Private Placement V/S Preferential Allotment

MEANING :-

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 :-

• An offer to be made only to a selected group of persons as identified by the Board whose number not to exceed 200;
• Private Placement Offer Letter in Form PAS – 4 to be circulated among the investors (Letter of offer, serially numbered, to be given either in writing or electronic mode within 30 days of recording of the investor’s name by the Company) ;
• Private Placement offer does not have any right of renunciation;
• The Company shall not utilize the money, unless the return of allotment has been filed with the Registrar of Companies;
• Approval from shareholders by way of Special Resolution is required for Private Placement (excepting non-convertible debentures);
• In Private Placement of Securities investor has to remit the funds from his bank account only;
• The Company to file return of allotment (Form PAS – 3) within 15 days of allotment and can use the money only if the Form PAS-3 has been filed;
• The Company also to maintain a complete record of private placement offers in Form PAS – 5;
• In case of different securities issued, the maximum limit of 200 persons in a Financial Year will be applicable for each of such securities, so issued.

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 :-

• Securities can be issued to existing members, employees or to outsiders also;
• Conditions of Private Placement are also required to be followed for Preferential allotment (Rule 13(1)); Exception to the above condition is that  the shares are allotted to one or existing members only;
• Preferential Allotment can be made only for equity share or for securities convertible into equity shares.
• In Preferential Allotment specified securities can be issued for cash or for consideration other than cash.
• Preferential Allotment Issue needs to be authorized by Articles of Association;
• Board and Shareholders’ Approval by way of Special Resolution is required for making Preferential Allotment of specified securities
• Explanatory statement annexed with the Notice of General Meeting in which Preferential Allotment needs to be approved shall contain detailed disclosures as per Rule 13 of Companies (Share Capital and Debenture) Rules, 2014;
• Price of the shares to be determined based upon valuation report from registered valuer.
• Price offered in Preferential Allotment issue shall not be less than the price determined by the Registered valuer;
• The offer can be made to any person whether they are equity shareholders and employees of the company or others.

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?