As per my last article on the topic of fund raising by company, in which I discussed various methods or ways in which a company can raise funds, we will discuss one the most prevalent way of raising fund i.e. through preferential allotment of securities under the Companies Act, 2013.

We all are already aware about preferential Allotment done by many companies as it is very easy to infuse capital by this method. Know let us discuss this topic on thorough and its various important aspects in simple question answer way.

preferntial Allotement

What is preferential allotment?

A preferential issue is an issue of shares or convertible securities by listed or unlisted companies to a select group of investors, but it is neither a rights issue nor a public issue.

As per Companies Act, 2013 it covers Shares the expression, “shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.

Which section governs preferential allotment?

Section 62 along with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 and Section 42 along with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes the procedures and provisions for preferential allotment of shares.

Why companies do preferential allotment?

Companies go for preferential allotment as it is one of the fastest way to increase shares capital and bringing capital in company.

Moreover, when a company raise capital in this way it becomes the asset of company as it leads to increase in existing shares capital. The allottee/(s) become members of the company and this fund is considered as owned fund.

Which companies can do preferential allotment?

Any company can for preferential allotment, whether it’s a Public or private, listed or unlisted, Section 8 Companies, etc.

What kind of securities are covered under preferential allotment?

This Section specifically covers the “shares or other securities” means equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into or exchanged with equity shares at a later date.

Whom securities can be allotted on preferential basis?

Allotment of shares to some other persons who are given “preference” over existing members. This allotment increase the number of members in the company.

What is the procedure for preferential allotment?

The process for allotment is given step-wise as follows:-

  • Send notice to convene Board Meeting at least seven days before the meeting.
  • Convene Board Meeting and consider below given matters:-
  • Consider the valuation report as received.
  • Deciding the list of allottees (not exceeding more than 50 at a time and 200 aggregate in the financial year excluding the qualified institutional buyer)
  • Fix day, date, venue and time of extra ordinary general meeting
  • Finalization of draft offer letter in the form PAS-4
  • Finalization of notice for extra ordinary general meeting along with the explanatory statement as required in the law.
  • Decide the offer period
  • Open a separate bank account in a scheduled bank to receive money.
  • Convene extra ordinary general meeting and passing of resolution for allotment.
  • File MGT-14 and then the private placement offer letter i.e. PAS-4 cum application shall be dispatched to the proposed allottees with the following attachments:
  • Certified true copy of the special resolution
  • Explanatory statement
  • Dispatch private placement offer letter cum application to the proposed allottees within thirty days, either in writing or in electronic mode.
  • Proposed Allottees shall subscribe to the shares in the private placement offer letter cum application along with the subscription money paid either by cheque or demand draft or other banking channel but not by cash whatsoever.
  • The money as received shall be deposited in a separate bank account.
  • Convene Board Meeting for the allotment of shares within 60 days of receipt of money.
  • File PAS-3 within fifteen days of allotment of shares

What are the forms involved in preferential allotment?

Only two (2) forms are required i.e. MGT-14 for passing of resolution by the members of the company in the Annual General Meeting or Extra-ordinary general meeting as the case may be, this should be filled within thirty (30) days from the passing of resolution. And PAS-3 for return of allotment of shares this should be filled within fifteen (15) days from Board allot the securities to allotees.

What are attachment of the forms?

In case of E-form MGT-14, the following are the attachments are attached:-

  • Certified true copy of the special resolution
  • Explanatory statement

In case of E-form PAS-3, below given are attached:-

  • List of allottees
  • Certified true copy of the special resolution along with explanatory statement
  • Valuation Report
  • Copy of contract in case the shares are being issued for consideration other cash.
  • Complete record of private placement offers and acceptances in Form PAS-5

What is the penalty of a company fails to adhere by provisions of preferential allotment?

If any company and directors fails to adhere with provision of preferential allotment, there is no direct penal provision are given the governed provision however, the general section for Punishment Where No Specific Penalty or Punishment is Provided under the Companies Act, 2013, If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

Disclaimer: – The above article is prepared keeping in mind all the important and basic question as well as provision of section 62 and 42 of the Companies Act, 2013 which comes in mind of a professional or other stakeholder while company doing preferential allotment. The author has tried to cover all the important and basic question. Under no circumstance, the author shall not liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.

(The Author is Corporate Consultant and provides varied array of services including Start-ups mentor, Secretarial, Legal, Trademark, taxation, Audit, GST, Book keeping and other ancillary advisory service in Delhi, Chandigarh as well as The National Capital Region (NCR) and can be contacted through email id:- [email protected] and Contact Number: 91-8178515005)

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Qualification: CS
Company: Proventure- Aiding your Business
Location: NEW DELHI, New Delhi, IN
Member Since: 06 Jul 2019 | Total Posts: 63
I am Company Secretary and engaged with this profession from last nine (9) years. Throughout this journey, my moto is to help people start their startups and business. View Full Profile

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April 2021