Difference between Preferential Allotment and Private Placement

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.

First, understand the meaning of Preferential Allotment and Private Placement as defined under the respective provisions of the Companies Act, 2013:-

According to the provisions of Section 62 of the Companies Act, 2013

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.

In the Preferential Allotment, the meaning of the expression “Shares or Other Securities” is defined under clause (ii) of sub-rule (i) of Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.

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 later date.

Whereas,

According to the provisions of Section 42 of the Companies Act, 2013

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

In the Private Placement, the meaning of the expression, “Securities” is not defined under the provisions of Section 42 read with Rule 14 of the Companies (Private Placement) Rules, 2014.

Accordingly, the meaning of the expression, “Securities” are considered from sub-clause (81) of clause 2 which defines “Securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).

Further, according to the clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956, “Securities” includes

1. shares, scrips,  stocks,  bonds,  debentures,  debenture  stock  or  other  marketable securities    of    a    like    nature    in  or    of    any    incorporated  company or  a pooled investment vehicle 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. units or any other instrument issued by any pooled investment vehicle;
7. any certificate or instrument (by whatever name called), issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or   receivable,  including   mortgage   debt,   assigned   to   such   entity,   and acknowledging  beneficial  interest  of  such  investor  in  such  debt  or  receivable, including mortgage debt, as the case may be;
8. Government securities;
9. such other  instruments  as  may  be  declared by  the  Central Government to be securities;
10. rights or interest in securities.

Conclusion

Considering the definition given under the respective section of the Companies Act, 2013 of the expression “Private Placement” and Preferential Allotment”, the basis of the difference lies in the meaning of “Securities”.

As per Section 62, Securities means equity shares/ convertible securities whereas, under Section 42, Securities include equity shares/ compulsorily convertible securities/ non-compulsorily convertible securities, etc. (as defined above).

Accordingly, If the Company is planning to issue Equity Shares or Convertible Securities, then both the provisions of Section 62(1)(c) read with Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 and Section 42 read with the Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 shall apply.

Further, If the Company is planning to issue Non-Convertible Securities, in this case, only the provisions of Section 42 read with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 shall apply and the provisions of Section 62(1)(c) read with Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 shall not apply.

Conclusion:

The primary difference between Preferential Allotment and Private Placement lies in the scope of securities covered and the applicable provisions of the Companies Act, 2013. Preferential Allotment is specific to the issuance of equity shares or convertible securities, while Private Placement extends to a broader range of securities, including both convertible and non-convertible instruments. Understanding these distinctions is crucial for companies planning to raise capital and comply with regulatory requirements effectively.