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, which satisfies the conditions specified in Section 42 of the Companies Act, 2013.
Preferential Allotment means issue of shares or other securities (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) by a company to any selected person or group of persons, on preferential basis
The term “Securities” play a crucial role in interpretation of these two terms. Allotment of any kind of security on a private basis which attracts provisions of Section 42 is called as Private Placement of Securities whereas allotment of equity shares or securities convertible into equity shares attracts both Section 42 and 62(1)(c) and called as Preferential Allotment of securities.
Any procedural compliance under Section 62(1)(c) shall be in addition to that of Section 42 but not in substitute of the same.
In simple words Preferential Allotment means Private Placement of equity shares or convertible securities.
PRIVATE PLACEMENT OF SECURITIES :-
“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, which satisfies the conditions specified in Section 42.
Section 42 read with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 deals with Private Placement of Securities.
Important Provisions :-
Practical Issues in Private Placement :-
1. No offer period timings has been prescribed in the Act for Private Placement of Securities.
2. Can a Company make one single Private Placement offer and have multiple times of allotment of securities to various investors?
PREFERENTIAL ALLOTMENT OF SPECIFIED SECURITIES:-
The offer is subject to the rules and regulations made by Securities and Exchange Board of India, in the case of listed entities and Companies (Share Capital and Debentures) Rules, 2014, in the case of unlisted entities.
Section 62(1)(c) of the Act read with Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 and Section 42 read with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 deals with Preferential Allotment of Specified Securities.
Important Provisions :-
KEY DIFFERENCES BETWEEN PRIVATE PLACEMENT AND PREFERENCIAL ALLOTMENT
> Section 42 provides for a general provision regarding allotment of securities of any kind whereas Section 62(1)(c) provides for a specific provision of allotment of equity shares or for securities convertible into equity shares.
> In Private Placement any security including Equity shares, Preference shares or Debentures can be issued. In Preferential Allotment only Equity shares and other securities convertible into Equity shares can be issued.
> Private Placement can be made to any person as identified by the Board, on the other hand Preferential Allotment can be made to members, employees or any other persons.
> Offer Letter for Private Placement shall be in prescribed format i.e. Form PAS – 4 but not such any format has been prescribed for Preferential Allotment.
> The payment of subscription of securities in Private Placement can be made through any banking channel but not in cash but in Preferential Allotment payment can be made through cash or for consideration other than cash.
> Time limit for allotment of securities in Private Placement is within 60 days of receipt of subscription money and in Preferential Allotment equity shares and convertible securities shall be issued within 12 months from the date of passing Special Resolution.
Practical Issues in Preferential Allotment :-
If a Company issues equity shares to an outsider u/s 62(1)(c), will it be termed as Preferential Allotment or Private Placement?