Preferential Issue of shares - A quick summary

PREFERENTIAL ALLOTMENT –IMPORTANT PROVISIONS

Difference between Pvt. Placement and Preferential Allotment

• Governed u/s 62(1)(c) of the Act read with Rule 13 of Companies (Share Capital and Debentures) Rules, 2014;
• Can be issued to existing members, employees, or outsiders too;
• Conditions of Private Placement are also required to be followed for Preferential allotment ( Rule 13(1) );
• Exception to be above is given only if the shares are allotted to one or existing members alone;
• Can be issued only for securities which either are equity or convertible into equity.
• Can be issued for consideration other than cash too.

PROCEDURAL ASPECTS

• Issue to be authorized by Articles of Association;
• Board and Shareholders’Approval (Special Resolution) to be obtained;
• Explanatory statement to contain detailed disclosures as per Rule 13 of Companies (Share Capital and Debenture) Rules,2014;
• Price of the shares to be determined based upon valuation report from registered valuer; Not applicable for listed Companies;
• Price offered shall not be less than the price determined by the valuer;
• Offer letter to be sent to the proposed allottees in Form PAS-4 (this is not applicable if the proposed allottees are existing members alone).
• The proposed investors to accept the offer in the prescribed format and to bring in the subscription money in a separate bank account (not applicable if shares are issued only to the existing member or members)
• Other conditions of Section 42 (Private Placement) to be complied with (not applicable if shares are issued only to the existing member or members)
• Allotment to be made within 12 months from the date of passing Special Resolution authorizing Preferential Allotment.
• If allotment not completed within 12 months, another Special Resolution is required to be passed.

DISCLOSURES IN EXPLANATORY STATEMENT

• the objects of the issue;
• the total number of shares or other securities to be issued;
• the price or price band at/ within which the allotment is proposed;
• basis on which the price has been arrived at along with report of the registered valuer;
• relevant date with reference to which the price has been arrived at;
• the class or classes of persons to whom the allotment is proposed to be made;
• intention of promoters, directors or key managerial personnel to subscribe to the offer;
• the proposed time within which the allotment shall be completed;
• the names of the proposed allottees and the percentage of post preferential offer capital that may be held by them;
• the change in control, if any, in the company that would occur consequent to the preferential offer;
• the number of persons to whom allotment on preferential basis have already been made during the year, in terms of number of securities as well as price;
• the justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered valuer.
• The pre issue and post issue share holding pattern of the company in prescribed format.

A quick procedure of preferential issue with keeping section 42 also in loop.