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PREFERENTIAL ALLOTMENT- AN OVERVIEW

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 who is listed on any stock exchange and the rules & provisions of SEBI have to prevail. The company may decide to raise the funds from the public to meet its financial needs. Allotment to a large number of people is a lengthy procedure & it is complicated and takes much time. Thus amongst all the methods of raising funds, this is most feasible.

LEGAL FRAMEWORK FOR PREFERENTIAL ALLOTMENT

The company can raise funds from the number of options but the best mode of raising fund is Preferential Allotment for unlisted companies. The regulatory framework that governs preferential allotment is:

  • Section 62(1)(C) read with Rule 13 of Companies (Share Capital & Debenture) Rules, 2014 and section 42 read with Rule 14 of Companies (Prospectus & Allotment of Securities) Rules, 2014.
  • Provisions of SEBI (ICDR) Regulations, 2009.

EXERCISING THE OPTION FOR PREFERENTIAL ALLOTMENT

Many Companies opt for the option of preferential allotment because it is the method through which companies provide the route to those shareholders who are not able to afford a large chunk of companies shares at affordable prices during IPOs. Such shareholders dint get any voting rights. They are paid only in case the company incurred a profit. Apart from the public, these options are given to venture capitalists, financial institution and existing shareholders to increase their stake and holding in the Company. The company also exercises this option for securing the equity participation of those shareholders who are valuable to the Company. 

CONDITIONS TO BE FULFILED

Before making the preferential issue, the company must fulfill the following conditions before making the allotment:

    1. Take the approval of all the shareholders through AGM or EGM or postal ballot.
    2. Make sure that the company is authorized to make preferential allotment through its Article of Association.
    3. Prepare the list of allottees that cannot exceed 50 at a time. There cannot be more than 200 allottees in a financial year.
    4. Open the separate bank account in a scheduled bank through which the subscriber can subscribe to the shares and the money received in such an account has to be utilized allotment only.
    5. The value of invitation per person cannot be less than INR 20000 of the face value of the shares.
    6. Fully paid shares have to be issued.
    7. For the companies who are listed in the stock exchange, allottees can have shares only in dematerialized form
    8. PAN of each allottee is a must
    9. Issuer Company cannot make the allotment to any person who has sold his equity shares during six months preceding the allotment.

INELIGIBILITY

Following persons are ineligible for preferential allotment:

      • The person who has sold his equity shares for six months before the allotment
      • The person who has earlier applied for the option but has failed to exercise the same.

LOCK-IN PERIOD

As per SEBI guidelines if shares are issued on a preferential basis by the Listed Company then those shares have to be locked in for certain time:

      • Securities issued under preferential allotment, to the promoter, shall be locked in for three years from the date of trading approval.
      • Not more than 20% of the total paid-up capital of issuing company shall be locked in for three years from the date of trading approval.
      • Equity shares allotted more than 20% can be locked in for one year from the date of trading approval.
      • Shares issued to the group other that of the promoter can be locked in for 1 year.

VALUATION REPORT

The price of the shares issued under preferential allotment cannot be less than the price determined based on the valuation report of the registered valuer or independent valuer. A registered valuer shall have an experience of 10 years or more. Listed companies have to comply with following regulations of SEBI guidelines:

    1. In case the equity shares of the companies are listed on the stock exchange for 26 weeks or more on the relevant date, the price of issue shall be not less than the higher of the following:
      • Average of the weekly high & low of the closing price of the shares on the stock exchange during:
        • 26 weeks preceding the relevant date
        • 2 weeks preceding the relevant date
    2. In case the equity shares of the companies are listed on the stock exchange for less than 26 weeks on the relevant date at a price not less than the higher of the following:
      • Price at which shares are issued by the Company in its IPO
      • Average of the weekly high & low of the closing price of the shares on the stock exchange for 2 weeks preceding the relevant date.

OFFER LETTER

The company has to prepare the offer letter in the format of Form PAS-4 and the complete record of preferential allotment has to be maintained in form PAS-5.

STEPS FOR PREFERENTIAL ALLOTMENT

    • Call the board meeting and send the notice of the board meeting at least 7 days before the date of the meeting.
    • 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.
    • Open the separate bank account for preferential allotment.
    • Send the notice of EGM of clear 21 days before the date of EGM
    • Conduct the meeting & pass the special resolution in EGM for the approval of Preferential Allotment.
    • 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.
    • 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.
    • Conducting another board meeting after 60 days of receipt of allotment money.
    • 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.
    • Issue the Share Certificates to all the allottees within two months of allotment.
    • Stamp duty must be paid under the provision of the following state.
    • Update the register of members prepared in form MGT-1.

Frequently Asked Questions (FAQs)

  • 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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