ACS Anjali Singh

Difference between Private Placement and Preferential Allotment under Companies Act, 2013

For a Layman Private placement (or non-public offering) is a funding mode through Shares or Other Securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors.

Preferential Allotment is the process by which allotment of securities/shares is done on a preferential basis to a select group of investors. In this Company makes  bulk allotment of Shares/ Securities to individuals, companies, venture capitalists or any other person through a fresh issue of shares.

In this Article Author has  compared Issue of Securities through Private Placement covered under Section 42 of Companies Act, 2013 and Issue of Shares via Private Placement covered under section 62(1)(c) of Companies Act, 2013 for an Unlisted Company.

S.NO. POINT OF DIFFERENCE
PRIVATE PLACEMENT PREFERENTIAL ALLOTMENT
1. Governing Section Governed under the provisions of Section 42 of Companies Act,2013 Governed under the provisions of Section 62(1)(c) of Companies Act,2013
2. Associated Rule Rule 14 of Companies( Prospectus and Allotment of Securities ) Rules, 2014 Rule 13 of Companies (Issue of Share Capital and Debentures) Rules, 2014
3. Issue of Securities (as defined under Section 2(81) of Companies Act, 2013) which says

“Securities means the Securities defined in clause (h) of Section 2(81) of Securities Contracts (Regulation) Act, 1956.

Issue of Shares or Securities means equity shares, fully or partially convertible debentures or any other securities, which would be convertible or exchanged into Equity Shares.
4. Offer Document Prescribed Document i.e. Private Placement Offer Letter (PAS 4) No such format is prescribed
5. Limit on Number of Allottees Offer or Invitation of Securities shall be made to Maximum of 50 Persons at a time

And

200 Persons in aggregate during a Financial Year and this limit of 50/200 shall exclude QIBs( Qualified Institutional Buyers) and Employees who are being offered securities under Employee Stock Option Scheme under section 62(1)(b) of Companies Act,2013

The limit as applicable on Private Placement shall apply as it is as per Rule 13(1) of Companies( Prospectus and Allotment of Securities ) Rules, 2014
6. Consideration Payment through cheque, Demand Draft or other bank channels but not by Cash. Shares can be issued for Cash or for a Consideration other than Cash.
7. Bank Account Separate Bank Account in a Scheduled Bank is required to  keep the application money. Nothing Specifically Required.
8. Valuation Report No Valuation Report is     required. Valuation report is required.
9. Authorization in Articles No authorization in AOA is required Authorization in AOA is required.
10. Special Resolution Prior Special Resolution is Required Same
11. Allotment Within 60 Days of receipt of Application money. Allotment shall be made within 12 months of passing the Special Resolution.
12. Documents Involved PAS-4 (Private Placement Offer Letter)

PAS-3 (E Form required to be filed on MCA 21 portal

PAS 5 (Record of Private Placement Offers to be maintained by the Company)

E Form PAS-3 will be required to filed on MCA 21 portal as return of allotment

Extract of Section 42 of Companies Act, 2013

4. Offer or invitation for subscription of securities on private placement.

(1) Without prejudice to the provisions of section 26, a company may, subject to the provisions of this section, make private placement through issue of a private placement offer letter.

(2) Subject to sub-section (1), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, [excluding qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62], in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.

Explanation I.—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 recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter.

Explanation II.— For the purposes of this section, the expression—

(i) “qualified institutional buyer’’ means the qualified institutional buyer as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 as amended from time to time.

(ii) “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.

(3) 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.

(4) 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 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with.

(5) All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash.

(6) A 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 for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day:

Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.

(7) All offers covered under this section shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and that such persons shall receive the offer by name, and that a complete record of such offers shall be kept by the company in such manner as may be prescribed and complete information about such offer shall be filed with the Registrar within a period of thirty days of circulation of relevant private placement offer letter.

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

(9) Whenever a company makes any allotment of securities under this section, it shall file with the Registrar a return of allotment in such manner as may be prescribed, including the complete list of all security-holders, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.

(10) If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.

Extract of Ssection 62 of Companies Act, 2013

62. Further issue of share capital

(1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered—

(a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—

(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;

(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;

(b) to employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed;

or

(c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribed.

(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be despatched through registered post or speed post or through electronic mode to all the existing shareholders at least three days before the opening of the issue.

(3) Nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company:

Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.

(4) Notwithstanding anything contained in sub-section (3), where any debentures have been issued, or loan has been obtained from any Government by a company, and if that Government considers it necessary in the public interest so to do, it may, by order, direct that such debentures or loans or any part thereof shall be converted into shares in the company on such terms and conditions as appear to the Government to be reasonable in the circumstances of the case even if terms of the issue of such debentures or the raising of such loans do not include a term for providing for an option for such conversion:

Provided that where the terms and conditions of such conversion are not acceptable to the company, it may, within sixty days from the date of communication of such order, appeal to the Tribunal which shall after hearing the company and the Government pass such order as it deems fit.

(5) In determining the terms and conditions of conversion under sub-section (4), the Government shall have due regard to the financial position of the company, the terms of issue of debentures or loans, as the case may be, the rate of interest payable on such debentures or loans and such other matters as it may consider necessary.

(6) Where the Government has, by an order made under sub-section (4), directed that any debenture or loan or any part thereof shall be converted into shares in a company and where no appeal has been preferred to the Tribunal under sub-section (4) or where such appeal has been dismissed, the memorandum of such company shall, where such order has the effect of increasing the authorised share capital of the company, stand altered and the authorised share capital of such company shall stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into.

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15 responses to “Difference between Private Placement and Preferential Allotment”

  1. Swati says:

    Ms. Anjali most of the differences are incorrect as Preferential allotment needs to follow private placement process.

    Infact in PAS-3 you have to certify that: received money payable on subscription of such securities through cheque or demand draft or other banking channels but not in cash, incase of Pvt. Placement/Preferential issue.

  2. Jai Premani says:

    hiii Anjali, thnnx for this valuable article,
    could you also clarify, is there any Min or Max period under preferential allotment for which offer must remain open, if the company is a unlisted public company?

  3. Saurabh Arora says:

    1) Your article states that Valuation Report is not required in case of Private Placement and this seems contrary to first proviso to Rule 14(2)(a). Please clarify ?

  4. SAILESH JAIN says:

    Dear Sir,

    In case of preferential issue, Rule 13 of the Companies (Share Capital and
    Debentures) Rules, 2014 requires compliance with Section 42 of the Act by the words

    Rule 13 “……and such issue on preferential basis should also comply with
    conditions laid down in section 42 of the Act”

    Hence I believe even preferential issue u/s. 62(1) (c) will have to comply with the conditions specified under section 42 and most of the differences stated above may not hold good.

    Please guide me suitably

    Thanks

    • Divesh Goyal says:

      I am agree with Mr. Sailesh Jain. For prefrential allotment also required to follow section 42 and rule 14. Therefore above mentioned mostly difference are not correct.

  5. Arjun R says:

    Nice Article Anjali. Keep writing.

  6. Himanshu Agarwal says:

    Hi Anjali,
    I want to know which section/rule specifies about the limit of 50 persons for private placement.

  7. kamal says:

    In General shares issued by private limited company to its relative or selected person. Is it Preferential allotment or private placement ?

  8. shweta says:

    very metaculously explained and anylised

  9. Naveen Rishi says:

    It seems that a rights issue of shares will be treated as preferential allotment. Is there any difference between a rights issues and a preferential allotment? The stringent requirements and compliances associated with private placement can be bypassed by giving the option to the existing shareholders to renounce their shares.

    • Arjun R says:

      Hi Naveen. Pls go through the Explanation to Sub Rule (1) to Rule 13 of Cos. (Share Capital and Debentures), Rules, 2014. It is clearly mentioned that preferential allotment does not include rights issue. The said explanation to the rule is reproduced below for your reference

      Explanation.- For the purposes of this rule, (i) the expression ‘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;

      Difference between rights issue and preferential allotment is that

      1. Rights issue can only be made to existing shareholders of the company in
      2. Preferential allotment 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;

      Regards,
      Arjun Rajagopal

  10. preeti garg says:

    Hii Ms. Anjali, I guess point no. 8 in comparison table has been interchanged.. because valuation report is required in the case of private placement and not compulsorily required in case of preferential allotment.. correct me if I am wrong..

    • Anjali Singh says:

      Hello Preeti,thank you for your input,highly appreciated.As per Proviso of Rule 13(1)of Companies (Share Capital and Debenture) Rules, 2014 valuation report is not required if the entity is a listed entity whereas as per Rule 13(2)(g) a valuation report is required under preferential allotment whether allotment is for cash or other than cash.
      Preeti,please let me know if there is any update on this topic.
      Anjali Singh

  11. kushal jain says:

    very good article .. thank you

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