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Overview of Preferential Allotment

In India, an existing company can expand its business operations and raise funds in three ways. These methods include the issue of right or bonus shares to existing shareholders in proportion to the shares held by them, initial public offer and preferential allotment. 

Preferential allotment involves bulk allotment of fresh issue of shares by a company to individuals, venture capitalists and companies at a pre-determined price. Usually, a company chooses to make a preferential allotment to people who want to acquire a strategic stake in the company. This includes the existing shareholders like promoters, venture capitalists, financial institutions, suppliers or buyers who want to increase their stake in the company. Therefore, preferential allotment allows the company to get equity participation of those whom it considers to be a value addition as shareholders.

Every company, whether it is a private or public, listed or unlisted, and even section 8 company can opt for preferential allotment. 

Laws Relating to Preferential Allotment

In India, the legal provisions regulating the concept of Preferential Allotment are as follows: 

  • Section 62 of the Companies Act, 2013;
  • Section 42 of the Companies Act, 2013;
  • Rule 13 of the Companies (Share Capital and Debentures) Rule, 2014;
  • Rule 14 of the Companies (Prospectus and Allotment of Securities) Rule, 2014.

Reasons to Choose Preferential Allotment

The reasons for choosing preferential allotment can be summarized as: 

  • To provide a way for those shareholders who were unable to purchase shares during initial public offerings;
  • To assist the company in securing equity participation;
  • To help the company in raising funds;
  • To increase the flow of capital in the economy;
  • To increase the share capital of the company;
  • To provide an option to promoters, venture capitalists, financial institutions, suppliers or buyers to increase their stake in the company.

Types of Securities covered under Preferential Allotment

The types of securities covered under Preferential Allotment in India are as follows:

  • Shares;
  • Fully Convertible Debentures;
  • Partly Convertible Debentures;
  • Any other security which can be exchanged with or converted into equity shares at a later date.

Forms required for Preferential Allotment

In India, the process of Preferential Allotment requires only two forms, which can be summarized as follows:  

  • Form MGT-14: A company needs this form to pass the shareholders resolution in the AGM (Annual General Meeting) or EGM (Extraordinary General Meeting). The directors need to file this form with the ROC (Registrar of Companies) within thirty days starting from the date of passing the resolution. Form MGT-14 also requires the following attachments:
  1. A copy of the Special Resolution (SR) and Explanatory Statement;
  2. Both the copies must be certified by a Practising CA, CS or any Cost Accountant of the Company.
  •  Form PAS-3: The directors of the issuer company need to file the Return of Allotment in Form PAS 3 with the Registrar of Companies within fifteen days of allotment. Form PAS-3 also requires the following attachments:
  1. List of Allot-tees;
  2. A copy of the Special Resolution (SR) and Explanatory Statement;
  3. Valuation Report;
  4. A copy of the contract, if the company issues shares for consideration other than cash;
  5. A copy of records concerning the offer of private placement;
  6. A copy of acceptance in Form PAS-5.

Details Included in the List of Allot-tees

The list of allot-tees must contain the following details:   

  • Details of Security Holder such as full name, PAN (Permanent Account Number), address, and E-mail Id;
  • Details of the class of security allotted;
  • Date of allotment of security;
  • Total number of securities held by each shareholder, 
  • Nominal Value of the shares allotted;
  • Amount paid on such securities; and 
  • Details about the consideration received if the company has issued shares for some consideration other than cash.

Conditions Relating to Preferential Allotment

The following conditions must be fulfilled before and after undergoing the process of Preferential Allotment in India:

  • A company needs to check whether its authorized capital is enough to issue shares through preferential allotment. If not, then the company needs to alter the capital clause of its MOA (Memorandum of Association);
  • Where a company decides to issue shares for consideration other than cash, it needs to confirm that such consideration would be done by a registered valuer who will submit a valuation report along with the reasons for such valuation. 
  • A company needs to file a declaration stating that the preferential allotment of securities is done after passing a special resolution according to Rule 13 (2) (b) of the Companies (Share Capital and Debentures) Rules, 2014. It also needs to confirm that the process of allotting securities is completed within twelve months from the date of passing the resolution. 
  • The company needs to allot its shares within sixty days from the date of receipt of share application money. If the company fails to allot the shares, it needs to refund all the amount received within fifteen days from the date of completion of sixty days. However, if the company fails to refund the share application money, it will be liable to pay interest at a rate of 12% p.a., starting from the expiry of the 60th day.

Note: It is relevant to note that if a company fails to comply with any of the provisions mentioned above, the allotment of securities would be treated as a public offer.

Difference between Preferential Allotment, Private Placement, and Right Issue

Sr. No

Basis of Difference

Right Issue

Private Placement

Preferential Allotment

1

Applicable provisions under the Companies Act, 2013.

Section 62 (1) (a) read with Securities Exchange Board of India (ICDR) Regulations, 2009.

Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

Section 62(1) (c) read 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.

2

Type of Security

A company can only issue shares, i.e. equity and preference shares.

A company can issue any kind of security, i.e. equity shares, preference shares, and debenture.

A company can only issue shares, i.e. equity and preference shares.

3

Eligible for Offer

A company can issue shares to the existing equity shareholders in proportion to their shareholding

A company can offer shares to investors, any pre-selected group of persons or any outsider (other than public offer).
A company can send an invitation to a minimum of 50 Persons and a
 maximum of 200 persons in a financial year.

A company can issue shares to existing shareholders and outsiders.

4

Approval Required

For the Right Issue, a company needs to pass a board resolution in the board meeting of the company. 

A company needs to take approval from both directors and shareholders in the general meeting.

A company needs to take approval from both directors and shareholders in general meeting.

5

Offer period

A minimum of fifteen days and a maximum of thirty days. 

No minimum period is defined under this section. However, an offer remains open for a maximum period of 365 days.

No minimum period is defined under this section. However, an offer remains open for a period of 365 days.

6

Format of offer Letter

No specific format is prescribed.

A company needs to make the letter of offer as per form PAS-4. Further, it needs to maintain records as per PAS-5. 

A company needs to make the letter of offer as per form PAS-4. Further, it needs to maintain records as per PAS-5.
 However, no specific format is prescribed in the case of existing members.

7

Forms Required 

A company needs to file PAS-3 twice with the Registrar of Companies. Firstly, within thirty days from passing the board resolution for allotment of shares and secondly, within thirty of allotment of the shares.

A company needs to file MGT-14 with the ROC within thirty days from passing the special resolution in the general meeting.
 It also needs to file PAS-3 within fifteen days of allotment of shares.

A company needs to file MGT-14 with the ROC within thirty days from passing the special resolution in the general meeting.
 It also needs to file PAS-3 within fifteen days of allotment of shares.

8

Prescribed time for the allotment of securities (otherwise it will be treated as a deposit)

Within sixty days from the date of receipt of share application money.

Within sixty days from the date of receipt of share application money.

Within sixty days from the date of receipt of share application money.

9

Opening of Bank Account

No separate bank account is needed.

A separate bank account is needed.

A separate bank account is needed.

10

Fund utilisation

A company can utilise its fund any time after receiving them.

A company can utilise its fund only after filing PAS-3.

A company can utilise its fund only after filing PAS-3.

11

Valuation Report

Valuation Report is not compulsory in the right issue.
 However, a company needs a valuation report in case it issues shares to the existing non-resident shareholder.

Valuation Report is not compulsory.

Valuation Report is compulsory.

12

Renunciation 

Shareholders need to renounce their rights to accept or reject the offer letter.
 However, a company needs authorisation from AOA.

No such right is available.

No such right is available.

13

Explanatory Statement

There is no need to attach an explanatory statement with the notice as the right issue does not require shareholders’ approval.

The notice must contain an explanatory statement according to rule 14 (2) of the Companies (Prospectus and Allotment of Securities) Rules, 2014.

The notice must contain an explanatory statement according to Rule 13 (d) of the Companies (Share Capital and Debentures) Rules, 2014, read with Rule 14 (2) of the Companies (Prospectus and allotment of securities) Rules, 2014.

14

Investment Size or Minimum Subscription 

A company does not require minimum subscription in right issue.

A company does not require minimum subscription in private placement.

A company does not require minimum subscription in preferential allotment.

15

Mode of the receipt of subscription money

A company can receive subscription money either in cash or through the banking channel.

A company can receive subscription money only through the banking channel.

A company can receive subscription money only through the banking channel.

16

Issue of Debenture 

A company cannot issue debenture through the right issue of shares.

A company can issue debenture through the private placement of shares.

A company cannot issue debenture through the preferential allotment of shares.

17

Non-Convertible Preference Shares

A company cannot issue non-convertible preference shares through right issue of shares.

A company can issue non-convertible preference shares through the private placement of shares.

A company cannot issue non-convertible preference shares through the preferential allotment of shares.

 

Procedure for Preferential Allotment

The steps involved in the process for preferential allotment in India are as follows:

  • Notice of Board Meeting: A notice of the Board Meeting (BM) must be sent at least seven days before the date of BM.
  • Hold a Board Meeting: In a Board Meeting, the directors need to discuss and pass resolutions on the following:
  1. To consider the valuation report as received from the registered valuer;
  2. To decide the list of allottees (a company can send an invitation to only fifty people at a time and two hundred in aggregate in a financial year, excluding the QIB (Qualified Institutional Buyer);
  3. To fix a day, date, time and venue of the EGM (Extraordinary General Meeting);
  4. To decide the offer period;
  5. Approval of Letter of Offer as per form PAS-4;
  6. To decide the agenda in the notice together with the Explanatory Statement for an EGM.
  • Open a Separate Bank Account: The company needs to open a separate bank account to receive share application money.
  • Convene an EGM: A Special Resolution (SR) for authorising the preferential allotment of securities must be passed in the EGM. 
  • File MGT-14 and PAS-4 with ROC: After passing the special resolution, the directors are required to file form MGT-14 with the ROC (Registrar of Companies), and then file an application cum offer letter for the private placement in form PAS-4. The company will dispatch the application to the proposed allottees together with the following attachments:
  1. A copy of the Special Resolution (SR) and Explanatory Statement.
  2. Both the copies must be certified by a Practicing CA, CS, or by any Cost Accountant of the Company.
  • Dispatch Application for Private Placement: The directors need to send the application cum offer letter for private placement to all the proposed allot-tees at least three days before the opening of the issue. Such an application should be sent within thirty days of passing a special resolution through a registered post/ speed post/ courier/ E-mail/ hand delivery, etc.
  • Payment of Subscription Money: All the proposed allot-tees must subscribe to the shares offered in the application cum offer letter for private placement. They need to pay the subscription money either by demand draft or cheque or by any other banking channel. Allot-tees are not allowed to pay the subscription money in cash.
  • Deposit of the Money Received: The directors need to deposit all the share application money received in a separate bank account.
  • Hold a Board Meeting: The company needs to hold a Board Meeting for the allotment of shares within sixty days of the receipt of share application money.
  • File PAS-3 with ROC: The directors need to file form PAS-3 with the ROC (Registrar of Companies) within fifteen days of allotment of shares.

Package Inclusions

  • Discussion on the Eligibility criteria for making Preferential Allotment;
  • Drafting of Letter of Offer;
  • Guidance on the procedure for Preferential Allotment;
  • Consultation for the Valuation report;
  • Filing Forms with the Registrar of Companies;

FAQs for Preferential Allotment

Preferential Allotment is a process in which a company allots the share to a different group of people or companies on a preferential basis. Preference shareholders will be paid a dividend on a priority basis by a company. The preferential allotment can be made by a company that is listed on any stock exchange, and the rules and provisions of SEBI have to prevail.

The main difference between Preferential Allotment and Private Placement is the following listed:

  1. The Private Placement is an invitation to offer securities to a pre-decided and specified group of investors. Private Placement is done to raise funds.
  2. Whereas Preferential Allotment is basically the issuance of shares to a group of people from a listed company. Further, Preferential Allotment is done with the aim of raising cash.

No, the main difference between the Preferential Allotment and Right Issue is that the Rights Issue is basically an offer to the existing shareholders of the company. In contrast, Preferential Allotment is the offer or an invitation to offer shares and securities to a specified group of people.

The following listed are the benefits for the shareholder annexed with the concept of Preferential Allotment:

  1. In the case of the Preferential Allotment of shares, the concerned Preference Shareholders are directly paid by the company that, too, with zero brokerage cost.
  2. Preferential shareholders can easily claim dividends in the subsequent year if in case they are not provided with the same for any given particular year.
  3. Preference shareholders capital is always secure and safe, even if the company gets bankrupt or fails in the market. Further, the preferential shareholders are paid out first among all.

If in case the shares are issued to the shareholders according to Sec 62(1)(a), then, in that case, the passing of special resolution and filing of MGT-14 is mandatory.

The following listed are the steps included in the Procedure of Allotment of Shares:

  1. Call the board meeting and send the notice of the board meeting at least 7 days before the date of the meeting.
  2. At a board meeting approve the Preferential Allotment and discuss the following agendas:
  • Evaluate the valuation report
  • Fix the number of allottees that cannot be more than 50 at one time and in aggregate 200 for a particular year.
  • Fixing the day, date and time for holding EGM
  • Finalizing the draft.
  • Finalizing the notice for EGM along with an explanatory statement
  • Deciding the final offer letter.
  1. Open the separate bank account for preferential allotment.
  2. Send the notice of EGM of clear 21 days before the date of EGM.
  3. Conduct the meeting & pass the special resolution in EGM for the approval of Preferential Allotment.
  4. After passing Special Resolution, file MGT-14 with ROC along with sending PAS-4 to the allottees annexed with documents:
  • Explanatory Statement
  • CTC of Special Resolution.
  1. Allottees need to pay for their allotment through cheque or demand draft. And the received money will be deposited to the separate bank account open for this purpose.
  2. Conducting another board meeting after 60 days of receipt of allotment money.
  3. File PAS-3 within 15 days of conducting board meeting with the following attachments –
  • List of Allottees
  • Copy of contract
  • Certified True Copy of SR passed along with an explanatory statement
  • Details of all the private placement offers and acceptance letter in form PAS-5.
  1. Issue the Share Certificates to all the allottees within two months of allotment.
  2. Stamp duty must be paid under the provision of the following state.
  3. Update the register of members prepared in form MGT-1.

Allotment of Shares shall be done within a period of 60 days, starting from the receipt of application money.
If in case the Allotment of securities is not done within a period of 60 days, then the said company is liable to refund the whole application money received within next 15 days.

  • Preference shareholders are directly paid by the company with zero brokerage costs.
  • Preferential shareholders can claim for dividends.
  • Preference shareholders are always paid first, even in the case of the company gets bankrupt. They are the safest shareholders.

Merchant banker, registered with SEBI or Chartered Accountant in practice having minimum experience of 10 years has to prepare the Valuation Report.

No, until and unless the return of allotment is filed with the registrar in for PAS- 3, money received for the allotment of shares cannot be utilized for any purpose other than the allotment.

  • Full name of allottees
  • Address
  • PAN number
  • Mobile number & email id
  • Class of shares held
  • Number of shares held
  • Date of allotment of shares

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