Analysis of Preferential Allotment Vs. Private Placement

CS Santosh Pandey

CRITICAL ANALYSIS OF THE PROVISIONS FOR ASCERTAINING THE DIFFERENCE BETWEEN PREFERENTIAL ALLOTMENT AND PRIVATE PLACEMENT

INTRODUCTION

As we all are aware that there are various ways of raising fund in the company, which may be equity financing, debt financing or by any other issue of securities. The Company apart from the raising of fund by way loans sometimes opts the method of issuing equity shares, preference shares, debentures or any other security, which may or may not be at later stage convertible into shares.

It has been a very vital discussion among the professionals as to what shall be the process of issuance termed as and as to what procedure do we need to abide with, and most of the time the professionals are unable to find the difference between the meaning of private placement and preferential allotment, i.e. whether to define the issue of securities in the term of Private Placement or Preferential Allotment.

In this article, we seek to analyse the difference between Private Placement under section 42 and Preferential allotment under section 62(1)(c) of the Companies Act, 2013 (hereinafter referred to as ‘the 2013 Act’)

DIFFERENCE AS TO SCOPE OF THE SECTION

ANALYSIS OF DEFINITION OF PRIVATE PLACEMENT UNDER SECTION 42 OF THE 2013 ACT

As per the Explanation II of Section 42 of the 2013 Act, the definition of ‘Private Placement’ is as under-

“Private Placement” means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this section.

Section 42 deals with the offer or invitation, to subscribe securities to a select group of persons by a Company.

Further, as per Section 2(81) of the 2013 Act “Securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).

This is a definition by reference and as per clause (h) of Section 2 of the Securities Contracts (Regulation) Act, 1956, “securities” include—

1. shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate,
2. derivative,
3. units or any other instrument issued by any collective investment scheme to the investors in such schemes,
4. security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002,
5. units or any other such instrument issued to the investors under any mutual fund scheme,
6. Government securities,
7. such other instruments as may be declared by the Central Government to be securities, and
8. rights or interest in securities.
   

If we evaluate the definition of securities as per clause (h) of Section 2 of the Securities Contract (Regulations) Act, 1956, it covers in its ambit all kinds of securities, i.e. equity shares, preference shares, debentures, etc., whether fully, partly or optionally convertible into equity shares at later stage.

Till now, we can say that if company wants to raise funds from a select group of person by way of issuance of any of the above securities, it needs to comply with the provisions of Section 42 of the 2013 Act.

ANALYSIS OF DEFINITION OF PREFERENTIAL ALLOTMENT UNDER CLAUSE (C) OF SUB-SECTION (1) OF SECTION 62 OF THE 2013 ACT AND RULES MADE THEREUNDER

As per explanation to  Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 (hereinafter referred to as “Rule 13” )-

1. ‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities.
   
2. the expression, “shares or other 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.
   

The above mentioned explanation, lists out the following securities as being subject to compliance of section 62(1)(c) of the 2013 Act read with Rule 13 :

a) Equity Shares,

b) Fully Convertible Debentures,

c) Party Convertible Debentures, or

d) Any other securities, which would be convertible into or exchanged with equity shares at a later date.

If we analyse the other side of the above list, we can conclude that Section 62 of the 2013 Act, does not cover in its ambit the non-convertible preference shares and any other security not convertible into equity shares at a future date and thus the Company is not required to comply with the provisions of Section 62 of the 2013 Act in case of issuance of Non-convertible Preference Shares and Non-convertible securities.

Thus, any security mentioned in clause (81) of Section 2 of the 2013 Act, which is fully partly or optionally convertible into equity shares at a later stage have to comply with Section 62 of the 2013 Act.

Further as per Sub-rule (1) of Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014–

‘For the purposes of clause (c) of sub-section (1) of section 62, If authorized by a special resolution passed in a general meeting, shares may be issued by any company in any manner whatsoever including by way of a preferential offer, to any persons whether or not those persons include the persons referred to in clause (a) or clause (b) of sub-section (1) of section 62 and such issue on preferential basis should also comply with conditions laid down in section 42 of the Act.’

If we analyse the above provision than it clearly says that for complying with Section 62, one needs to comply with Section 42 of the 2013 Act.

It means whenever a company issues equity shares or any convertible securities, the company needs to comply with Section 62 and 42 of the 2013 Act, but if a company is issuing non-convertible preference shares or any non-convertible securities it needs to comply with Section 42 only and not Section 62.

DIFFERENCE AS TO TIME FRAME AND CONDITIONS

If we analyse sub-section (3) of Section 42 of the 2013 Act-

No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.

It only stipulates that-

Unless the previous offer or invitation has been completed or withdrawn or abandoned, the company cannot make fresh invitation or offer for private placement of securities. It does not stipulates the time frame for completion of issuance process of securities on private placement basis.

Further, as per the provisions of sub-section (6) of Section 42 of the 2013 Act, the allotment is to be made within 60 days of the receipt of application money, and if the Company is unable to make allotment within the aforesaid period, the Company shall refund the money within 15 days from the completion of 60 days, failing of which will lead the Company to be charged @ 12% per annum.

On the other hand, in case of Preferential Allotment, as per clause (e) and clause (f) of sub-rule 2 of Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014–

(e) the allotment of securities on a preferential basis made pursuant to the special resolution passed pursuant to sub-rule (2)(b) shall be completed within a period of twelve months from the date of passing of the special resolution.

(f) 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.

If we analyse the above provision it clearly stipulates that the allotment of securities shall be made within 12 months from the approval of members for the preferential allotment and if the company is not able to do so, it is again required to attain the member approval by way of special resolution.

In other words, if a company makes preferential allotment, than it needs to make sure that the offer must be accepted and the allotment of securities in respect to that, both shall be completed within twelve months. If the offer is not accepted within the aforesaid period, the company is required to conduct a general meeting for the extention of the offer period of issuance of securities on preferential basis.

As we have examined earlier that the securities falling under the ambit of Section 62 of the 2013 Act, have to comply with Section 42 also, thus we can conclude from the above discussion that, the time frame for allotment of securities in case of preferential allotment of securities will be-

a) 60 days from the date of receipt of application money,

OR

b) completion of 12 months from the date of special resolution, whichever is earlier, failing which may lead the company to have an extra-ordinary general meeting to extend the time of 12 months.

Note: The extension to be granted under Rule 13(2)(f) of the Companies (Share Capital & Debentures) Rules, 2014 cannot in any manner be considered as the extension of time period specified under sub-section (6) of Section 42 of the 2013 Act.

TABLE SHOWING DIFFERENCE BETWEEN PREFERENTIAL ALLOTMENT AND PRIVATE PLACEMENT

S.NO.	PARTICULARS	NAMELY	OTHER CONDITIONS
1.	Issuance of Equity shares. (not only to existing members)	Preferential Allotment	Compliance of both Section 62 and 42 both.
2.	Issuance of Fully, partly or optionally convertible debentures	Preferential Allotment	Compliance of both Section 62 and 42 both.
3.	Issuance of any other securities convertible into equity shares	Preferential Allotment	Compliance of both Section 62 and 42 both.
4.	Issuance of non-convertible preference shares	Private Placement	Only Section 42 needs to be complied.
5.	Issuance of any other non-convertible securities	Private Placement	Only Section 42 needs to be complied.
6.	Time Frame as to completion of allotment in case of Private Placement		Allotment is to be made within 60 days of receipt of application money.
7.	Time Frame as to completion of allotment in case of Preferential Allotment		The allotment shall be completed within 12 months from the date of special resolution OR Within 60 days from the date of application money. Whichever is earlier. In case the period of 12 months comes earlier and the company doesnot make allotment than in that case, fresh approval of members by way of SR is required to be attained.

For any query or discussion you can reach the author at pcs.santosh@outlook.com.