Introduction
Under the Companies Act, businesses have access to diverse funding avenues, including raising capital from the public, shareholders, and employees. Additionally, companies have the option to issue shares to a select or pre-determined group of individuals.
Private Placement or Preferential Allotment has emerged as a strategic and versatile financial mechanism, enabling companies to raise capital efficiently while fostering growth and innovation. This targeted and discreet approach allows businesses to secure funds directly from a chosen group of investors, bypassing the conventional methods of public offerings, thus providing a tailored solution to meet their financial needs.
Governing Sections and Rules
The Companies Act, 2013 prescribes distinct rules and procedures for Private Placement and Preferential Allotment, highlighting their differences. While Private Placement and Preferential Allotment are separate mechanisms, Preferential Allotment must also comply with the requirements of Section 42, which governs Private Placement. This dual compliance ensures that all procedural and regulatory norms are met effectively.
| Private Placement | Preferential Allotment |
| Section 42 Offer or Invitation for subscription of securities on Private Placement; read with Rule 12 Return of Allotment; read with Rule 14 Private Placement. |
Section 62(1)(c) read with 13 Issue of shares on preferential basis; read with Chapter III part II Section 42; read with Rule 12 Return of Allotment |
Definition and Meaning
| Private Placement | Preferential Allotment |
| Private Placement means any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum-application, which satisfies the condition mentioned in Section 42 of the Companies Act, 2013. | Preferential Offer means an issue of shares or 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 select person or group of persons on a preferential basis as per Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 |
Similarity between Private Placement and Preferential Allotment
Under Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, in the case of an issue on a preferential basis, the company must comply with the conditions outlined in Section 42 of the Companies Act, 2013. Please note that special emphasis should be placed on the word ‘conditions’.
| SR | Private Placement | Preferential Allotment |
| 1. | It is governed by the provision and applicable rules of the Companies Act, 2013 | It is governed by the provision and applicable rules of the Companies Act, 2013 |
| 2. | Private Placement involve for the issuance of securities to select group of investors rather than the public, allowing companies to raise funds from pre-identified entities or individuals. | Preferential Allotment involve for the issuance of securities to select group of investors i.e., members, employees, or any other person rather than the public, allowing companies to raise funds from pre-identified entities or individuals. |
| 3. | The Company is required to obtain board approval in the board meeting and members’ approval by passing a Special Resolution in the Members’ Meeting. | The Company is required to obtain board approval in the board meeting and members’ approval by passing a Special Resolution in the Members’ Meeting. |
| 4. | Under Private Placement, the company can issue securities to up to 50 selected persons in a single tranche. However, the total number of persons to whom securities can be issued or allotted must not exceed 200 in a financial year. | In case of Preferential Allotment, the total number of persons to whom shares or other securities can be issued or allotted must not exceed 200 in a financial year. |
| 5. | In the case of Private Placement, the offer and application shall not provide an option for the right of renunciation. | As per the Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 provisions of Section 42, applicable to Preferential Allotment, on the basis of that the issue of shares or other securities under Preferential Allotment shall not include an option for the right of renunciation. |
| 6. | The Company is required to annex an explanatory statement containing disclosures related to Private Placement. | Similarly, in the case of Preferential Allotment, the Company must attach an explanatory statement with disclosures specific to the Preferential Allotment. |
| 7. | The Company is required to obtain valuation report from the Valuer to determine the issue price of the securities. | For the calculation of the issue price the company is require to obtain valuation report from the Registered Valuer. |
| 8. | The Company cannot utilise the monies raised through Private Placement unless the allotment is made and the return of allotment in PAS-3 is filed with the Registrar. |
In the case of Preferential Allotment, the company is required to file the return of allotment in Form PAS-3. The company cannot utilise the funds until the form has been filed. |
| 9. | In the case of Private Placement, the company is required to open a bank account with a Scheduled Bank to deposit the monies received for the offer. | Similarly to Private Placement, in the case of Preferential Allotment, the company is required to open a bank account with a Scheduled Bank to deposit the monies received for the offer. |
Difference between Private Placement and Preferential Allotment
| SR | Private Placement | Preferential Allotment |
| 1. | It is not mandatory to check the authority in the Articles of Association of the Company to approve a Private Placement. |
The company’s articles of association will have the authority to approve Preferential Allotment. |
| 2. | The Private Placement shall be made to the selected group of persons who has been identified by the Board. However, power to approve remain in the hand of Shareholders. |
In case of Preferential Allotment shares or securities to the select person or group of persons by passing Special Resolution in the general meeting. |
| 3. | In Private Placement, the term “securities” is used, indicating that Private Placement can be undertaken for all categories of securities. | In contrast, in the case of Preferential Allotment, the terms “Shares” or “Other Securities” are used. “Other Securities” refers to fully or partially convertible debentures and any other securities convertible into equity at a later date. |
| 4. | It is requiring Board and Shareholder’s approval before the issuance of securities. | It is requiring Shareholder’s approval before the issuance of share or securities convertible into equity. |
| 5. | The Company is required to issue a Private Placement Offer and Application in Form PAS-4, which must be serially numbered and provided to the identified persons. | However, no specific form or format has been prescribed for Preferential Allotment. |
| 6. | In the case of Private Placement, if a company makes an offer to allot or invites subscriptions from more than 200 persons in a financial year, the offer will be treated as a public issue. | On the other hand, in the case of Preferential Allotment, the term “Preferential Offer” is specifically defined, and public offerings fall outside the scope of Preferential Allotment. |
| 7. | The Company is required to maintain records of Private Placement in the prescribed format, i.e., PAS-5. | In contrast, there is no prescribed format or specific register required to record Preferential Allotment. |
| 8. | The subscriber to a Private Placement offer has the option to pay through cheque, demand draft, or other banking channels. However, payment in cash is not permitted. |
On the other hand, in the case of Preferential Allotment, the consideration can be paid either in cash or through other modes, including non-cash transactions. |
| 9. | In the case of Private Placement, the company must allot the securities within sixty days from the date of receipt of payment. | The Preferential Allotment may be completed within twelve months from the date of passing of Special Resolution. |
| 10. | If the company is unable to allot the securities within sixty days, it is required to repay the money within fifteen days from the expiry of the sixty-day period. | In case of allotment is not completed within a period of twelve months. The Company may pass another Special Resolution to complete the allotment. |
| 11. | If the payment is not refunded within fifteen days from the expiry of the sixty-day period, the Company is required to pay interest at the rate of 12% per annum from the expiry of the sixty-day period. | In the case of Preferential Allotment, the company is not required to refund the money. Instead, it may pass a Special Resolution and proceed with the allotment of shares or other securities. |
| 12. | The Company cannot made fresh offer or invitation unless the existing offer or invitation is completed or withdrawn. | In the case of Preferential Allotment, if a period of twelve months expires, the company can, by passing a special resolution, either complete the allotment or re-approve the offer previously accepted. |
| 23. | In the case of Private Placement, the Company can utilise the money either for allotment or for repayment if the allotment is not completed. | Whereas, in the case of Preferential Allotment, repayment of money is generally not applicable, as there is an option to pass a Special Resolution to revalidate or continue with the same offer. |
Conclusion: When reading the provisions of Private Placement and Preferential Allotment together, we observe several similarities, as the provisions for Preferential Allotment inherently require compliance with the conditions outlined for Private Placement.
In other words, Preferential Allotment can be considered a subset of Private Placement; however, Private Placement cannot be categorized as Preferential Allotment.
While the similarities are notable, the differences between the two are limited but significant. For instance:
- Under Private Placement, the company can issue any type of securities, whereas Preferential Allotment is restricted to issuing shares or securities that are convertible into equity at a later date.
- In Private Placement, payments cannot be made in cash; funds must be transferred through banking channels. Conversely, Preferential Allotment allows payments to be made in cash or through non-cash considerations.
Apart from the differences mentioned above, there are no significant variations in the compliance requirements for Private Placement and Preferential Allotment. Both mechanisms share similar regulatory frameworks and procedural obligations under the Companies Act, 2013, ensuring transparency and accountability in the issuance of securities.
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| Ms. Anita Chaudhary
ACS, M. Com (BPCG) Chaudhary & Negi Partners (Company Secretaries) Founder and Managing Partner Email: [email protected]
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Mr. Aashish Negi
FCS, LLB, B. Com, CSR Certified Professional Chaudhary & Negi Partners (Company Secretaries) Co-Founder and Managing Partner Email: [email protected]
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Disclaimer Note: This Section analysis represents the writer’s understanding and interpretation of the subject matter. The views expressed herein are solely those of the writer and do not necessarily reflect any organization’s views. The information provided is for informational purposes only and should not be considered professional advice. While efforts have been made to ensure accuracy, there may be errors or omissions. Individuals may interpret the content differently, and the writer disclaims liability for such interpretations. Readers are encouraged to conduct their own research and seek tailored professional advice before making decisions based on this information. The writer is not liable for any damages or losses arising from the use of this article. By accessing this article, you agree to this disclaimer.
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