Introduction: In the realm of corporate finance, understanding the nuances between Right Issue and Preferential Allotment is crucial for both companies and investors. These mechanisms, governed by the Companies Act, 2013, offer distinct pathways for companies to raise capital, each with its own set of rules, procedures, and implications for shareholders. Right Issues allow companies to offer shares to existing shareholders at a predetermined price, while Preferential Allotments enable the allocation of shares to a select group of investors, potentially including outsiders, under specific conditions. This detailed comparison highlights the procedural and regulatory distinctions between these two capital-raising strategies, shedding light on their impact on existing shareholders and the company’s capital structure.
Table Showing the Difference Between Rights Issue and Preferential Allotment
| SR. NO. | PARTICULARS | RIGHTS ISSUE | PREFERENTIAL ALLOTMENT |
|---|---|---|---|
| 1. | Provisions | Issue of shares on a rights basis is governed by Section 62(1)(a) of the Companies Act, 2013. | Issue of shares on a preferential basis is governed by Section 62(1)(c) of the Companies Act, 2013.
In addition, it is subject to compliance with the applicable provisions of Chapter III (i.e., Public Offer and Private Placement). |
| 2. | Rules | No specific rule is prescribed for Rights Issue. | Pursuant to Section 62(1)(c) of the Companies Act, 2013, Rule 13 (Issue of Shares on Preferential Basis) of the Companies (Share Capital and Debentures) Rules, 2014 is applicable. Additionally, Rule 14 (Private Placement) of the Companies (Prospectus and Allotment of Securities) Rules, 2014 is also applicable. |
| 3. | Types of Securities | Only shares can be issued (both Equity and Preference Shares). | Shares and other securities, such as equity shares, fully convertible debentures, partly convertible debentures, or any other securities convertible into equity shares at a later date, can be issued. (Section 62(1)(c) & Rule 13(1)(ii) of the Companies (Share Capital and Debentures) Rules, 2014). Additionally, under Private Placement, any security can be issued (Equity, Preference, Debentures, etc.) as per Section 42 of the Companies Act, 2013. |
| 4. | Person to Whom Offer is Made | Shares are issued in proportion to the existing shareholding. (Section 62(1)(a) of the Companies Act, 2013). | Shares may be issued to both existing shareholders and outsiders. (Section 62(1)(c) of the Companies Act, 2013). |
| 5. | Limit on the Number of Persons to Whom Offer is Made | No limit, but the offer is made to all existing shareholders. | No limit under Section 62(1)(c) of the Companies Act, 2013 and Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014. However, under Section 42(2) of the Companies Act, 2013, it shall not exceed 50 persons or a higher number as prescribed, but not more than 200 in total in a financial year (Rule 14(2)(b) of Companies (Prospectus and Allotment of Securities) Rules, 2014). |
| 6. | Approval | Board approval through a Board Meeting is required. (Section 62(1)(a) and Section 179(3)(c) of the Companies Act, 2013). | Both a Board Resolution and Special Resolution are required to approve Preferential Allotment. (Section 62(1)(c) and Section 179(3)(c) of the Companies Act, 2013). |
| 7. | Period of Offer | The offer remains open for a minimum of 7 days and a maximum of 30 days. (Section 62(1)(a)(i) of the Companies Act, 2013 & Rule 12A of the Companies (Share Capital and Debentures) Rules, 2014). | No provision for the offer period. |
| 8. | Offer Letter | No specific format is prescribed. The offer letter can be in any format. | The offer letter must be in the prescribed format, i.e., PAS-4. (Section 42(3) of the Companies Act, 2013 & Rule 14(3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014). |
| 9. | Dispatch of Offer Letter | Through registered post, speed post, electronic mode, courier, or any mode with proof of delivery to all existing shareholders at least 3 days before the opening of the issue. (Section 62(2) of the Companies Act, 2013). | In writing or via electronic mode within 30 days of recording the name of the identified person as per Section 42(3) of the Companies Act, 2013. (Rule 14(3) of the Companies (Prospectus and Allotment of Securities) Rules, 2014). |
| 10. | Filing with ROC Before Issue of Offer Letter | No filing required. | The offer letter can be issued only after the Special Resolution has been filed with the ROC in E-Form MGT-14. (Rule 14(8) of Companies (Prospectus and Allotment of Securities) Rules, 2014). |
| 11. | Return of Allotment | E-Form PAS-3 for allotment of shares must be filed within 30 days. (Section 39 of the Companies Act, 2013 & Rule 12 of Companies (Prospectus and Allotment of Securities) Rules, 2014). | E-Form PAS-3 for allotment of shares must be filed within 15 days of allotment. (Section 42(8) of the Companies Act, 2013 & Rule 14(6) of Companies (Prospectus and Allotment of Securities) Rules, 2014). |
| 12. | Period of Allotment | Shares must be allotted within 60 days of receiving application money, otherwise treated as a deposit under Rule 2(1)(c)(vii) of Companies (Acceptance of Deposits) Rules, 2014. | The allotment must be made by the earlier of either: (i) 12 months from the Special Resolution, or (ii) 60 days from receipt of application money. (Rule 13(2)(e) of Companies (Share Capital and Debentures) Rules, 2014 & Section 42(6) of the Companies Act, 2013 & Deposit Rules). |
| 13. | Separate Bank Account | No separate bank account is required to receive application money. | A separate bank account is mandatory to receive application money. (Proviso to Section 42(6) of the Companies Act, 2013). |
| 14. | Mode of Allotment Money | The company can issue shares for cash or through banking channels. | Shares can be issued for cash or for consideration other than cash. All payments must be made through cheque, demand draft, or banking channels but not in cash. (Section 42(4) of the Companies Act, 2013). |
| 15. | Utilization of Application Money | No restrictions on the utilization of application money before filing the return of allotment. | No utilization of application money is allowed unless the return of allotment is filed with the ROC. (Proviso to Section 42(4) of the Companies Act, 2013). |
| 16. | Valuation Report | No valuation report is required. | A valuation report is mandatory for making a preferential allotment. (Section 62(1)(c) of the Companies Act, 2013 & Rule 13(3) of Companies (Share Capital and Debentures) Rules, 2014). |
| 17. | Price of Shares or Securities | No provision. | The price of shares or securities to be issued on a preferential basis shall not be less than the price determined based on the valuation report of a registered valuer. (Rule 13(2)(g) & Rule 13(3) of Companies (Share Capital and Debentures) Rules, 2014). Note: The price of shares issued on a preferential basis by a listed company does not require a valuation report from a registered valuer. |
| 18. | Attachment of Valuation Report with PAS-3 | Not required. | Mandatory to attach the valuation report with PAS-3. (Rule 12(7) of Companies (Prospectus and Allotment of Securities) Rules, 2014). |
| 19. | Right to Renounce | Shareholders have the right to renounce, reject, or approve the offer. (Section 62(1)(a)(ii) of the Companies Act, 2013). | No such right is provided. (Proviso to Section 42(3) of the Companies Act, 2013). |
| 20. | Explanatory Statement | Not applicable as no shareholder approval is required. | The notice should contain an Explanatory Statement as per Rule 13(2)(d) of Companies (Share Capital and Debentures) Rules, 2014 & Rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014. |
| 21. | Minimum Subscription | No minimum subscription criteria are required. | No minimum subscription criteria are required. |
Conclusion: The choice between Right Issue and Preferential Allotment hinges on a company’s strategic objectives, the need for capital, and the desired investor base. Right Issues cater to existing shareholders, offering them a chance to increase their stake in the company under favorable terms. In contrast, Preferential Allotments open the door for targeted capital infusion from selected investors, including those outside the current shareholder base, providing companies with flexibility in managing their capital needs. Both options are governed by specific provisions under the Companies Act, 2013, necessitating careful compliance with regulatory requirements to ensure a smooth capital-raising process. Understanding these differences is fundamental for companies aiming to optimize their capital structure while aligning with their broader financial strategies and for investors seeking to make informed decisions in the ever-evolving corporate landscape.
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The differentiation is good . But there are spelling mistakes and grammar mistakes.