Online Preferential Allotment - An Overview

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. 

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.

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.

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 Allottees;
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.

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 allottees 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 allottees 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. Allottees 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.

Difference between Preferential Allotment, Private Placement, and Right Issue

FAQ of Preferential Allotment