Preferential Allotment of Shares under Companies Act, 2013

Summary: Preferential allotment of shares is a method for Indian companies to raise capital by issuing shares or other securities to a select group of individuals or entities, as distinct from public offers or rights issues. Governed primarily by Sections 62(1)(c) and 42 of the Companies Act, 2013, along with related rules, this mechanism offers speed and discretion in targeting strategic investors like promoters, venture capitalists, or high-net-worth individuals. Securities can be equity, fully/partly convertible debentures, or other convertible instruments. Key conditions for preferential allotment include prior approval by a Special Resolution of shareholders and, ideally, authorization in the company’s Articles of Association. An offer cannot be made to more than 200 persons in a financial year, excluding Qualified Institutional Buyers and employees, with this limit applying individually to each kind of security. The names of proposed allottees and their post-allotment shareholding percentage must be disclosed in the explanatory statement for the general meeting.

The process requires issuing an offer letter in Form PAS-4 (unless to existing members only), which must be serially numbered and sent specifically to the identified persons. The offer cannot carry a right of renunciation. Allotment must be completed within 12 months of the special resolution or 60 days from receiving application money, whichever is earlier. The issue price must be based on a valuation report from a registered valuer. Crucially, no fresh offer can be made until an earlier one is completed, withdrawn, or abandoned, though simultaneous offers of different security types to a class of identified persons are permitted if the 200-person limit is not exceeded. Companies are prohibited from publicly advertising these offers. All subscription money must be received via banking channels into a separate bank account, not in cash.

The procedural steps involve initial checks like authorized share capital, followed by a Board Meeting to approve the offer and convene a General Meeting. An e-form MGT-14 must be filed within 30 days of the Board Resolution. An Extra Ordinary General Meeting (EGM) is then held to pass the Special Resolution, followed by another MGT-14 filing within 30 days of the EGM. After circulating the offer letter (PAS-4), the company receives applications and money into the separate bank account. A subsequent Board Meeting is held within 60 days of receiving funds to allot shares, and Form PAS-3 must be filed with the Registrar of Companies within 15 days of this allotment. Share certificates must be issued within two months, with stamp duty paid within 30 days of issuance. Important considerations include the mandatory valuation report, the prohibition of cash transactions for subscription money, and the restriction on utilizing subscription money before filing PAS-3. The 200-person limit applies individually per security type. Failure to comply can result in penalties, refund obligations, and the offer being deemed a public offer. Preferential allotment differs from a rights issue as it is selective, whereas a rights issue is proportional to existing shareholders. For listed companies, SEBI regulations impose lock-in requirements on shares allotted under preferential offers.

I. Kind of Shares:

A business cannot run without funds. In case of an incorporated company, initial capital always comes from subscribers to the memorandum. After that company can raise funds by Loans/borrowings or issue of further securities.

As Per Section-43 of Companies Act, 2013 Share capital of Company limited by shares shall be of two kinds:

1. Equity Shares

2. Preference Share

II. Ways of Issue of Securities: –

As Per Section-23 of Companies Act, 2013 a Company can issue securities:

1. By way of Public Issue (IPO/ FPO)

2. By way of Right issue of Shares

3. By Bonus Issue of Shares

4. By Private Placement/ Preferential Allotment of Shares

In This Article We will discuss about Preferential Allotment Shares.

III. Corresponding Provisions of Law:

Section 62(1)(c) of the Companies Act 2013 read below mentioned rules and section:

• Section 42 of the Act, 2013 i.e. Private placement need to follow for preferential allotment.
• Rule 13 of Companies (Share Capital and Debentures) Rules, 2014
• Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014
• Section 180(1)(c) of the Act, 2013 w.r.t limits upto which NCDs can be raised

IV. Condition for Person Sharing Land Boarder with India:

“As per Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022 Dated 05th May, 2022.” W.e.f. May 05, 2022 no offer or invitation of any securities under preferential allotment shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with the private placement offer cum application letter.

List of Countries sharing land border with India: China, Pakistan, Bhutan, Myanmar, Nepal and Bangladesh.

V. Type of securities:

Through preferential allotment of shares company can issue following type of shares / securities:

• Issuance of Equity shares.
• Issuance of Fully or partly convertible debentures
• Issuance of any other securities convertible into equity shares

CONDITIONS FOR PREFERENTIAL ALLOTMENT OF SHARES

A. Offer to be previously approved by Special Resolution:

The proposed offer of shares or invitation to subscribe shares has been previously approved by the shareholders of the company, by a Special Resolution, for each of the Offer of Invitation.

B. [1]Authorization in Article of Association:

There should be authority in AOA of the Company to issue shares/ securities through PAS. If such power is absent then amend the clauses of AOA to insert power to PAS.

C. Maximum No. of persons to whom offer can be made:

• An offer can be made under a Preferential Allotment Offer Letter to not more than 200 people in a financial year.
• Not just the limitation of allotment to 200 people but even an invitation to subscribe can’t be made to more than 200 people.
• The 200-person limit excludes Qualified Institutional Buyers and Employees and the limit of 200 people is calculated individually for each kind of security.

The restriction of 200 member would be reckoned individually for each kind of share / security i.e. (equity share, preference share or debenture).

D. Finalization of name of Allottees:

As per rule 13(2)(d) Company have to mention the the [2]names of the proposed Allottees and the percentage of post preferential offer capital that may be held by them in the explanatory statement to be issued for the General Meeting.

E. Offer Letter (PAS -4):

The Company shall prepare the offer letter in form PAS-4 and maintain the complete record of PAS in form PAS-5. [3]In case of any preferential offer made by a company to one or more existing members only then no need to prepare offer letter in PAS-4 format and no need to prepare PAS-5.

F. Modes of issue of Letter of Offer:

Letter of offer can be issue through any of following mode:

• Registered Post or
• Speed Post or
• Electronic Mode or
• Courier or
• Any other mode having proof of delivery

Note: Letter of offer can be delivered through hand Delivery. One thing is important that, Company have to keep maintain proof of delivery of letter of offer to the shareholders.

G. Right of Renunciation:

As per sub section 2, the private placement offer application can not carry any right of renunciation. As per rule 3, No person other than the person so addressed in the private placement offer cum application letter shall be allowed to apply through such application form.

Note: One can opine that, it is clear that right of private placement of shares can’t be renounced.

H. Time period for completion of the Allotment:

[4]The allotment of securities on a preferential basis shall be completed within a period of twelve months from the date of passing of the special resolution. If the allotment of securities is not completed within twelve months from the date of passing of the special resolution, another special resolution shall be passed for the company to complete such allotment thereafter.

OR

The company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money. Whichever is earlier.

I. Valuation report:

The price of shares or other securities to be issued on preferential basis shall not be less than the price determined on the basis of valuation report of a registered valuer.

J. Application Form:

The offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the names of such persons at extra ordinary general meeting.

K. No further offer till completion of earlier offer:

As per Sub section 5, No fresh offer or invitation under this section shall be made unless the allotment with respect to any offer or invitation made earlier have been completed.

A. If a Company give offer for Equity shares, such offer is pending. Whether Company can simultaneously issue offer letter for Preference shares?

As per language of sub section 5, if any offer of any security is pending, company is not allowed to issue other security until unless allotment is made for pending offer or invitation has been withdrawn or abandoned by the Company. However,

Exemption Condition: Subject to maximum number of identified person under section 42(2) a Company may, at any time, make more than one issue of securities (that is, of equity share, preference share or debenture) to such class of identified persons as may be prescribed.

In a welcome move Companies would be allowed to make offer ‘Multiple Security Instruments Simultaneously’.

Note:

if the number of persons to whom the offer is made does not exceed 200, then the company may, at any time, make more than one issue of securities to such class of identified persons. Prima facie, it appears that this proviso allows a company to make simultaneous offers of different kinds of securities as long as the number of applicants doesn’t cross 200.

In other words, a group of investors in a private equity transaction can be termed as a ‘class of identified persons’ (as provided under proviso of revised sec 42(5)) and then they can be offered two different types of securities simultaneously or some can be offered one type of security and some can be offered a other type of securities.

L. Minimum gap between two offers.

There is no condition in the Act or rule regarding minimum gap between two offers. A company can come with new offer immediately after completion of earlier offer.

M. No advertisement of offer:

No company offering securities under this section shall release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.

N. Maximum no. of offers in a Financial year:

There is no condition in the Act or rule regarding maximum Number of Private Placement offers in a financial year. According to this company can come with private placement offer in a financial year any no. of times. But remember an offer can’t be made more than 200 peoples in a financial year.

O. Separate Bank Account:

i. The payment for subscription should be through the bank account of the person subscribing to the securities.

ii. The Company should keep a record of the bank account from where such payments have been received.

iii. No cash transaction is permitted.

iv. The money so received shall be kept in a separate bank account of the company and utilized only for allotment (or repayment).

v. Payment may be made either by Cheque or Demand Draft or other banking channel.

Note: this provision shall not be applicable in case of “issue of shares for consideration other than cash”.

NOTE:

Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be required to be complied with

Process of Prefrential allotment

INITIAL STEPS:

a. Check the Authorized Share Capital of Company.

b. If Authorized capital permits to increase paid up share capital, then its ok. If Authorized capital doesn’t permit to increase authorized capital then first increase authorized share capital of company.

c. To decide Name of identified person and no. of shares offered to them.

d. To Draft Letter of Offer in PAS-4.

e. To obtain Valuation Report from Registered Valuer.

POCEDURE OF PREFRENTIAL ALLOTMENT

I. STEP – Call Meeting of Board Director:

• Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting as per SS-I.
• Attach Agenda, Notes to Agenda & draft resolution of Board Meeting along with Notice.

II. STEP- Hold the Board Meeting:

i. Check the quorum of Board Meeting.

ii. Identify the persons to whom you will issue shares

iii. Pass Board Resolution for approval of offer letter i.e. PAS-4.

iv. Authorize a director of company to issue Letter of Offer.

v. Letter of offer shall be dispatched through above mentioned modes.

vi. Issue Notice of General Meeting. (As per Section- 101(1) issue notice of General Meeting at least 21 days before General meeting).

vii. Notice shall specify place, date, day and the hour of the meeting and shall contain a statement on the business to be transact in the such meeting. [Section-101(2)]

viii. Authorize a director of company to issue notice of General Meeting and

ix. Authorize a director to certify and file e-forms with ROC.

x. Pass Board resolution for opening of Separate Bank Account

III. STEP- Filing of e-form MGT-14

i. File MGT-14 with within 30 days of passing of Board Resolution.

ii. Attachments

iii. Certified True copy of Board Resolution

IV. STEP- To Call General Meeting

i. To issue Notice of General Meeting.

ii. Issue notice to Directors, Shareholders, Auditors etc.

iii. Prepare explanatory statement as per Section 62(1)(c) and read with rule 13 and Section 42 read with rule 14.

V. STEP- Hold Extra Ordinary general Meeting:

• Check the quorum of Meeting.
• Present Offer Letter in PAS-4 before the members of the meeting.
• Pass Special Resolution for Preferential allotment of Shares.

VI. STEP – Filing of e-form MGT-14

1. File MGT-14 with within 30 days of Passing of Special Resolution.

2. Attachments

• • Notice of General Meeting along with Explanatory Statement.
  • Certified True copy of Special Resolution.
  • Minutes of General Meeting
  • Attendance Sheet of General Meeting

VII. STEP- Circulate Letter of Offer in form PAS-4:

• Offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made.
• Offer Letter sent either in writing or electronic mode.
• Issue offer letter any time after filing of MGT 14

VIII. STEP – Correspondence by Shareholders

i. Receive the acceptance/ rejection of offer from shareholders within time prescribed in Letter of Offer.

ii. Receive the application money from the shareholders accepting the offer within time prescribed in Letter of Offer in separate Bank Account.

IX. STEP- Call Board Meeting after receiving of allotment of money.

• Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting.
• Attach Agenda of Board Meeting along with Notice.

X. STEP- Hold the Board Meeting:

Within 60 days of receipt of letter of offer company have to allot shares by holding of Board Meeting

i. Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting.

ii. Attach Agenda of Board Meeting along with Notice.

iii. Attach Notes of Agenda and Draft Resolution along with Agenda.

iv. Attach list of people who have subscribed for the shares.

X. STEP- File form with ROC:

To File PAS-3 with concerned Registrar of Companies within 15 days of passing of Resolution in Board Meeting for Allotment of Shares.

ATTACHMENTS:

List of Allottees.

CTC of Board Resolution for allotment of Shares

XII. STEP- To Issue of Share Certificates:

Issue Share Certificate in Form- SH-1 (as per Section-56) with in 2 (two) months from the date of Board Meeting in which allotment of shares made by the Company.

XIII. STEP– Payment of Stamp Duty on Issue of Share Certificate:

As per Indian Stamp Act, every company is required to make payment of Stamp Duty on Share Certificates within 30 days of issue of Share Certificates.

Every state have their own process and provision for payment of stamp duty.

Quick Bites

A. Whether Valuation report required for Preferential Allotment of Shares?

There is mandatory requirement to obtain Valuation Report for Preferential Allotment of shares. Company can’t issue shares on Face Value in case of Preferential Allotment of Shares.

B. Whether Company can receive allotment money in Cash u/s 62(1)(c)?

Section 62(1)(C) doesn’t allow the company to receive Allotment money in Cash. Allotment money must be received in separate Bank Account. However, there is process of allotment of shares for consideration other than cash in this section.

C. Whether there is any restriction on use of money received from subscribers of Right Offer?

Section 42 Company can’t use subscription money of Private Placement of Shares before filing of PAS-3

D. Whether Limit of 200 persons shall be calculated individually/ jointly for each type of securities?

The restriction of 200 persons would be reckoned ‘Individually’ for each kind of security that is ‘Equity Shares, Preference Shares or Debentures’.

E. Whether there is need to file offer Letter PAS-4 with ROC in e-form GNL-1?

As per Amendment, there is no need to file e-form PAS-4 with ROC in e-form PAS-4.

F. How does the 200-investor limit apply across different classes of securities in the same financial year?

Insight: The 200 cap is per type of security (i.e., 200 for equity, 200 for preference shares, 200 for NCDs). Many companies miss this nuance and club all types together.

G. What happens if a company receives application money from more than 200 persons, but all do not get allotted shares?

Insight: Even offering to more than 200 is a violation and will trigger public offer norms, irrespective of actual allotment.

H. What is the difference between Preferential Allotment and Private Placement?

While the terms are often used interchangeably, preferential allotment refers to issuing shares on a preferential basis, while private placement under Section 42 is the procedural route. Preferential allotment must comply with both Section 62(1)(c) and Section 42 if shares are issued to a select group.

I. What is the timeline for completing the Preferential Allotment?

1. Board Meeting – To approve offer and convene EGM.

2. EGM – Pass Special Resolution.

3. Offer Letter (Form PAS-4) – Within 30 days of EGM.

4. Receipt of application money – In a separate bank account.

5. Allotment – Within 60 days of receipt.

6. Return of allotment (Form PAS-3) – Within 15 days of allotment.

J. What if the company fails to allot within 60 days?

The application money must be refunded within 15 days after expiry of 60 days, failing which interest @ 12% p.a. is payable from the 76th day onwards.

K. What are the consequences of non-compliance?

• Penalties on the company, promoters, and directors.
• Refund of subscription money.
• Deemed public offer (if limits under Section 42 are breached).
• Compounding proceedings.

L. Is Preferential Allotment allowed in case of Rights Issue?

No, preferential allotment and rights issue are mutually exclusive modes of share issuance. Rights issue is offered to all existing shareholders proportionately, while preferential allotment is made selectively.

M. What are lock-in requirements under SEBI regulations?

For listed companies:

• Shares allotted to promoters: 3-year lock-in (minimum 20%).
• Others: 1-year lock-in.

Basic Abouts Private Placement of Shares:

a. Mandatory to open Separate Bank Account for Right issue of Shares.

b. Needs to file MGT-14 for Issuance of Letter of Offer with ROC by Private Limited Companies.

c. PAS-3 can be file within 15 days of holding of Board Meeting for allotment of Share.

d. Shares can be issued only on valuation price.

e. There is restriction under Companies act to receive subscription money only through banking channel.

Notes: 

[1] In case of Private Placement authorization in AOA is not mandatory.

[2] This requirement is different from the Private Placement. In Case of Private Placement of share there is no need to decide the name of Allottees at or before the General Meeting.

[3] There is no such exemption in case of private placement of shares.

[4] The same in not prescribed under Private Placement of Shares.

*****

Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com).

Also Read:
Private Placement V/S Preferential Allotment

Preferential Allotment of shares | Companies Act, 2013 | Procedure

Step-by-Step Guide: Issuance of Shares on Preferential Basis

Difference between Preferential Allotment and Private Placement

Preferential Issue of Shares under Companies Act, 2013

Right Issue Vs. Preferential Allotment under Companies Act, 2013

Process of preferential allotment of share under Companies Act, 2013

Preferential Allotment of Shares – Key Factors, Procedure & Timeline

Checklist: Preferential Allotment of Securities to Persons other than Existing Equity Share Holders

Private Placement vs. Preferential Allotment: A Head-to- Head Comparison