Comparison between Issue of shares on Right Basis (Right Issue) and Issue of shares on Preferential Basis (Preferential Allotment through Preferential Offer) under Companies Act, 2013

Issue of share on Rights Basis and issue of shares on Preferential Basis are covered under Section 62 of the Companies Act, 2013 and Companies (Share Capital and Debentures) Rules, 2014 and Companies (Prospectus and Allotment of Securities) Rules, 2014.

The Right Issue of shares is a formal invitation to the existing shareholders of the Company to buy additional new shares and such shares are issued in proportion to existing shareholding. Whereas Preferential Allotment involves bulk allotment of fresh issue of shares by a company to any person such as Individuals, Venture Capitalists and others at a pre-determined price. Usually, a company chooses to make a Preferential Allotment to people who want to acquire a strategic stake in the company. This includes the existing shareholders like Promoters, Venture Capitalists, Financial Institutions who want to increase their stake in the company. Therefore, Preferential Allotment allows the company to get equity participation of those whom it considers to be a value addition as shareholders.

 ‘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, right 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.

Difference Between Right Issue and Preferential Allotment 

Sr. No.  Particulars Right Issue Preferential Allotment
1 Provisions Issue of share on Rights Basis is governed through Section 62(1)(a) of the Companies Act, 2013 Issue of shares on Preferential Basis is governed through Section 62(1)(c) of the Companies Act, 2013.

In addition to the above, it is subject to the compliance with the applicable provisions of Chapter III (i.e. Public Offer and Private Placement)

2 Rules No Rule has been prescribed for Right Issue Pursuant to Section 62(1)(c) of the Companies Act, 2013, Rule 13 (issue of shares on Preferential basis) of Companies (Share Capital and Debentures) Rules, 2014 is applicable.

Further, in addition to above Rule, Rule 14 (Private Placement) of Companies (Prospectus of Securities) Rules, 2014 is applicable.

3 Type of Securities Only shares can be issued

(Equity as well as Preference Shares)

Shares and other securities mean equity shares, fully convertible debentures, partly convertible debentures or any other securities, which would be convertible into exchanged with equity shares at a later date. [Section 62(1)(c) & Rule 13]

However, under Private Placement any security can issue. (Equity, Preference Debenture etc.) [Section 42]

4 Person to whom offer is made shares are issued in proportion to existing shareholding. [Section 62(1)(a)] Shares may be issued to both existing shareholders and even outsiders. [Section 62(1)(c)]
5 Limit of Person to whom offer is made No limit but offer to all existing shareholder. No Limit under Section 62(1)(c) and Rule 13 but under Section 42 shall not exceed fifty or such higher number as may be prescribed.

Not more than 200 in the aggregate in a financial year [Proviso to Rule 14(2)]

6 Approval  Board approval through Board Meeting is required. [Section 62(1)(c) and Section 179(3)(c)] Both Board Resolution and Special Resolution is needed to approve Preferential Allotment.

[Section 62(1)(c) and Section 179(3)(c)]

7 Period of Offer Offer remains open for the minimum period 15 days and maximum 30 days. [Section 62(1)(a)(i)] No provisions for offer period.
8 Offer Letter No specific format has been prescribed. Offer letter can be in any format. Offer letter shall be in prescribed format i.e. PAS-4 [Section 42(3) & Rule 14(3)]
9 Dispatch of offer letter 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 at least 3 days before opening the issue [Section 62(2)] Either in writing or in electronic mode within in 30 days of recording the name of identified person pursuant to sub-section (3) of Section 42. [Rule 14(3)]
10 Filing with ROC before issue of offer letter No filing required Offer letter can be issued only after SR has been filed with ROC in MGT14. [Rule 14(8)]
11 Return of Allotment E-form PAS-3 for allotment of shares within 30 days. [Section 39 & Rule 12] PAS-3 for allotment of shares within 15 days of allotment [Section 42(8) & Rule 14(6) and also Section 39 & Rule 12]
12 Period of Allotment Allot shares within 60 days of receipt of application money [Otherwise treated as deposit under Rule 2(1)(c)(vii) of Companies (Acceptance of Deposit) Rules, 2014] The allotment shall be made of the earlier of these two-

–    12 months of Special Resolution; or

–   60 days from receipt of application money.

[Rule 13(2)(e) and Section 42(6) and Deposit Rules]

13 Separate Bank Account No separate Bank account is required to receive application money. Separate Bank account is mandatorily required to receive application money.

[Proviso to Section 42(6)]

14 Mode of Allotment Money Company can issue share on cash or through banking Channels [no restriction] Shares can be issued for Cash or for a Consideration other than Cash. [Section 62(1)(c)]

But, all the monies payable towards subscription shall be paid through Cheque, Demand Draft or banking channels, but not in cash [Section 42(4)]

15 Utilization of application money No restriction for filing of return of allotment before utilization of application money. No utilization of application money unless return of allotment is filed with ROC. [Proviso to Section 42(4)]
16 Valuation Report No need of any valuation report Valuation Report is mandatory for making preferential allotment. [Section 62(1)(c)]
17 Price of Shares or securities No provision 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. [Rule 13(2)(g) & Rule 13(3)]
18 Attachment of valuation report with PAS-3 Not required Mandatory required to attached valuation report with PAS-3 [Rule 12(7)]
19 Right to renounce Shareholders under this option have right to renounce, reject or approve the offer. [Section 62(1)(a)] No such right under this option [Proviso to Section 42(3)]
20 Explanatory Statement Not applicable because no shareholder approval is required. Notice should contain Explanatory statement according to Rule 13 (d) & Rule 14(2).
21 Minimum Subscription No Minimum Subscription No Minimum Subscription

*Above Rule 13 is concerned with Companies (Share Capital and Debentures) Rules, 2014.

** Above Rule 14 is concerned with Companies (Prospectus and Allotment of Securities) Rules, 2014.

*** Above Rule 12 is concerned with Companies (Prospectus and Allotment of Securities) Rules, 2014.

*****

Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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