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.
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.
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.
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.
Any company can for preferential allotment, whether it’s a Public or private, listed or unlisted, Section 8 Companies, etc.
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.
Allotment of shares to some other persons who are given “preference” over existing members. This allotment increase the number of members in the company.
The process for allotment is given step-wise as follows:-
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.
In case of E-form MGT-14, the following are the attachments are attached:-
In case of E-form PAS-3, below given are attached:-
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:- firstname.lastname@example.org and Contact Number: 91-8178515005)