Preferential Allotment

IMPORTANT DEFINITIONS: 

1. Issuer:

means a company or a body corporate authorized to issue specified securities under the relevant laws and whose specified securities are being issued and/or offered for sale in accordance with these regulations.

2. Specified 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.

3. Convertible Securities:

means a security which is convertible into or exchangeable with equity shares of the issuer at a later date, with or without the option of the holder of such security and includes convertible debt instrument and convertible preference shares

4. Relevant Date:

As per Regulation 161 of SEBI (Issue of Capital and Disclosure Requirements), Regulations, 2018  

5. Promoter:

• Who has been named in draft offer document or offer document
• or is identified by issuer in Annual Returns under section 92 of Companies Act, 2013
• who has control over affairs of issuer directly or indirectly whether as a shareholder, director or otherwise
• In accordance with whose advise, directions, or instructions the board of directors are accustomed to act (except person acting in his professional capacity)
• Provided further that a financial institution, scheduled commercial bank, (foreign portfolio investor other than individuals, corporate bodies and family offices), mutual fund, venture capital fund, alternative investment fund, foreign venture capital investor, insurance company registered with the Insurance Regulatory and Development Authority of India or any other category as specified by the Board from time to time, shall not be deemed to be a promoter merely by virtue of the fact that 20%or more of the equity share capital of the issuer is held by such person unless such person satisfy other requirements prescribed under these regulations.

6. Promoter Group:

• Promoter
• Immediate relative of promoter i.e. spouse, parents, or child of person or spouse
• Promoter as a Body Corporate:
  • Subsidiary or Holding Company
  • Holding 20%or more in any body corporate and/or any body corporate holds 20% or more of equity shares of  Promoter
  • Group of individuals or companies or combination of them holds 20%or more of equity shares in any body corporate & are also acting in concern
• Promoter as a Individual:
  • Holding 20% or more in any body corporate, firm,HUF or any of his immediate relative;
  • Any body corporate in which any body corporate as in above point holds 20%or more of the equity share;
  • Holding of Promoter & any of his immediate relative is equal to 20%or more in any HUF or firm.
• Aggregation of all person’s shareholding is categorized  under  ‘Promoter Group’

7. Lock-In:

• Indicates a freeze on shares of the holder.
• As per Regulation 167 of SEBI (Issue of Capital and Disclosure Requirements), Regulations, 2018

8. Frequently Traded Shares:

• shares of the issuer,
• in which traded turnover,
• on any Recognised Stock Exchange,
• during the 12 calendar months,
• preceding the relevant date,
• is at least 10%of the total number of shares .

9. Minimum Promoter’s Contribution:

• Promoter to hold atleast 20%of the issue either of equity shares or convertible securities.
• Provided that in case it is less than 20%, alternative investment funds or foreign venture capital investors or scheduled commercial banks or public financial institutions or insurance companies registered with Insurance Regulatory and Development Authority of India may contribute to meet the shortfall in minimum contributionas specified for the promoters, subject to a maximum of 10% of the post-issue capital without being identified as promoter(s).

10. Private Placement:

• As per section 42of Companies Act, 2013 and Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014
• An offer or invitation made only to a select group of persons who have been identified by the Board;
• whose number shall not exceed fiftyor such higher number as may be prescribed;
• Excluding the Qualified Institutional Buyers (QIB) and employees of the company being offered securities under a scheme of Employees Stock Option (ESOP)in a financial year subject to such conditions as may be prescribed.

INTRODUCTION 

*IPO- Initial Public offer  

*FPO-Further Public offer

APPLICABILITY FOR PREFERENTIAL ISSUE:  

√ Section 42 and 62 of Companies Act, 2013

√ Rule 13 of Companies (Share & Debenture) Rules, 2014

√ Rule 14 of Companies (Prospectus and Allotment of Securities) Rules,2014

√ Chapter V Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018

WHAT IS PREFERENTIAL ISSUE? 

• Issue of specified securities;
• By the issuer;
• To any selected person or group of person;
• On a private placement basis;
• In accordance with Chapter V of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018
• And doesn’t include Right Issue, Public Issue, Employee Stock Option Plan (ESOP), Employee Stock Purchase Scheme (ESPS), Issue of Sweat Equity Shares, or Depository Receipts issue in any county outside India or Foreign Securities;
• Other securities include: fully/partly convertible debenture, or other security to be converted into equity at later date;

OFFER OF SECURITY ON PRIVATE PLACEMENT BASIS:  

Other Points to be considered:

• Special Resolution annexed with explanatory statement to be passed by the company to make offer or invitation to subscribe to the securities at shareholders meeting including basic justification for pricing and other details as may be necessary.
• Application should be serially numbered and addressed specifically to whom the offer is made
• Company to maintain complete record in Form PAS 5

FURTHER ISSUE OF SHARES 

√ Further issue of shares by existing company as per section 62 of Companies Act, 2013.

√ Offered to:

√ Exercising the option to convert of any Debenture or Loan into equity shares won’t fall under this section. (Except in case of debenture or loan to government)

ISSUE OF SHARES ON PREFERENTIAL BASIS 

√ Rule 13of Companies (Share Capital & Debentures) Rules, 2014

√ Issue to be authorized by Special Resolution passed in General Meeting

√ For issue of shares on preferential basis by listed company the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 would be applicable (no valuation by Registered Valuer is required in case of listed company)

√ For issue of shares on preferential basis by unlisted company follow provisions hereunder and subject to following compliance:

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WHO ARE NOT ELIGIBLE TO MAKE ISSUE? 

159(1)  Any person:  

• Sold or transferred
• Any equity shares
• During six months preceding relevant date

159(1) Promoter or promoter group: 

• Sold or transferred
• equity shares during
• six months preceding relevant date

EXCEPTION Board relaxation under regulation 11(2) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011

• If  promoters(s)/promoter group sale equity shares which qualify as inter-se transfer amongst qualifying person under regulation 10 (1)(a) of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 2011
• Transfer of share by promoters(s)/promoter group on account of invocation of pledge by scheduled commercial bank or public financial institution.

159(1) When promoters(s)/promoter group fails to exercise the warrant, they become ineligible for 1 year from:

• Date expiry of tenure of warrant or
• Date of cancellation of warrants.

159(2)  Promoters or Directors is a fugitive economic offender.

• Guideline for issue price is provided by Reserve Bank India and which shall also be in compliance of Companies Act, 2013 in case of stressed issuer.
• Issue price shall be certified by TWO independent valuers. 
• Specified securities allotted shall be locked-in for a period of atleast 3 years from date of allotment.
• After conversion of security in between lock-in period the remaining lock-in period would be considered for converted security.
• Special Resolution to be passed by shareholders of issuer before the issue.
• Information to be included in explanatory statement:
  • Identity of natural persons being the ultimate beneficial owner & who ultimately control the proposed allottees;
  • Business model; oStatement on growth of business over a period of time;
  • Summary of audited Financial Statement of previous 3 financial year; o Track record of turning around companies; o Compliance of provision applicable under Companies Act, 2013.

CONDITION TO PREFERENTIAL ISSUE 

> Listed Issuer making Preferential Issue of specified securities: 

• Equity shares should be fully paid up at the time of allotment of shares only;
• Special Resolution to be passed by the shareholders of the issuer;
• All equity shares to be allotted to proposed allottees should be in demat form;
• Company/Issuer in compliance with the condition of continuous listing of equity shares as specified in listing agreement with stock exchange or as amended from time to time;
• Issuer should have Permanent Account Number (PAN) of proposed allottees, except exempted by Board from specifying Permanent Account Number (PAN).

WHAT IS RELEVANT? 

WHAT IS THE TENURE OF CONVERTIBLE SECURITIES? 

• Tenure of convertible securities of issuer shall not exceed 18 monthsfrom date of allotment.
• For Example:
  • Date of Allotment: 15.05.2021, then the maximum time to convert the securities into equity shares would be 15.10.2022.

DISCLOSURES TO BE MADE TO SHAREHOLDERS 

1) Object of preferential issue;

2) Maximum number of specified securities to be issued;

3) Intent of promoter, director, key managerial personnel to subscribe to offer;

4) Pre and Post Issue shareholding pattern of issuer;

5) Time frame for completion of preferential issue;

6) Identity of natural person who are ultimate beneficial owner  and/or who has ultimate control over the allottees and change in holding post allotment of securities and change in control;

7) Undertaking that the issuer shall re-compute the price if so required under the regulation;

8) Undertaking that the issuer, if on re-computation the additional price is not paid than the share shall be locked-in till the amount is paid;

9) Disclosure as per schedule VI, if issuer or any of its promoter or directors is a willful defaulter.

> Copy of Statutory Auditor’s Certificate for compliance of the issue with the requirements of this regulation.

> If issue is based on consideration other than cash than valuation of asset by Independent Valuer to be submitted to the Stock Exchange where the shares of the issuer are listed.

> Special resolution shall specify the relevant date for price computation to be allotted on conversion of securities.

PRICING OF FREQUENTLY TRADED SHARES 

√ If the price is determined as per sub-regulation 2than the price shall be computed by issuer on completion of 26 weeks from the date of listing on RSE with reference to average of weekly high and low of volume weighted average price.

√ If recomputed price is greater than price paid on allotment, than difference is to be paid by allottees to issuer.

√ Only five Qualified Institutional Buyers (QIB’s) to be allotted the specified preferential issue at the price determined as per sub regulation 164(1)(b)

√ Frequently traded shares: Traded Turnover on RSE during 12 calendar months preceding the relevant date is atleast 10% of total number of shares  

FOR EXAMPLE: 

In case of securities listed for less than 26 weeks:

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PRICING CALUCALTION: 648.225

In case of securities listed for more than 26 weeks: 

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PRICING CALUCALTION: 57.488

*Average of High and Low of Volume Weighted Average Price

PRICING OF INFREQUENTLY TRADED SHARES 

ADJUSTMENTS IN PRICING 

> As per Regulation 166 pricing determined as per Regulation 164 or 165 shall be subject to appropriate adjustments:

√ makes an issue of equity shares by way of capitalization of profits or reserves, other than by way of a dividend on shares;

√ makes an issue of equity shares after completion of a demerger wherein the securities of the resultant demerged entity are listed on a stock exchange;

√ makes a rights issue of equity shares;

√ consolidates its outstanding equity shares into a smaller number of shares;

√ divides its outstanding equity shares including by way of stock split;

√ re-classifies any of its equity shares into other securities of the issuer;

√ is involved in such other similar events or circumstances, which in the opinion of the concerned stock exchange, require adjustments.

LOCK-IN OF SECURITIES 

Promoter & Promoter Group

Persons other than promoter

√ On conversion of securities remaining period shall be considered for lock-in of converted security

√ If on recalculation the excess price is not paid till the expiry of lock-in, the shares shall continue to be locked-in till such payment is made

√ The entire pre-preferential allotment shall be locked-in from relevant date upto 6 months of trading approval (applicable also if the issue is not going for listing

√ Total Capital of issuer:

• Public issue;
• Right issue;
• Convertible security;
• Specified security issued on preferential basis to promoter/promoter group.

√ 20 % of Total Capital of issuer:

• Minimum promoter’s contribution;
• Held and locked-in;
• In past;
• As per the guideline;
• Not to be taken into account.

√ If minimum promoter’s contribution is free from lock-in it shall not be put into fresh lock-in again even though it falls under 20 % requirement.

TRANSFERABILITY OF SECURITIES 

√ Transfer inter-se by Promoter and Promoter Group, then the remaining period of lock-in shall continue.

√ No transfer before the trading approval.

PAYMENT OF CONSIDERATION 

In case of other than warrants [169(1)]

In case of warrants [169(2)]

√ If warrant is not exercised by the holder, than the same is forfeited by the issuer.

√ Submit a certificate of statutory auditor to Stock Exchange stating that issuer is in compliance of the regulations.

ALLOTMENT OF SECURITIES 

STAMP DUTY 

RECENT PREFERENTIAL ALLOTMENT