Preferential Allotment of shares | Companies Act, 2013 | Procedure

Company having share capital can increase its subscribed capital through following modes of issues:

• Preferential allotment Sec 62(1)(c)
• Rights issue Sec 62(1)(a)
• ESOP Sec 62(1)(b)
• Private Placement Sec 42
• Bonus shares Sec 63

Many times because of availability of many options to issue securities a dilemma arises that which one will be better option to fulfill our requirement; Therefore this Article will help you to understand what kind of Securities can be issued through Preferential allotment ,to whom it can be issued, Procedure of the issue and Provisions thereof.

1. Brief Introduction of Preferential Allotment:

Preferential allotment is a process in which shares are allotted to a specific group of people or companies which are interested in it on preferential basis at a predetermined price 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.

2. Applicable Section and Rules:

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 section 42) of Companies (Prospectus and allotment of Securities) Rules, 2014 is applicable.

Provided that in case of any preferential offer made by a company to one or more existing members only, the provisions of sub-rule (1) and proviso to sub-rule (3) of rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 shall not apply.

3. Eligible person to get securities under Preferential Allotment:

Any person,if it is authorized by Special Resolution, including person allotted shares under right issue or ESOP therefore it can be said that any person either existing shareholder or outsider is eligible to get securities under preferential allotment.

4. Company eligible to allot securities under preferential allotment:

Any company can go for preferential allotment, whether it’s a Public or private, listed or unlisted, Section 8 Companies, etc, Except Nidhi Company because it is not governed by section 62 by amendment notification dated 5th June 2015.

5. kind of Securities to be allotted under Preferential allotment:

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.

6. Type of Consideration Required:

• In cash and/or
• Consideration other than Cash

7. Valuation Report:

• The price of the shares or other securities to be issued on a preferential basis, either for cash or for consideration other than cash, shall be determined on the basis of valuation report of a registered valuer;
• where shares or other securities are to be allotted for consideration other than cash, the valuation of such consideration shall be done by a registered valuer who shall submit a valuation report to the company giving justification for the valuation;
• The price of shares or other securities to be issued on preferential basis shall not be less than the price determined on the basis of valuation report of a registered valuer (by Sub-rule (3) is inserted by notification G.S.R. 413 (E) dated 18 June, 2014).

8. Forms to be filed under Preferential allotment along with time limit:

9. Procedure for Preferential allotment :

Following procedure should be followed by the Company intending to issue securities under Preferential allotment:

• Send notice to convey the Board meeting to approve the following agendas:
• Issue of securities by way of Private Placement Basis.
• Number of securities to be issued.
• Finalization of Draft offer letter in Form PAS-4
• Approve the notice of calling for Extra-Ordinary General Meeting of the shareholders of the Company to take members approval.
• Opening of a separate Bank Account in a schedule Bank to receive application money
• Deciding the list of allottees
• Take note of the Valuation Report and decided the price of security.
• Decide the offer period
• Convey Board Meeting at least after 7 days from the date of notice and approve the agendas mentioned in the notice
• Convene Extra-Ordinary General Meeting for the followings purpose:
  • Pass Special Resolution to approve Private Placement.
  • Approve the Offer cum application Letter (form PAS-4) to be sent to the Identified Person
  • File Form MGT-14 with ROC within 30 days of passing the Special Resolution approving the Private Placement.
• Send Offer cum Application Letters in Form PAS-4 to Identified Persons within 30 days of recording the names of the identified persons.
• Prepare the complete record of private placement offer in Form PAS-5.
• Receiving application money in a Separate Bank Account with Scheduled Bank within the offer period as decided by the Company
• After Closure of Offer Period call a Board Meeting and pass Resolution for allotment of securities and issue securities certificate.
• File the return of allotment in Form PAS-3 within 15 days from the date of the allotment made i.e. After passing Board Resolution for allotment of securities.
• The Company will be allowed to utilize the money raised through Private Placement only after Return of Allotment in Form PAS-3 is filed with the ROC

10. Conclusion:

Through this article we try to cover provisions and procedure applicable on the Companies specially unlisted companies (because in case of listed companies more procedure needs to be followed according to SEBI guidelines) at the time of issuing securities through preferential allotment.

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Hope the information will assist you in your Professional endeavours. In case of any query / information, please do not hesitate to write back to us at [email protected].