Summary: In the context of India’s growing start-up ecosystem, companies frequently need to raise capital, and two prominent mechanisms under the Companies Act, 2013 are Private Placement and Preferential Allotment. Private Placement involves offering securities to a select group of investors, such as high-net-worth individuals or institutions, adhering to Section 42 of the Act and related rules. It allows for a broad range of securities, including both convertible and non-convertible instruments, often sold at negotiated prices. In contrast, Preferential Allotment, governed by Section 62(1)(c) and Section 42 of the Act, focuses on issuing equity shares or convertible securities at a predetermined price, usually at a discount to the market price, to a specific group of investors, often existing stakeholders. Preferential Allotment is more targeted, typically involving a limited number of investors and adhering to additional regulatory requirements, such as the Companies (Issue of Share Capital and Debentures) Rules, 2014. Understanding these differences helps businesses select the appropriate fundraising strategy while ensuring compliance with regulatory frameworks.
The rise in start-up culture and entrepreneurship in India over the past few years has resulted in an increase in fund raising by businesses. While launching a business has many obstacles, raising finance is the main one that all new businesses must overcome.
Businesses formed in accordance with the Companies Act, 2013 (the “Act”) may choose to offer a range of securities to their investors and occasionally satisfy their capital needs. Securities are the formal word for the financial instruments that Corporations issue to investors. Securities are an investor’s stake in the firm, but they are essentially a set of rights and obligations that the investor acquires either at the moment of the securities issuance or upon the fulfillment of certain conditions or the Company’s winding up.
Companies typically issue Equity-based, Debt-based, or Hybrid instruments throughout the fund-raising process. Hybrid securities combine elements of both Equity and Debt-based instruments.
Under Companies Act, 2013 Companies may raise funds either through Rights Issue or through private or preferential Allotment. Let us understand, what the difference between Preferential and Private Placement is.
Preferential Allotment and Private Placement are two distinct mechanisms through which companies can issue securities to select groups of investors. While both serve similar purposes, they have key differences as defined under the provisions of the Companies Act, 2013.
Preferential Allotment is a process by which shares or other securities are allotted to a specific group of people or companies which are interested in it on preferential basis at a predetermined price 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.
Accordingly, “Shares or Other Securities” means Equity shares, fully convertible debentures, partly convertible debentures or any other securities that would be convertible into or exchanged with equity shares at a future date.
Issue of Shares on Preferential Basis is governed through Section 62(1)(c) of the Companies Act, 2013.
Preferential allotment is a pivotal tool for companies seeking targeted capital infusion. Preferential allotment is a strategy used by companies to issue shares to a certain set of investors, including venture capitalists and strategic partners.
In accordance with Section 42 of the Companies Act of 2013, a Private Placement is any offer, invitation to subscribe for, or issuance of securities to a particular group of individuals made by a Company (as opposed to through a public offer) through a private placement offer-cum-application form, provided that the form satisfies the requirements outlined in said section.
If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognized stock exchange in or outside India, the same shall be deemed to be an offer to the public and will be governed as per applicable provisions.
A private placement issuer can sell a more complex security to accredited investors who understand the potential risks and rewards.
KEY DIFFERENCES BETWEEN PREFERENTIAL ALLOTMENT VS PRIVATE PLACEMENT
Private Placement is a strategy for obtaining money that involves selling securities to a select group of buyers, usually high-net worth individuals or institutional investors whereas in case of preferential allotment is to a limited number of investors, usually existing ones.
For Private Placement Companies are required to adhere to Section 42 of the Companies Act 2013 and Rule 14 of the Companies (Prospectus and Allotment of Shares) Rules, 2014 while in case of Preferential Allotment in addition to Section 42 and Rule 14 of the Companies (Prospectus and Allotment of Shares) Rules, 2014 it is required to adhere to Section 62(1)(c) of Companies Act 2013 and Rule 13 of the Companies (Issue of Share Capital and Debentures) Rules, 2014.
Private placement is typically done at a negotiated price, while preferential allotment is typically done at a discount to the market price.
Conclusion:
The main distinction between a private placement and a preferential allocation is the range of securities that are covered and the laws that apply under the Companies Act of 2013. Whereas Private Placement covers a wider range of securities, including both convertible and non-convertible instruments, Preferential Allotment is limited to the issuing of equity shares or convertible securities. It is imperative that organizations who intend to raise capital and effectively comply with regulatory requirements comprehend these distinctions.
*****
Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement
Author Bio
