1. The issue of shares on a preferential basis is governed by Section 62(1)(c) of the Companies Act, 2013 and Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.
2. In accordance with the provisions of Section 62(1)(c) of the Act, where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to any persons, if it is authorized by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed.
3. Clause (a) of Section 62(1)(a) of the Act governs the provisions for Rights Issue to existing shareholders and Clause (b) governs the provisions for ESOPs. It means that the preferential issue can be also be made to the existing shareholders and employees of the Company.
4. It is important to note that the price, at which shares are issued on a preferential basis, must be determined by the valuation report of a registered Valuer, who is registered with the Insolvency and Bankruptcy Board of India (IBBI). In case the issue is made for consideration other than cash then the value of such consideration must also be determined by the registered valuer.
5. Preferential Offer means an issue of shares or 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.
6. 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.
7. The issue of shares on a preferential basis should also comply with conditions laid down in section 42 of the Act. Therefore, before proceeding further we must also understand the provisions of Section 42 of the Act.
8. Section 42 of the Act read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 governs the procedure of private placement of securities.
9. Private Placement means any offer or invitation to subscribe or issue of Securities to a selected group of persons by a company (other than by way of public offer) through private placement offer-cum-application.
10. Here, it is very important to note that preferential issue can be made to issue only the equity shares or any other securities which can be converted into equity shares at a later date as the definition of securities in case of the preferential issue has been very clearly defined under Rule 13. Whereas private placement of securities can be made to issue any kind of securities, either convertible into equity shares or not.
11. Now, we will discuss in detail the step by step procedure of issue of shares on the preferential basis:
1. Call a Board Meeting by giving seven days’ clear notice to the Directors of the Company to transact the following agenda items:
1. Approve the agenda for the issue of shares on preferential basis;
2. Appoint the registered Valuer for the determination of the price of shares to be issued on a preferential basis;
3. Identify the persons whom the shares on a preferential basis is proposed to be issued in Form PAS-5;
4. Approve the draft letter of offer in From PAS-4;
5. Approve the resolution for opening separate bank account of the Company;
6. Approve the draft notice of extra-ordinary General Meeting of the members for approving the preferential issue by way of special resolution.
12. Call an extra-ordinary general meeting of the members by giving 21 days’ clear notice to the members of the Company and approve the issue of shares on preferential basis by way of passing the special resolution and approve the draft letter of offer in Form PAS-4.
13. File the Special Resolution in e-form MGT-14 with the Registrar of Companies within 30 days from the date of passing Special Resolution.
14. Issue the offer letter in Form PAS-4 along with the serially numbered application form to the proposed allottees.
15. It must be noted that the offer letter shall be addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within 30 days of recording name of such person. It must also be noted that such offer letter shall be issued only after the relevant Board Resolution or Special Resolution has been filed with the Registrar in e-Form MGT-14.
16. Therefore, the Special Resolution shall be filed immediately after it is passed with the ROC in e-Form MGT-14 so that the time gap between the recording of names in Form PAS-5 and sending of offer letter to the proposed allottee shall not exceed 30 days.
17. It is advisable to file the offer letter in Form PAS-4 and record of private placement in PAS-5 with the Registrar of Companies in e-Form GNL-2 within 30 days from the date of issue of offer letter.
18. Thereafter, receive the application form from the proposed allottee along with the subscription money either by cheque or demand draft or other banking channel but not in cash.
19. No person other than to whom the offer is made shall apply to the preferential issue or private placement.
20. It must be noted that a company shall not utilise the subscription money unless allotment is made and the return of allotment is filed with the Registrar in e-Form PAS-3.
21. The monies received on application shall be kept in a separate bank account in a scheduled bank opened for this purpose and shall not be utilised for any purpose other than— (a) for adjustment against allotment of securities; or (b) for the repayment of monies where the company is unable to allot securities.
22. Thereafter,, call a Board Meeting by giving 7 days’’ clear notice within 60 days from the date of receipt of subscription money for allotment of shares to the proposed allottee.
23. File the return of allotment in e-Form PAS-3 within 15 days from the date of allotment of shares along with the list of allottees and Board Resolution for allotment.
24. Issue share certificates to the allottee in prescribed form SH-1. In case of Demat, credit the shares in the Demat Account of the Allottee by way of Corporate Action.
The key points to be remembered while issuing shares or securities on preferential basis or by way of private placement:
1. The preferential issue of shares and private placement of securities must also be authorized by the Articles of Association of the Company.
2. The persons to whom shares or securities are issued on preferential basis or by way of private placement shall be identified by the Board and their number shall not exceed 200 in a financial year for each kind of security. While counting the number of 200, QIB and employees being offered securities under ESOP shall be excluded).
3. It must be noted that the allotment of securities on preferential basis shall be completed within 12 months from the date of passing special resolution or within 60 days from the date of receipt of application money, whichever is earlier.
4. No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company.
5. No company issuing securities on preferential basis or by way of private placement shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.
1. The following disclosures are mandatorily required to be given in the explanatory statement to be annexed to the notice of the general meeting:
2. the objects of the issue;
3. the total number of shares or other securities to be issued;
4. the price or price band at/within which the allotment is proposed;
5. basis on which the price has been arrived at along with report of the registered Valuer;
6. relevant date with reference to which the price has been arrived at;
7. the class or classes of persons to whom the allotment is proposed to be made;
8. intention of promoters, directors or key managerial personnel to subscribe to the offer;
9. the proposed time within which the allotment shall be completed;
10. the names of the proposed allottees and the percentage of post preferential offer capital that may be held by them;
11. the change in control, if any, in the company that would occur consequent to the preferential offer;
12. the number of persons to whom allotment on preferential basis have already been made during the year, in terms of number of securities as well as price;
13. the justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered Valuer.
6. The pre issue and post issue shareholding pattern of the company in the prescribed format.
7. 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. It means that the explanatory statement shall not disclose the particulars required under sub-rule (1) of Rule 14 and the existing shareholders shall have the right to renounce their right in favour of other person.
8. Where the preferential offer of shares or other securities is made by a company whose share or other securities are listed on a recognized stock exchange, such preferential offer shall be made in accordance with the provisions of the Act and regulations made by the Securities and Exchange Board of India (SEBI).
9. A company making an offer or invitation on preferential basis or by way of private placement shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per-cent per annum from the expiry of the sixtieth day.
10. If a company defaults in filing the return of allotment within the period prescribed, the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.
11. If a company makes an offer or accepts monies in contravention of the provisions of this Act, the company, its promoters, and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest to subscribers within a period of thirty days of the order imposing the penalty.
12. Any private placement issue not made in compliance of the provisions of the Act shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be applicable.