions of the following state.<\/li><li> Prepare and update the register of members in form MGT-1. <\/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>Preferential Allotment is\nundeniably the best methods that companies can opt to raise their capital. If\nyou also wish to raise funds for your company, then you must first take guidance\nfrom our experts. Our team of professionals are masters of their field and guide\nyou the right way using their years of experience. <\/p>\n\n\n\n<div class=\"read\"><p><b>Also, Read:<\/b> <mark><a href=\"https:\/\/swaritadvisors.com\/learning\/how-preferential-allotment-can-increase-your-profit\/\" target=\"_blank\" rel=\"noopener noreferrer\">How Preferential Allotment can Increase your Profit?<\/a><\/mark>.<\/p><\/div>\n","protected":false},"excerpt":{"rendered":"<p>The Company Act 2013, has prescribed several methods to raise the capital of a company, which include right issue of shares, employee stock ownership plan (ESOP), preferential allotment, sweat equity shares, and IPOs. Among all the stated methods, it seems that the preferential allotment is the best fundraising source for unlisted companies. The provisions and [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":7104,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[546],"tags":[],"_links":{"self":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/7099"}],"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=7099"}],"version-history":[{"count":16,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/7099\/revisions"}],"predecessor-version":[{"id":11226,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/posts\/7099\/revisions\/11226"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media\/7104"}],"wp:attachment":[{"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/media?parent=7099"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/categories?post=7099"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/swaritadvisors.com\/learning\/wp-json\/wp\/v2\/tags?post=7099"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}