Preferential Issue by Listed Issuer – Companies Act & SEBI Regulations

Summary: Preferential issue refers to the allotment of shares or securities by a company to a select group of persons on a private placement basis, governed by Section 62(1)(c) and Section 42 of the Companies Act, 2013, and SEBI ICDR Regulations. It excludes public, rights, ESOPs, and other standard share issues. While often confused with private placement, preferential issue specifically relates to equity and convertible securities, with stricter rules for listed entities. Companies must fulfill several conditions such as board and shareholder approvals, valuation reports, pricing norms based on market activity, lock-in requirements, and disclosure mandates. Ineligible entities include those with outstanding SEBI dues or links to fugitive offenders. Detailed timelines and compliance steps exist for issue, allotment, consideration, and post-issue formalities. Additional oversight like appointment of a monitoring agency is needed if the issue exceeds ₹100 crore. Preferential issue is a strategic tool for capital raising, especially during financial constraints, with protective measures to safeguard investor interest.

Section 62(1)(c) of Companies Act, 2013
Read with
Rule 13 of Companies (Share Capital and Debenture) Rules, 2014
and
Section 42 of Companies Act, 2013
Read with
Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014
and
CHAPTER XI: Regulation 158 – 170 of SEBI (ICDR) Regulation, 2018

Definition-

Preferential issue is not defined under Companies Act, 2023 (the Act). However, Rule 13 of Companies (Share Capital and Debenture) Rule, 2014 explains preferential issue as below:

• An issue of shares or other securities,
• by a company to any select person or group of persons on a preferential basis
• does not include shares or other securities offered through a public issue, rights 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

Regulation 2(1)(nn) of SEBI (Issue of Capital and Disclosure Requirement) Regulation, 2018 (ICDR Regulation) defines preferential issue as an issue,

• By Listed entity
• Of specified securities
• To select person or group of persons
• On private placement basis
• Under Chapter V of ICDR Regulation
• Excluding issues by way of employee stock option scheme, employee stock purchase, Depository Receipts and sweat equity.

Other important definitions under ICDR Regulation,

• Regulation 2(1)(eee) defines specified securities as equity shares and convertible securities.
• Convertible securities are defined under Regulation 2(1)(k) of ICDR Regulation as, securities which are optionally or compulsorily convertible into or exchangeable with equity shares at a later date and include convertible debt instrument and convertible preference shares.

Private Placement v/s Preferential Issue-

Private Placement and Preferential Issue are often used interchangeably. Although both these terms mean issue of securities to a select group of persons, they are not exactly the same.

Private placement, under section 42 of Companies Act, 2013, lays down the process by which issue of securities can be made to a select group of persons. This includes all kinds of securities including shares, debentures and convertible securities.

Preferential issue, however, is one of the modes of issue of specified securities i.e. equity and convertible securities, used by company to raise capital. It, however, does not include the issue of non-convertible debt securities.

The issue of securities on preferential basis also required adherence to the process laid down under section 42 of Companies Act.

Ineligible issuer

1.If any promoter or director of issuer is Fugitive Economic Offender.

2. Outstanding dues of SEBI, stock exchange or depositories, unless an appeal related to this subject matter is admitted by relevant authority.

3. Any person who has sold or transferred shares of issuer in past 90 trading days preceding the relevant date, except

a. Where SEBI has granted relaxation under Regulation 11(2) of SAST Regulation

b. Interse transfer between promoters or promoter group

c. Transfer due to invocation of pledge by SCB, PFI, systemically important NBFC, MF or insurance company

4. Promoter or promoter group who have failed to exercise warrant shall be ineligible for preferential issue until 1 year from

a. Date of expiry of the tenure of the warrants, or

b. date of cancellation of the warrants

Conditions of preferential issue-

The following conditions are required to be fulfilled under Regulation 160 of ICDR Regulation for preferential issue of securities,

-Pass a Special Resolution in General Meeting

-Shares allotted to be fully paid up at the time of allotment

-Obtain pan of the proposed allottees

– All existing shares of allotee should be in demat form before applying for in-principle approval (IPA)

-The IPA to be made on the same day as sending of notice for shareholder meeting.

-Continuous Compliance of listing agreement and LODR

Additionally, as per Companies Act, the issue should be authorised by Articles of Association of the company.

Pricing-

Some important definitions to note-

a) Frequently traded shares are where,

-Traded turnover

-On any Recognised Stock Exchange

-during 240 trading days before the relevant date

-Atleast 10% of total no. of such class of shares

-If shares are not identical throughout such period (i.e. if capital structure has been changed) then weighted average no. of shared to be taken instead of total no. of shares.

b) Stock Exchange–

-Any Recognised Stock Exchange where equity shares are listed

-And

-Highest trading volume recorded

-During 90 trading days before relevant date

Preferential Issue to QIB  

-Maximum number of allotees shall be 5 QIBs.

-Price for preferential issue to QIBs minimum of

• • 10 trading days VWAP preceding the relevant date of related equity listed shares
  • Floor price arrived at using method in AOA, if any

-No allotment to QIB who is a promoter or related to promoter, either directly or indirectly.

-Where deemed to be related to promoter means,

• • Having right under shareholder agreement entered into with promoter or promoter group
  • Veto right
  • Right to appoint nominee director

-Not deemed to be related to promoter

• • Not holding any shares in issuer
  • Acquired rights in capacity as lender

Disclosures

The following disclosures are required to be made to the shareholder in the explanatory statement attached to notice of general meeting sent under section 102 of the Companies Act:

Issue related

1.Object of issue

2. Max no. of specified securities to be issued

3. Timeframe for completion of issue

4. Pre issue and post issue shareholding pattern of issuer

 Allotee related

1.Intention of promotor to subscribe to issue

2. The ultimate Beneficial Owners (except when the allottees are listed company, mutual fund, scheduled commercial bank, insurance company)

3. Post issue holding % of allotees and change in control, if any

4. Promoter/ non-promoter status of allotee. Pre issue as well as post issue

 Undertaking/Disclosure

1. Undertaking that the issuer shall re-compute the price where it is required to do so

2. Undertaking that if the amount payable on account of the re-computation of price is not paid within the time stipulated in these regulations, the specified securities shall continue to be locked- in till the time such amount is paid by the allottees.

3. Disclosure as per Schedule VI of ICDR, if the issuer, their promoter or director is wilful defaulter or fraudulent borrower.

 Additional disclosures as per Rules made under Companies Act:

1.Total no. of securities being issued

2. of shares/ securities & price or price band

3. Basis of price along with valuation report

4. Relevant date used for arriving at a price for the issue

5. Class/ classes of proposed allottees

6. Details of previous preferential offer during the year i.e. no. of persons, no. of securities and price

7. Justification for allotment other than cash along with valuation report as per specified format

Monitoring Agency

• Issue size exceeds 100 cr
• By Credit Rating Agency registered with Board
• Not applicable to PFI, Bank, Insurance Companies
• Report to be submitted to issuer on quarterly basis in format specified
• Till 100% of the proceeds of the issue are utilised
• Board of Directors of issue to give comments on the report in format specified
• Issue to upload the report on its website within 45 days from end of quarter and submit the same to Stock Exchange.

Relevant date

Allotment 

Consideration 

Lockin

Pledge

• Specified securities, other than SR shares, of promoters can be pledged for loan by SCB, PFI, Systematically important NBFC, HFC if-
  • Loan is availed by issuer or subsidiary,
  • For object of issue of said preferential issue
  • Pledge is a condition of loan sanctions.
• Post invocation of pledge, the lock in will continue and transfer cannot be done until pledge expires.

Transferability 

• Transfer of locked in securities can be done amongst promoters, promoter group and to new promoter.
• Such transfer can be done only post trading approval from all Stock Exchanges.
• The lock in shall continue post transfer.

Valuation report-

 Valuation report by an independent registered valuer is required in case:

• Where the issuer’s equity shares are infrequently traded
• Where there is change in control or allotment of more than 5% of the post issue fully diluted share capital pursuant to preferential issue
• Allotment is for consideration other than cash (only in the form of swap of shares).

Process of Preferential Issue by Listed Entity-

Pre-issue-

• Check if the limit of the authorised capital of the company is enough to accommodate the proposed issue. If not enough, then first authorised capital to be increased in General Meeting of shareholders under the Companies Act.
• Also check if preferential issue is permissible under AOA of the company. If not, the same need to be amended first.
• Appoint Board registered independent valuer and obtain valuation report with justification of price in cases mentioned above.
• Obtain PAN of allottees.
• Obtain prior approval of lender if there is any covenant relating to change in shareholding
• Obtain transaction statement of all the proposed allottee(s) from 90 trading days prior to the relevant date till commencement of lock-in / relevant date, issued by the Depository Participant (with lock in end date specified)

• Obtain confirmation from NSDL/ CDSL for lockin of pre issue shareholding of proposed allottees.
• Obtain certificate from a practicing company secretary certifying the compliance of the regulation for the proposed issue.
• Appointment of Monitoring Agency if the issue size exceeds 100 cr.

Issue Process-

• Issue notice of Board Meeting.
• Prior intimation to Stock Exchange of the meeting of Board of Director for approving preferential issue of securities atleast 2 working days in advance (excluding date of intimation and date of meeting) under Regulation 29 of LODR.
• Pass Board Resolution in Board Meeting for the following
  • Approving preferential issue
  • Recording names of proposed allottees
  • Approving draft of application form in Form PAS-4
  • Approving the price and the rationale of pricing along with valuation report, if required.
  • Calling of General Meeting for approving the issue
  • Approving notice and Explanatory statement for General Meeting
  • Approving opening of separate bank account
  • Authorizing filing of Form MGT-14 and Form SH-7, if required.
• Intimation of result of Board Meeting to Stock Exchange within 30 minutes of conclusion of the meeting under Regulation 30 of LODR.
• Sending of notice of general meeting
• Applying for in-principle approval on the same day of sending of notice of general meeting
• Pass special resolution in General Meeting of shareholders.
• Disclosure of proceedings of General Meeting to Stock Exchange under regulation 30 of LODR.
• File the resolution/s passed in Form MGT-14 within 30 days of passing of resolution.
• File Form SH-7 intimating alteration of share capital to ROC within 30 days of passing of resolution, in case authorized capital is required to be increased.
• Issue of Offer Letter to be issued to proposed allottees.
• Opening of separate bank account.
• Issue opens and applications are received against the offer letters issued. Issue closes as per offer period.
• Obtain certificate from statutory auditor certifying that consideration is received from respective allottee’s bank account (and first holder’s account in case of joint holders). Submit the same to Stock Exchange.
• Pass Board Resolution for following,
  • Approving allotment of securities
  • Authorizing filing of Form PAS-3 and Form FC-GPR, if applicable
  • Authorizing Corporate Action
• Execute Corporate Action
• Obtain final listing and trading approval from Stock Exchange.

Post issue-

• File Form PAS 3 within 30 days of allotment.
• File Form FC-GPR within 30 days of allotment, in case of foreign holders.
• Make necessary entries in the Register of Securities in Form MGT-1 or Form MGT-2.
• Maintain record of the issue in Form PAS-5.
• Make disclosures on website of the company under regulation 46 of LODR.
• Recomputation of price post 90 trading days where the issue was made before completion of 90 trading days prior to relevant date.
• Ensure lockin is maintained on securities post trading approval as per regulation 167 of ICDR.
• Ensure monitoring of use of funds by Monitoring Agency appointed.

Points to note-

• Ensure proper disclosure of objects of issue, if there are multiple, and the amount allocated to each object as per guidance note issued by Stock Exchange.
• Relevant date to be mentioned in resolution in case of convertible securities
• Convertible Securities need to be converted within 18 months of allotment.
• Provision of separate bank account, Application form in PAS-4, return of allotment, etc under section 42 of Companies Act are applicable to preferential issue. Process for private placement is detailed in the article- https://taxguru.in/company-law/private-placement-section-42-process-provisions-forms-rules.html
• Offer Letter to proposed allottees shall be sent only after filing of Form MGT-14.
• Issue of securities on preferential basis for Consideration other than cash can only be in the form of swap of shares w.e.f. amendment in January 2022.
• Listing application needs to be made to Stock Exchange within 20 days of allotment.

Stock Exchange Checklist-

• BSE Checklist for IPA-

https://www.bseindia.com/downloads1/Preferential_Prior_issue.zip

• Post Issue BSE Checklist –https://www.bseindia.com/downloads1/Preferential_Post_issue.zip

 Conclusion-

Preferential issue is an effective and quick way of raising funds as compared to public issue. It is a useful tool when a company is not performing well and hence cannot raise the required funds for survival and growth directly from the public. SEBI, through the pricing and various other provisions in the ICDR regulation, has ensured the safeguarding of interest of retail investors whilst allowing companies to raise capital.

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Disclaimer-

The information provided is for educational purposes and should not be considered as professional advice. The author shall not be liable for any direct, indirect, special or incidental damage resulting from, arising out of or in connection with the use of the information.