Procedure of Preferential Allotment of Shares under Companies Act, 2013

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Under Companies Act, 2013, Company can raise funds via preferential allotment, employee stock option plan, sweat equity shares and right issue. Issue of Shares through preferential basis is the fastest way for a Company to raise capital. Section 62 (Allotment of Shares) and Section 42 (Allotment of Securities) of Companies Act, 2013, provides for the Issue of Shares on Preferential Basis. In this article, the procedure for the Issue of Shares on Preferential Basis will be discussed.

What is the Preferential Issue of Shares?

A preferential issue is an issue of shares or convertible securities by listed or unlisted companies to a select group of investors, but it is neither a rights issue nor a public issue.

As per Companies Act, 2013 it covers Shares the expression, “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.

Section 62 along with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 and Section 42 along with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes the procedures and provisions for preferential allotment of shares.

Reasons for choosing preferential allotment can be summarized as: 

  • To provide a way for those shareholders who were unable to purchase shares during initial public offerings;
  • To assist the company in securing equity participation;
  • To help the company in raising funds;
  • To increase the flow of capital in the economy;
  • To increase the share capital of the company;
  • To provide an option to promoters, venture capitalists, financial institutions, suppliers or buyers to increase their stake in the company.
Procedure of Preferential Allotment of Shares under Companies Act, 2013

Laws Relating to Preferential Allotment

In India, the legal provisions regulating the concept of Preferential Allotment are as follows: 

  • Section 62 of the Companies Act, 2013;
  • Section 42 of the Companies Act, 2013;
  • Rule 13 of the Companies (Share Capital and Debentures) Rule, 2014;
  • Rule 14 of the Companies (Prospectus and Allotment of Securities) Rule, 2014.

Ineligible person for preferential issue of shares

  • The Person who belongs to a promoter or group who has sold his equity shares during six months preceding the relevant date
  • The Person who belongs to the promoter or group has earlier applied for a warrant but failed to exercise it.

Procedure for preferential allotment

  • Send notice to convene a Board Meeting at least seven days before the meeting.
  • Convene Board Meeting and consider below given matters:-
  • Consider the valuation report as received.
  • Deciding the list of allottees (not exceeding more than 50 at a time and 200 aggregate in the financial year excluding the qualified institutional buyer)
  • Fix day, date, venue and time of extraordinary general meeting
  • Finalization of draft offer letter in the form PAS-4
  • Finalization of notice for extraordinary general meeting along with the explanatory statement as required in the law.
  • Decide the offer period
  • Open a separate bank account in a scheduled bank to receive money.
  • Convene extraordinary general meeting and passing of resolution for allotment.
  • File MGT-14 and then the private placement offer letter i.e. PAS-4 cum application shall be dispatched to the proposed allottees with the following attachments:
  • Certified true copy of the special resolution
  • Explanatory statement
  • Dispatch private placement offer letter cum application to the proposed allottees within thirty days, either in writing or in electronic mode.
  • Proposed Allottees shall subscribe to the shares in the private placement offer letter cum application along with the subscription money paid either by cheque or demand draft or other banking channel but not by cash whatsoever.
  • The money as received shall be deposited in a separate bank account.
  • Convene Board Meeting for the allotment of shares within 60 days of receipt of money.
  • File PAS-3 within fifteen days of allotment of shares

Conclusion

Preferential Issue is the fastest way for a company to raise capital. A preferential issue is an issue of shares or convertible securities by listed or unlisted companies to a select group of investors, but it is neither a rights issue nor a public issue. A person holding preferential shares has the right to be paid from company assets before common stockholders if the company goes into bankruptcy. They usually do not have voting rights, and are rewarded only by dividends.

We at Legal Window have experienced professionals who will assist you with the process of Issue of Shares on Preferential Basis. Our professionals will help you and will ensure the successful completion of your work.

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