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 Difference Between Right Issue and Preferential Allotment:
|
SR. NO. |
PARTICULARS | RIGHT ISSUE | PREFERENTIAL ALLOTMENT |
| 1. | Provisions | Issue of Share on Rights Basis is governed through Section 62(1)(a) of the Companies Act, 2013. | Issue of Share on Preferential Basis is governed through Section 62(1)(c) of the Companies Act, 2013.
In addition to the above, it is subject to the compliance with the applicable provisions of the Chapter lll (i.e. Public offer and Private Placement) |
| 2. | Rules | No Rule has been prescribed for Right Issue | Pursuant to Section 62(1)(c) of the Companies Act, 2013, Rule 13 (issue of shares on Preferential basis) of Companies (Share Capital and Debentures) Rules 2014 is applicable.
Further in addition to above Rule, Rule 14 (Private Placement) of Companies (Prospectus and Allotment of Securities) Rules 2014 is applicable. |
| 3. | Types of Securities | Only Shares can be issued
(Equity as well as Preference Shares) |
Shares and other securities mean equity shares, fully convertible debentures, partly convertible debentures or any other securities which would be convertible into exchanged with equity shares at the later date. [Section 62(1)(c)] of the Companies Act 2013 & Rule 13(1)(ii) Companies (Share Capital and Debentures) Rules, 2014.
However, under Private Placement any security can issue (Equity, Preference, Debentures etc.) (Section 42) of the Companies Act, 2013 |
| 4. | Person to whom offer is made | Shares are issued in proportion to existing shareholding.
[Section 62(1) (a)] of the Companies Act 2013 |
Share may be issued to both existing shareholders and even outsiders.
[Section 62(1)(c)] of the Companies Act 2013 |
| 5. | Limit of Person to whom offer is made | No limit but offer made to all existing shareholders. | No limit under Section 62(1)(c) of the Companies Act, 2013 and Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 but under Section 42(2) of the Companies Act, 2013 shall not exceed fifty or such higher number as may be prescribed.
Not more than 200 in the aggregate in a financial year [Rule 14(2)(b)] of Companies (Prospectus and Allotment of Securities) Rules 2014. |
| 6. | Approval | Board approval through Board Meeting is required.
[Section 62(1)(a) and Section 179(3)(c)] of the Companies Act, 2013 |
Both Board Resolution and Special Resolution is needed to approve Preferential Allotment.
[Section 62(1)(c) and Section 179(3)(c)] of the Companies Act, 2013 |
| 7. | Period of Offer | Offer remains open for the minimum period 07 days and maximum 30 days.
[Section 62(1)(a)(i)] of the Companies Act, 2013 & Rule 12A of Companies (Share Capital and Debentures) Rules, 2014 |
No provisions for offer period. |
| 8. | Offer Letter | No specific format has been prescribed Offer letter can be in any format. | Offer letter shall be in prescribed format i.e. PAS-4.
[Section 42(3) of the Companies Act, 2013 & [Rule 14(3) of Companies (Prospectus and Allotment of Securities) Rule 2014] Rule 2014] |
| 9. | Dispatch of offer letter | Through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least 3 days before opening of issue
[Section 62(2)] of the Companies Act, 2013 |
Either in writing or in electronic mode within in 30 days of recording the name of identified person pursuant to sub-section (3) of section 42 of the Companies Act, 2013
[Rule 14(3) of Companies (Prospectus and Allotment of Securities) Rule 2014] |
| 10. | Filling with the ROC before issue of offer letter | No filling required | Offer letter can be issued only after Special Resolution has been filed with ROC in E-Form MGT-14.
[Rule 14(8)] of Companies (Prospectus and Allotment of Securities) Rule 2014 |
| 11. | Return of Allotment | E-Form PAS-3 for allotment of shares within 30 days.
[Section 39 of the Companies Act, 2013 & Rule 12 of Companies (Prospectus and Allotment of Securities) Rules 2014 |
PAS-3 for allotment of shares 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 | Allot Shares within 60 days of receipt of application money [Otherwise treated as deposit under Rule 2(1)(c)(vii) of Companies [Acceptance of Deposit] Rules, 2014] | The allotment shall be made of the earlier of these two: (i) 12 months of Special Resolution or (ii) 60 days from receipt of application money.
[Rule 13(2)(e) of Companies (Share Capital and Debentures) Rules, 2014 and Section 42(6) of the Companies Act, 2013 and Deposit Rules] |
| 13. | Separate Bank Account | No separate bank account is required to open to receive application money. | Separate Bank account is mandatorily required to open to receive application money.
[Proviso to Section 42(6) of the Companies Act, 2013] |
| 14. | Mode of Allotment Money | Company can issue share on cash or through banking channels. | Shares can be issued for cash or for consideration other than Cash.
[Section 62(1)(C) of the Companies Act, 2013] But all the monies payable towards subscription shall be paid 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 restriction for filling of return of allotment before utilization of application money. | No utilization of application money unless return of allotment is filed with the ROC
[Proviso to Section 42(4) of the Companies Act, 2013] |
| 16. | Valuation Report | No need of any valuation report. | Valuation report is mandatory for making preference 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 the shares or other securities to be issued on the preferential basis shall not be less than the price determined on the basis of valuation report of a registered valuer.
[Rule 13(2)(g) & Rule 13(3) of Companies (Share Capital and Debentures) Rules, 2014] (that the price of shares to be issued on a preferential basis by a listed company shall not be required to be determined by the valuation report of a registered valuer) |
| 18. | Attachment of valuation report with PAS – 3 | Not required | Mandatory required to attached valuation report with PAS-3
[Rule 12(7) of Companies (Prospectus and Allotment of Securities) Rules 2014] |
| 19. | Right to renounce | Shareholders under this option have right to renounce, reject or approve the offer.
[Section 62(1)(a)(ii) of the Companies Act, 2013] |
No such right under this option
[Proviso to Section 42(3) of the Companies Act, 2013] |
| 20. | Explanatory Statement | Not applicable because no shareholder approval is required. | Notice should contain Explanatory statement according to 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 is required. | No Minimum Subscription criteria is 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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