Preferential Allotment of Shares – Key Factors, Procedure & Timeline

A firm can raise capital in a variety of ways, including the issuance of equities, preference shares, debentures, bonds, and deposits. If the shareholders do not want to dilute their position, they can issue debentures, bonds, or accept deposits, among other options. Another alternative is for the corporation to issue shares (equity or preference), with the option of initially issuing shares to existing shareholders and then to others. The Companies Act of 2013 established a number of procedures for issuing shares, including:

1. Private placements (Section 42)
2. Rights Issue (Section 62(1)(a))
3. Preferential Allotment (Section 62 (1)(c)) read with Rules 13 Companies (Share Capital & Debentures) Rules 2014 along with Section 42 read with Rule 14 of Part II of Companies (Prospectus and Allotment of Securities) Rules, 2014

A ‘preferential offer' is an issue of shares or other securities by a company to a single person or group of people on a preferential basis, and excludes shares or other securities offered through a public offering, rights offering, 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 the EU. A preferential issue is when a company sells shares or securities to a chosen set of investors at a discounted price. The allottees in the preferred issue are: -

1. Either the existing shareholders or
2. The employees under ESOP or
3. Others (where the above persons decline to accept the offer) either for cash or consideration other than cash.

Types of shares issued under preferential allotment:
1. Equity shares
2. Preference shares
3. Full convertible debentures
4. Partly convertible debentures.

The following are important considerations to keep in mind when issuing preferred shares:
1. It should be approved by the AOA.
2. Check the company's authorised capital limit; if necessary, it should be changed or expanded first at the shareholders meeting.
3. Offer letter in PAS-4 format.
4. The price per share for preferred allotment is determined by a registered valuer's valuation report. The price of preferentially issued shares or other securities shall not be less than the price set on the basis of a registered valuer's valuation report.
5. Establishing separate bank accounts
6. All current shareholders will receive notice of the offer via registered or speed mail, electronic means, courier, or any other mode with evidence of delivery.
7. Each Allottee's PAN.

Preferential Allotment of Shares and Securities Procedure:
A.Organizing a Board Meeting to Approve:
Choosing the Number of Allotments

Evaluation of the Valuation Report Approval letter in Form PAS-4 and serially numbered Application forms
Form PAS-5 for registering private placement offers has been approved.

EGM/AGM Set the date and time for the shareholders meeting EGM/AGM Notify shareholders of the Extraordinary General Meeting/Annual General Meeting

B.Provide shareholders with notice of the EGM/AGM, as well as an explanatory statement that includes the information.

Provide shareholders with notice of the EGM/AGM, as well as an explanatory statement that includes the information.

C. Holding of an EGM or AGM for the purpose of approving the Offer letter and passing a Special Resolution for the preferred Issue.

D. Within 30 days of the EGM or AGM, distribute the offer letter along with a serially numbered application form addressed to the individual to whom the offer is made.

E. Companies (Share Capital & Debentures) Rules 2014 Rule 13 (2)(d) requires the filing of Form MGT-14 with an explanatory statement.

F. Once the allocation funds have been received in the bank account, hold a board meeting to discuss allotment shares and the issuance of share certificates.

G. Return of allotment filing (Form PAS-3) within 15 days after allotment:
a. Allotment list.
b. Report of Valuation
c. Explanatory statement and special resolution
d. Share allotment resolution by the board of directors.

H. Within two months of the date of the allotment of shares, issue share certificates. Stamp duty must be paid in accordance with state regulations. Following the distribution of share certificates to shareholders, the Members' Register should be updated.

Time limit for finishing the allotment:
If the company does not finish the allotment within 12 months of the Special Resolution being enacted, another special resolution will be passed requiring the corporation to fulfil the allotment.

Conclusion:
Preferential Issue is the quickest way for a firm to raise capital without having to take out a bank loan or risk its assets. Investors are, by definition, shareholders in the business. If the firm goes bankrupt, people who own preferred shares have the right to be compensated from the company's assets before common shareholders. They typically lack voting rights and are compensated solely through dividends.