Preferential Allotment

IMPORTANT DEFINITIONS: 

1. Issuer:

means a company or a body corporate authorized to issue specified securities under the relevant laws and whose specified securities are being issued and/or offered for sale in accordance with these regulations.

2. Specified Securities:

means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.

3. Convertible Securities:

means a security which is convertible into or exchangeable with equity shares of the issuer at a later date, with or without the option of the holder of such security and includes convertible debt instrument and convertible preference shares

4. Relevant Date:

As per Regulation 161 of SEBI (Issue of Capital and Disclosure Requirements), Regulations, 2018  

5. Promoter:

• Who has been named in draft offer document or offer document
• or is identified by issuer in Annual Returns under section 92 of Companies Act, 2013
• who has control over affairs of issuer directly or indirectly whether as a shareholder, director or otherwise
• In accordance with whose advise, directions, or instructions the board of directors are accustomed to act (except person acting in his professional capacity)
• Provided further that a financial institution, scheduled commercial bank, (foreign portfolio investor other than individuals, corporate bodies and family offices), mutual fund, venture capital fund, alternative investment fund, foreign venture capital investor, insurance company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time, shall not be deemed to be a promoter merely by virtue of the fact that 20%or more of the equity share capital of the issuer is held by such person unless such person satisfy other requirements prescribed under these regulations.

6. Promoter Group:

• Promoter
• Immediate relative of promoter i.e. spouse, parents, or child of person or spouse
• Promoter as a Body Corporate:
  • Subsidiary or Holding Company
  • Holding 20%or more in any body corporate and/or any body corporate holds 20% or more of equity shares of  Promoter
  • Group of individuals or companies or combination of them holds 20%or more of equity shares in any body corporate & are also acting in concern
• Promoter as a Individual:
  • Holding 20% or more in any body corporate, firm,HUF or any of his immediate relative;
  • Any body corporate in which any body corporate as in above point holds 20%or more of the equity share;
  • Holding of Promoter & any of his immediate relative is equal to 20%or more in any HUF or firm.
• Aggregation of all person’s shareholding is categorized  under  ‘Promoter Group’

7. Lock-In:

• Indicates a freeze on shares of the holder.
• As per Regulation 167 of SEBI (Issue of Capital and Disclosure Requirements), Regulations, 2018

8. Frequently Traded Shares:

• shares of the issuer,
• in which traded turnover,
• on any Recognised Stock Exchange,
• during the 12 calendar months,
• preceding the relevant date,
• is at least 10%of the total number of shares .

9. Minimum Promoter’s Contribution:

• Promoter to hold atleast 20%of the issue either of equity shares or convertible securities.
• Provided that in case it is less than 20%, alternative investment funds or foreign venture capital investors or scheduled commercial banks or public financial institutions or insurance companies registered with Insurance Regulatory and Development Authority of India may contribute to meet the shortfall in minimum contributionas specified for the promoters, subject to a maximum of 10% of the post-issue capital without being identified as promoter(s).

10. Private Placement:

• As per section 42of Companies Act, 2013 and Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014
• An offer or invitation made only to a select group of persons who have been identified by the Board;
• whose number shall not exceed fiftyor such higher number as may be prescribed;
• Excluding the Qualified Institutional Buyers (QIB) and employees of the company being offered securities under a scheme of Employees Stock Option (ESOP)in a financial year subject to such conditions as may be prescribed.

INTRODUCTION 

*IPO- Initial Public offer  

*FPO-Further Public offer

APPLICABILITY FOR PREFERENTIAL ISSUE:  

√ Section 42 and 62 of Companies Act, 2013

√ Rule 13 of Companies (Share & Debenture) Rules, 2014

√ Rule 14 of Companies (Prospectus and Allotment of Securities) Rules,2014

√ Chapter V Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018

WHAT IS PREFERENTIAL ISSUE? 

• Issue of specified securities;
• By the issuer;
• To any selected person or group of person;
• On a private placement basis;
• In accordance with Chapter V of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
• And doesn’t include Right Issue, Public Issue, Employee Stock Option Plan (ESOP), Employee Stock Purchase Scheme (ESPS), Issue of Sweat Equity Shares, or Depository Receipts issue in any county outside India or Foreign Securities;
• Other securities include: fully/partly convertible debenture, or other security to be converted into equity at later date;

OFFER OF SECURITY ON PRIVATE PLACEMENT BASIS:  

Meaning:  Section 42 of Companies  Act, 2013	Private Placement: means any offer or invitation to subscribe to issue of securities to selected group of persons by a company (Other than by way of Public Offer) through Private Placement offer-cum application letter (PAS 4) Subscription money to be paid either by cheque or demand draft or other banking channel and not by cash Private placement offer & application shall not carry any right of renunciation.
Allotment:	√ Maximum allotment to 200 members in a financial year excluding: QIB and Employees of the company who have been allotted shares under Employee Stock Option Plan (ESOP) Limit applicable separately to each type of security √ Return of Allotment to be filed within 15 days in Form PAS 3
Forms	MGT 14	Filing of Resolution	Within 30 days of passing of resolution.
	PAS 4	Offer cum application letter	Within 30 days of recording the name of the allottees.
	PAS 5	List of Allottees	Attached with Form PAS 3
	PAS 3	Return of Allotment	Within 15 days of allotment of securities.

Other Points to be considered:

• Special Resolution annexed with explanatory statement to be passed by the company to make offer or invitation to subscribe to the securities at shareholders meeting including basic justification for pricing and other details as may be necessary.
• Application should be serially numbered and addressed specifically to whom the offer is made
• Company to maintain complete record in Form PAS 5

FURTHER ISSUE OF SHARES 

√ Further issue of shares by existing company as per section 62 of Companies Act, 2013.

√ Offered to:

(a) Existing Equity shareholders	Offer to be made by notice specifying the number of shares (timeline: not less than 15 days & not more than 30 days). Unless articles deemed prescribe, right to renounce the shares offered should be specified in notice. After expiry of time: Offer not accepted  Disposal of shares  in such a manner not disadvantageous to the  company Notice to be dispatched atleast 3 days before opening of issue
(b) Employees	Issue of Employee Stock Option Plan subject to passing of special resolution and conditions as may be prescribed.
(c) Any person except (a) &( b)	If, so authorised by special resolution Either for cash or for a consideration other than cash If the Price is determined by Registered Valuer (except in case of listed company)

√ Exercising the option to convert of any Debenture or Loan into equity shares won’t fall under this section. (Except in case of debenture or loan to government)

ISSUE OF SHARES ON PREFERENTIAL BASIS 

√ Rule 13of Companies (Share Capital & Debentures) Rules, 2014

√ Issue to be authorized by Special Resolution passed in General Meeting

√ For issue of shares on preferential basis by listed company the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 would be applicable (no valuation by Registered Valuer is required in case of listed company)

√ For issue of shares on preferential basis by unlisted company follow provisions hereunder and subject to following compliance:

Issue authorized by AOA

Issue authorized by Special Resolution of Members

Disclosure in Explanatory Statement:

Object of issue; Total number of shares; o Price or price band; Basis on which price is arrived; o Relevant date on which price is arrived; o Class or classes of person to whom allotment is to be made;  o intention of promoters, directors or key managerial personnel to subscribe to the offer; timeline of allotment; name of allottees & percentage of post preferential allotment;   o change in control if any; already made allotment of preferential basis during the year and its price; Justification for other than cash allotment;   o Pre and post issue holding as per format specified.

Completion of allotment of securities within 12 months from the date of passing of special resolution, if not allotted within time specified than pass another special resolution.

Price to be determined by Registered Valuer when issue for either cash or consideration other than cash

Convertible securities – as preferential issue price: Either upfront at time of issue as per valuer o At time of conversion : 30 days from the day holder becomes entitled to conversion Or Valuation report by valuer not earlier than 60 days before conversion

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WHO ARE NOT ELIGIBLE TO MAKE ISSUE? 

159(1)  Any person:  

• Sold or transferred
• Any equity shares
• During six months preceding relevant date

159(1) Promoter or promoter group: 

• Sold or transferred
• equity shares during
• six months preceding relevant date

EXCEPTION Board relaxation under regulation 11(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011

• If  promoters(s)/promoter group sale equity shares which qualify as inter-se transfer amongst qualifying person under regulation 10 (1)(a) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011
• Transfer of share by promoters(s)/promoter group on account of invocation of pledge by scheduled commercial bank or public financial institution.

159(1) When promoters(s)/promoter group fails to exercise the warrant, they become ineligible for 1 year from:

• Date expiry of tenure of warrant or
• Date of cancellation of warrants.

159(2)  Promoters or Directors is a fugitive economic offender.

• Guideline for issue price is provided by Reserve Bank India and which shall also be in compliance of Companies Act, 2013 in case of stressed issuer.
• Issue price shall be certified by TWO independent valuers. 
• Specified securities allotted shall be locked-in for a period of atleast 3 years from date of allotment.
• After conversion of security in between lock-in period the remaining lock-in period would be considered for converted security.
• Special Resolution to be passed by shareholders of issuer before the issue.
• Information to be included in explanatory statement:
  • Identity of natural persons being the ultimate beneficial owner & who ultimately control the proposed allottees;
  • Business model; oStatement on growth of business over a period of time;
  • Summary of audited Financial Statement of previous 3 financial year; o Track record of turning around companies; o Compliance of provision applicable under Companies Act, 2013.

CONDITION TO PREFERENTIAL ISSUE 

> Listed Issuer making Preferential Issue of specified securities: 

• Equity shares should be fully paid up at the time of allotment of shares only;
• Special Resolution to be passed by the shareholders of the issuer;
• All equity shares to be allotted to proposed allottees should be in demat form;
• Company/Issuer in compliance with the condition of continuous listing of equity shares as specified in listing agreement with stock exchange or as amended from time to time;
• Issuer should have Permanent Account Number (PAN) of proposed allottees, except exempted by Board from specifying Permanent Account Number (PAN).

WHAT IS RELEVANT? 

(a)	Equity Shares	Date 30 days prior to date of meeting of shareholders In case of stressed asset date of approval of corporate debt restructuring or date of resolution plan
(b)	Convertible Securities	As per point (a) or Date 30 days prior to date on which holder entitle to convert the securities.
For Example:  Shareholders Meeting to be held on : 05.05.2021;  Then, Relevant Date would be : 05.04.2021 Securities issued on 05.05.2021, Convert within 10 months 05.03.2022 Then, Relevant Date would be: 04.02.2022

WHAT IS THE TENURE OF CONVERTIBLE SECURITIES? 

• Tenure of convertible securities of issuer shall not exceed 18 monthsfrom date of allotment.
• For Example:
  • Date of Allotment: 15.05.2021, then the maximum time to convert the securities into equity shares would be 15.10.2022.

DISCLOSURES TO BE MADE TO SHAREHOLDERS 

1) Object of preferential issue;

2) Maximum number of specified securities to be issued;

3) Intent of promoter, director, key managerial personnel to subscribe to offer;

4) Pre and Post Issue shareholding pattern of issuer;

5) Time frame for completion of preferential issue;

6) Identity of natural person who are ultimate beneficial owner  and/or who has ultimate control over the allottees and change in holding post allotment of securities and change in control;

7) Undertaking that the issuer shall re-compute the price if so required under the regulation;

8) Undertaking that the issuer, if on re-computation the additional price is not paid than the share shall be locked-in till the amount is paid;

9) Disclosure as per schedule VI, if issuer or any of its promoter or directors is a willful defaulter.

> Copy of Statutory Auditor’s Certificate for compliance of the issue with the requirements of this regulation.

> If issue is based on consideration other than cash than valuation of asset by Independent Valuer to be submitted to the Stock Exchange where the shares of the issuer are listed.

> Special resolution shall specify the relevant date for price computation to be allotted on conversion of securities.

PRICING OF FREQUENTLY TRADED SHARES 

LISTED ON RECOGNIZED STOCK EXCHANGE (RSE)
For 26 weeks or more [164(1)]	For less than 26 Weeks [164(2)]
Shall not be less than higher of:
Average of weekly High & Low of volume weighted average price of quoted equity shares on RSE during 26 weeks preceding relevant date	Price = IPO price or Value of share = Scheme of Compromise/Arrangement/Amalgamation
Average of weekly High & Low of volume weighted average price of quoted equity shares on RSE during  2 weeks preceding relevant date	Average of weekly High & Low of volume weighted average price of quoted equity shares on RSE during shares listed preceding relevant date
	Average of weekly High & Low of volume weighted average price of quoted equity shares on RSE during 2 weeks preceding relevant date

√ If the price is determined as per sub-regulation 2than the price shall be computed by issuer on completion of 26 weeks from the date of listing on RSE with reference to average of weekly high and low of volume weighted average price.

√ If recomputed price is greater than price paid on allotment, than difference is to be paid by allottees to issuer.

√ Only five Qualified Institutional Buyers (QIB’s) to be allotted the specified preferential issue at the price determined as per sub regulation 164(1)(b)

√ Frequently traded shares: Traded Turnover on RSE during 12 calendar months preceding the relevant date is atleast 10% of total number of shares  

FOR EXAMPLE: 

In case of securities listed for less than 26 weeks:

OPTION – 1  (IPO Price)

*500

__

OPTION-2  (Listing date to Relevant Date)	WEEKS	FROM	TO	HIGH	LOW	TOTAL	AVERAGE	*648.225
	1	07.04.2021	11.04.2021	725.13	543.41	1268.54	634.27
	2	12.04.2021	18.04.2021	689.94	677.69	1367.63	683.815
	3	19.04.2021	25.04.2021	642.49	635.72	1278.21	639.11
	4	26.04.2021	02.04.2021	641.28	630.14	1271.42	635.71
	AVERAGE PRICE						2592.90

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OPTION-3  (2 weeks)	WEEKS	FROM	TO	HIGH	LOW	TOTAL	AVERAGE	*637.41
	1	19.04.2021	25.04.2021	642.49	635.72	1278.21	639.11
	2	26.04.2021	02.04.2021	641.28	630.14	1271.42	635.71
	AVERAGE PRICE						1274.8

PRICING CALUCALTION: 648.225

In case of securities listed for more than 26 weeks: 

OPTION-1  (26 Weeks)	WEEKS	FROM	TO	HIGH	LOW	TOTAL	AVERAGE	*37.605
	1	05.10.2020	11.10.2020	26.78	26.2	52.98	26.49
	2	12.10.2020	18.10.2020	26.55	24.99	51.54	25.77
	3	19.10.2020	25.10.2020	25.59	24.56	50.15	25.08
	4	26.10.2020	01.11.2020	25.37	24.51	49.88	24.94
	5	02.11.2020	08.11.2020	24.92	24.5	49.42	24.71
	6	09.11.2020	15.11.2020	26.74	25.7	52.44	26.22
	7	16.11.2020	22.11.2020	28.22	27.17	55.39	27.70
	8	23.11.2020	29.11.2020	30.29	27.69	57.98	28.99
	9	30.11.2020	06.12.2020	35.76	31.36	67.12	33.56
	10	07.12.2020	13.12.2020	34.4	31.08	65.48	32.74
	11	14.12.2020	20.12.2020	32.43	31.54	63.97	31.99
	12	21.12.2020	27.12.2020	31.73	29.62	61.35	30.68
	13	28.12.2020	03.01.2021	32.46	31.2	63.66	31.83
	14	04.01.2021	10.01.2021	35.99	33	68.99	34.50
	15	11.01.2021	17.01.2021	33.58	32.08	65.66	32.83
	16	18.01.2021	24.01.2021	37.65	31.02	68.67	34.34
	17	25.01.2021	31.01.2021	45.65	39.5	85.15	42.58
	18	01.02.2021	07.02.2021	49.9	47.9	97.8	48.90
	19	08.02.2021	14.02.2021	44.32	40.53	84.85	42.43
	20	15.02.2021	21.02.2021	44.16	40.37	84.53	42.27
	21	22.02.2021	28.02.2021	54.99	45.49	100.48	50.24
	22	01.03.2021	07.03.2021	60.59	55.53	116.12	58.06
	23	08.03.2021	14.03.2021	54.52	51.8	106.32	53.16
	24	15.03.2021	21.03.2021	54.63	50.93	105.56	52.78
	25	22.03.2021	28.03.2021	61.2	56.18	117.38	58.69
	26	29.03.2021	04.04.2021	58.33	54.24	112.57	56.29
	AVERAGE PRICE						977.72

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OPTION-2  (2 Weeks)	WEEKS	FROM	TO	HIGH	LOW	TOTAL	AVERAGE	*57.488
	1	22.03.2021	28.03.2021	61.2	56.18	117.38	58.69
	2	29.03.2021	04.04.2021	58.33	54.24	112.57	56.29
	AVERAGE PRICE						114.98

PRICING CALUCALTION: 57.488

*Average of High and Low of Volume Weighted Average Price

PRICING OF INFREQUENTLY TRADED SHARES 

To determine price issuer should take into account:
Valuation parameters:	Book value Comparable trading multiples Other parameters
Certificate from independent valuer stating that issuer has complied with the regulation to be submitted to stock exchange where the shares of issuer are listed.

ADJUSTMENTS IN PRICING 

> As per Regulation 166 pricing determined as per Regulation 164 or 165 shall be subject to appropriate adjustments:

√ makes an issue of equity shares by way of capitalization of profits or reserves, other than by way of a dividend on shares;

√ makes an issue of equity shares after completion of a demerger wherein the securities of the resultant demerged entity are listed on a stock exchange;

√ makes a rights issue of equity shares;

√ consolidates its outstanding equity shares into a smaller number of shares;

√ divides its outstanding equity shares including by way of stock split;

√ re-classifies any of its equity shares into other securities of the issuer;

√ is involved in such other similar events or circumstances, which in the opinion of the concerned stock exchange, require adjustments.

LOCK-IN OF SECURITIES 

Promoter & Promoter Group

√ Securities to remain locked-in for 3 years from: date of trading approval granted or equity shares allotted in case of exercise of warrant √ 20%of total capital of issuer locked-in for 1 year √ Remaining (80%) of the issue locked-in for 3 years √ Convertible securities or warrants not listed on Stock Exchange lock-in for 1 year from date of allotment √ For Eg:Date of Trading Approval – 05.05.2021 then, security to remain locked-in for 3 years till 05.05.2024

Persons other than promoter

√ 1 year lock-in from date of trading approval √ Convertible securities or warrants not listed on Stock Exchange – 1year from date of allotment √ For Eg:Date of Trading Approval – 05.05.2021 then, security to remain locked-in for 1years till 05.05.2022

√ On conversion of securities remaining period shall be considered for lock-in of converted security

√ If on recalculation the excess price is not paid till the expiry of lock-in, the shares shall continue to be locked-in till such payment is made

√ The entire pre-preferential allotment shall be locked-in from relevant date upto 6 months of trading approval (applicable also if the issue is not going for listing

√ Total Capital of issuer:

• Public issue;
• Right issue;
• Convertible security;
• Specified security issued on preferential basis to promoter/promoter group.

√ 20 % of Total Capital of issuer:

• Minimum promoter’s contribution;
• Held and locked-in;
• In past;
• As per the guideline;
• Not to be taken into account.

√ If minimum promoter’s contribution is free from lock-in it shall not be put into fresh lock-in again even though it falls under 20 % requirement.

TRANSFERABILITY OF SECURITIES 

√ Transfer inter-se by Promoter and Promoter Group, then the remaining period of lock-in shall continue.

√ No transfer before the trading approval.

PAYMENT OF CONSIDERATION 

In case of other than warrants [169(1)]

Full consideration; at the time of date of allotment of securities; except consideration is other than cash.

In case of warrants [169(2)]

atleast 25% of upfront payment on date of allotment of warrant; Remaining 75% of payment on date of exercise of option.

√ If warrant is not exercised by the holder, than the same is forfeited by the issuer.

√ Submit a certificate of statutory auditor to Stock Exchange stating that issuer is in compliance of the regulations.

ALLOTMENT OF SECURITIES 

ALLOTMENT
Within 15 days of passing of SR: · Except exempted by Board under SAST Regulation	Not within 15 days of passing of SR: · Pass new SR
Allotment of Specified Securities should be in demat form only.

STAMP DUTY 

RECENT PREFERENTIAL ALLOTMENT 

COMPANY	ALLOTTED	PRICE	RELEVANT DATE	LISTING DATE
TATA Power	Promoter	Rs. 53	30.06.2020	31.08.2020
IDFC First Bank	Promoter & Non-Promoter	Rs. 23.19	04.05.2020	25.06.2020
Adani Ports and Special Economic  Zones	Non-Promoter	Rs. 800	05.03.2021	10.05.2021