There are various ways through which a company can raise capital i.e. issue of equity, preference shares, issue of debentures, bonds, deposits etc. If the shareholders are not willing to dilute their stake then they may go for issue of debentures, bonds, accepting deposits etc. Another way is issue of shares (equity or preference) by the company where they shall have option to issue shares to their existing shareholders first and later to others. The Companies Act, 2013 have prescribed various methods through which the issue of shares can be made:
1. Private placements (Section 42)
2. Rights Issue (Section 62(1)(a))
3. Preferential Allotment (Section 62 (1)(c)) read with Rules 13 Companies (Share Capital & Debentures) Rules 2014 along with Section 42 read with Rule 14 of Part II of Companies (Prospectus and Allotment of Securities) Rules, 2014
‘Preferential Offer’ 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. A Preferential Issue is the Issue of Shares or Securities by Company to a selected group of investors at a pre-determined price. In preferential issue, the allottees are:-
1. Either the existing shareholders or
2. The employees under ESOP or
3. Others (where the above persons decline to accept the offer) either for cash or consideration other than cash.
Types of shares issued under preferential allotment:
1. Equity shares
2. Preference shares
3. Full convertible debentures
4. Partly convertible debentures
5. Any other securities which shall be convertible at a later date.
Key factors to be kept in mind while issuing shares at preferential basis:
1. It should be authorized by AOA
2. Check the authorized capital limit of the company, if needed, the same should be altered and increased 1st at the shareholders meeting.
3. Offer letter in Form PAS-4.
4. The valuation report by a registered valuer shall determine the price per share for preferential allotment. 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.
5. Opening a separate bank accounts.
6. Notice of offer shall be sent through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders.
7. PAN of each Allottee.
Procedure for Preferential Allotment of Shares and Securities:
A. Conducting a Board Meeting to approve the following:
-
- Fixing Number of Allottes
- Evaluation of the Valuation Report
- Offer letter approval in Form PAS-4 and Application forms serially numbered
- Approval of Form PAS-5 for recording private placement offer
- To fix date and time for shareholders meeting EGM/AGM
B. Issue Notice of Extra-Ordinary General Meeting/ Annual General Meeting to shareholders
Issue notice of EGM/AGM to shareholders along with explanatory statement which shall include the details
C. Holding of EGM or AGM for approving the Offer letter and passing of Special Resolution for preferential Issue.
D. Circulate the offer letter within 30 days of the EGM or AGM along with application form serially numbered specifically addressed to the person to whom such offer is made.
E. Filing of Form MGT-14 along with explanatory statement as per Rule 13 (2)(d) of Companies (Share Capital & Debentures) Rules 2014
F. Ones the allotment monies is received in the bank account call for another board meeting for allotment shares, issue of share certificates
G. Filing of Form PAS-3 for return of allotment within 15 days of allotment:
a. List of allottes.
b. Valuation report
c. Special resolution along with explanatory statement
d. Board resolution for allotment of shares.
H. Issue share certificates within 2 months from the date of Allotment of Shares. The Stamp duty should be paid as per the provisions of the State. The Register of the Members should be updated after the Issue of Share Certificate to the shareholders
Time limit for completion of Allotment:
Within 12 months from the date of passing of Special Resolution and if the same is not done within 12 months then another special resolution shall be passed for the company to complete such allotment thereafter.
Conclusion:
Preferential Issue is the fastest way for a company to raise capital without having to borrow from banks and risking its assets. The investors naturally become stakeholders in the company. A person holding preferential shares has the right to be paid from company assets before common shareholders if the company goes into bankruptcy. They usually do not have voting rights, and are rewarded only by dividends
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Disclaimer: This article is written merely for informational purposes and it should not be taken as a legal advice. The readers are advised to consult competent professionals before acting on the basis of any information provided here.
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