In the corporate world, companies often require capital infusion for various purposes such as expansion, debt repayment, or funding new projects. Companies have several options to raise funds, and three common methods under the Companies Act, 2013 are right issue, private placement, and preferential allotment. Each method has its own set of rules and regulations governing its implementation.
This article aims to provide a comprehensive understanding of the differences between right issue, private placement, and preferential allotment. We will explore the applicable provisions under the Companies Act, the types of securities that can be issued, the eligibility criteria for offering, required approvals, offer periods, documentation, timeframes for allotment, fund utilization, valuation reports, and other key aspects.
In this article Author explains Difference Between Right issue, Private Placement and Preferential Allotment under Companies Act, 2013 read with Companies (share Capital and debentures) Rules, 2014 and Companies (Prospectus and allotment of securities) Rules, 2014.
Chart of Difference Between Right issue Private Placement Preferential Allotment
| Sr. No | Basis of Difference | Rights Issue | Private Placement | Preferential Allotment |
|---|---|---|---|---|
| 1 | Applicable provisions under Companies Act, 2013 | Section 62(1)(a) read with Rules | Section 42 read with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 | Section 62(1)(c) read with Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 and Section 42 read with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 |
| 2 | Type of Security | Only shares can be issued (Equity and Preference) | Any security can be issued (Equity, Preference, Debenture, etc.) | Only shares can be issued (Equity and Preference) |
| 3 | Eligible for Offer | Issue of shares to existing Equity shareholders in proportion to their existing shareholding | Offer of shares to investors or any selected group of person or any outsider (other than by way of public offer). Invitation in one go max: 50 Persons. Max during year: 200 persons | Issue of shares to both existing shareholders and/or outsiders |
| 4 | Approval Required | Approval of Board of Directors through Board Resolution required | Both Board and Shareholder approval required (General Meeting) | Both Board and Shareholder approval required (General Meeting) |
| 5 | Offer period | Minimum period: 15 days. Maximum period: 30 days (however, in case of a private company, if consent from 90% of the shareholders is obtained, then the offer period can be less than defined above). *Add 3 additional days for dispatch | No specific minimum offer period defined under this section. However, maximum period of offer can be 365 days | No specific minimum offer period defined under this section. However, maximum period of offer can be 365 days |
| 6 | Format of offer Letter | No specific format | PAS-4 (offer Letter), PAS-5 (Complete record) | PAS-4 (offer Letter), PAS-5 (Complete record) *No such format in case of offer only to existing members |
| 7 | Forms to be filled | PAS-3 (within 30 days from allotment). PAS-3 needs to be filed within 30 days of passing of the board resolution for allotment of shares | 1. MGT-14 (within 30 days passing of special resolution in general meeting), 2. PAS-3 (within 15 days of allotment of shares) | 1. MGT-14 (within 30 days passing of special resolution in general meeting), 2. PAS-3 (within 15 days of allotment of shares) |
| 8 | Time period for allotment of securities *otherwise it will be treated as deposit | Within 60 days from the date of receipt of application money | Within 60 days from the date of receipt of application money | Within 60 days from the date of receipt of application money |
| 9 | Separate Bank Account | No separate bank account required | Separate bank account required | Separate bank account required |
| 10 | Fund utilisation | Fund can be utilized any time after receipt of same | Fund can be utilised only after filing PAS-3 | Fund can be utilised only after filing PAS-3 |
| 11 | Valuation Report | Valuation Report is not mandatory. *Valuation report is mandatory only in case of issue to non-existing non-resident shareholders | Valuation Report is not mandatory | Valuation Report is mandatory |
| 12 | Renounce the offer letter option | Shareholders have rights to renounce/accept/reject the offer letter. *Subject to authorization in AOA | No such right available | No such right available |
| 13 | Explanatory Statement | Not applicable because no shareholder approval is required | Notice should contain Explanatory statement as per Rule 14(2) of Companies (Prospectus and Allotment of Securities) Rules, 2014 | Notice should contain Explanatory statement according to Rule 13(d) of Companies (Share Capital and Debentures) Rules, 2014 read with Rule 14(2) of Companies (Prospectus and Allotment of Securities) Rules, 2014 |
| 14 | Minimum Subscription or Investment size | No minimum subscription required | No minimum subscription required | No minimum subscription required |
| 15 | Mode of Receipt of Subscription money | Subscription money can be received in cash or through a banking channel | Subscription money can be received only through a banking channel | Subscription money can be received in cash or through a banking channel |
| 16 | Debenture issue | Debentures can’t be issued through rights issue of shares | Debentures can be issued through rights issue of shares | Debentures can’t be issued through this method |
| 17 | Non-Convertible Preference Shares | Can’t be issued through rights issue of shares | Can be issued through rights issue of shares | Can’t be issued through this method |
Conclusion:
Raising capital is a crucial aspect of corporate finance, and companies need to carefully consider the appropriate method for raising funds while complying with the legal framework. Right issue, private placement, and preferential allotment offer distinct approaches, each with its own advantages and requirements.
By understanding the variations between these methods, companies can make informed decisions based on their specific needs and circumstances. It is essential to adhere to the relevant provisions under the Companies Act, as non-compliance can lead to legal consequences.
Whether a company chooses to opt for a right issue, private placement, or preferential allotment, it should prioritize transparency, accountability, and compliance to ensure fair treatment of shareholders and investors.
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Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, I assume no responsibility for the same.
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Please correct point no. 10 where it says “Fund can’t be utilise only after filing of PAS-3”. It is supposed to be ‘can’ instead of ‘Can’t’.
It can cause a lot of confusion for the trainees and students who are only starting out and use the articles for gaining insights and preparing for exams.
Hi
As per sl.no 11 on valuation of Rights issue, you have mentioned “*Valuation report is mandatory only in case of issue to non- existing non-resident shareholder”.
You have mentioned as non-existing shareholders. As per Rights issue, only existing shareholder has rights. Please correct.
And i want one clarification: Whether valuation report is required in the following cases under IT Act and Companies act.
Rights issue with premium or without premium by private Co and Listed company. Kindly explain with provision.