Preferential Allotment of shares under Companies Act, 2013

Preferential Allotment of Shares

As per Companies Act, 2013, a Company can raise funds via right issue, preferential allotment, employee stock option plans and sweat equity shares. However, the best way to raise funds for an unlisted Company is by way of preferential allotment of shares. 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 procedure and provisions for preferential allotment of shares.

The basic difference between Section 62 of the Companies Act, 2013 i.e. preferential allotment and Section 42 of the Companies Act, 2013 i.e. private placement is that Section 62 deals with allotment of shares only whereas Section 42 deals with allotment of securities [as defined in Securities Contract (Regulation) Act, 1956] as well. Comprehensively, when we issue shares both the sections needs to be complied with whereas when we issue securities only the provisions of Section 42 needs to be complied with. Further, in this article, we shall discuss about the procedure for issuance and allotment of shares on preferential basis.

A. Procedure for Preferential Allotment of shares under the Companies Act, 2013

B. FAQs on Preferential Allotment of shares under the Companies Act, 2013

1. From whom can we obtain valuation report?

Reply: As per Companies Act, 2013, the valuation report shall be made by an
independent merchant banker who is registered with the Securities and Exchange Board of India or an independent Chartered Accountant in practice having a minimum experience of ten years, However, as per Rule 11UA of Income Tax Act, only a merchant banker has the capacity to issue valuation report.

2. Can money received be utilized before filing PAS-3?

Reply: No, until and unless the return of allotment if filed with the Registrar i.e. PAS-3. Further, the money received shall not be utilized for any purpose other than for adjustment against allotment of securities; or for the repayment of monies where the company is unable to allot securities.

3. What shall list of allottee contain?

Reply: The list of allottee shall contain the following:

• the full name, address, permanent Account Number and E-mail ID of such security holder;
• the class of security held;
• the date of allotment of security;
• the number of securities herd, nominal value and amount paid on such securities; and particulars of consideration received if tire securities were issued for consideration other than cash.

4. Can the offer letter contain right to renunciation?

Reply: No, the offer letter cannot contain any right to renunciation. Moreover, the offer letter shall be serially numbered and addressed specifically to the person to whom the offer is made and no other person other than the person so addressed shall be allowed to apply through such application form.

5. Can subscription money be paid in cash?

Reply: No, as per the provisions of Section 42(4), subscription money shall be received only by way of cheque or demand draft or other banking channel and not by way of cash.

{The author is a Company Secretary in Practice and can be reached at (M) 9999952595 and (E) cskajalgoyal@gmail.com}