PREFERENTIAL ALLOTMENT OF SHARES

Meaning

A preferential allotment of shares is a corporate mechanism where a company issues new shares or convertible securities to a select group of investors rather than offering them to the general public or current shareholders at large. It is a strategic way to raise targeted capital, bring in strategic partners, or restructure debt.  Thus, this allotment of shares is not open to public like that of Initial Public Offer or further issue of share capital. The time taken for this process is very less compared to the period taken for Initial Public Offer.

The preferential shares are allotted at a pre-determined price. This allotment is governed by Section 62(1)(c) of the Companies Act, 2013 and Securities and Exchange Board of India Act and the regulations made there under.

Authorisation required

The Articles of Association must authorise the preferential allotment of shares. A listed issuer may make a preferential issue of specified securities, according to Section 72 of the Companies Act, 2013 (‘Act’ for short), if-

• A special resolution has been passed by its shareholders;
• All the equity shares, if any, held by the proposed allottees in the issue are in dematerialised form;
• The issuer is in compliance with the conditions for continuous listing of equity shares as specified in the listing agreement with the recognised stock exchange where the equity shares of the issuer are listed;
• The issuer has obtained the Permanent Account Number of the proposed allotted.

Procedure

The procedure involved in preferential allotment is as detailed below-

• There shall be a provision in the Articles of Association for the preferential allotment by the company. If not, the Articles of Association is to be altered in this regard.
• The Board must approve the preferential allotment. In the Board meeting the proposal is to be placed along with the details of number of shares to be allotted, the price of the share, details of shares allotted and the approval of conducting the Extra-ordinary General Meeting for getting the approval of shareholders in the Extraordinary General Meeting.
• The Registered Valuer shall be appointed for the valuation of the shares in respect of unlisted companies. For the listed company the pricing of the shares is to be decided based on the relevant date, Volume weighted average market price and Frequently traded / infrequently traded shares. Thereafter, the Extra-ordinary General Meeting is to be conducted. The preferential allotment is to be approved by the shareholders in the Extra Ordinary General Meeting.
• The special resolution passed in the Extra-Ordinary General Meeting is to filed in the prescribed form with the Registrar of Companies.
• Then the offer letter shall be prepared by the Company in Form PAS – 04 and issued to the identified persons, not exceeding 200 persons.
• Subscription amount shall not be received by cash. It can be paid through the bank channels.
• Then the shares shall be appointed to the eligible persons. If not allotted the amount collected shall be refunded.
• The shares shall be allotted within 60 days from the date of receipt of the payment. If no allotment is made the payment received shall be refunded to the concerned investor.
• After allotment of shares the company shall file form PAS- 3 with the Registrar of Companies.

Conditions

The following are the conditions in preferential allotment-

• Existing shareholders’ pre-emptive rights under Section 62 are bypassed only through special resolution.
• Company must comply with Section 42 (Private Placement).
• No public advertisement permitted.
• Offer can be made only to identified persons.

Violations

1. If the allotment is made for more than 200 members then it will be treated as public offer and the company is to comply with pubic issues.
2. Receipt of cash for allotment of shares is in violations of the provisions of Section 42 of the Companies Act.
3. Non filing of PAS – 3 will attract penalties.
4. A separate account is maintained for the purpose of this scheme; otherwise, it violates the preferential allotment rules.

Disclosures to Stock Exchange

The following are to be disclosed in this allotment procedure by a listed company-

• Purpose of issue
• Utilization of funds
• Identity of allottees
• Change in control
• Pre and post shareholding pattern.

Steps involved

The following steps will illustrate the procedure involved in preferential allotment-

1. Board Meeting;
2. Valuation Report;
3. EGM Notice;
4. Special Resolution;
5. MGT-14 Filing;
6. PAS-4 Offer Letter;
7. Receipt of Subscription Money;
8. Board Meeting for Allotment;
9. PAS-3 Filing;
10. Issue of Share Certificates.

Share issued below the value of Registered valuer

The shares shall not be issued below the amount as determined by the Registered Valuer. If is allotted below the valuation it amounts violation.

Netanalytiks Technologies Limited is a private Limited Company. The Board of the Directors of the said company has decided to raise funds by way of preferential allotment. The company, as per the requirements of law, appointed a Registered Valuer, registered with Insolvency and Bankruptcy Board of India. The Valuer valued the shares of the company at Rs.334.59 for each share, the face value of which is Rs.10/-.

The company, in its board meeting and in the extraordinary general meeting held on 15.03.2022 had approved the preferential allotment of 16,766 shares at price of Rs. 334 per share, assuming the price arrived at by the Registered Valuer could be rounded off. The company allotted 16,766 equity shares at a price of Rs. 334/- each to the identified persons. The company also filed the return of allotment in the prescribed manner thereafter.

Later, the company noticed that it has issued preferential shares at Rs.334/- which is less than the value of the Registered valuer @ Rs.334.59 which is in violation of the provisions of the Companies Act, 2013 and the company wanted to rectify the same. the company rectified the default by recovering remaining Rs. 0.59 per share along with interest at rate of 12%. The receipt of this differential amount was acknowledged by the Board of Directors on 17.02.2025.

However, the company has filed a suo-motu adjudication application admitting violation of provision of section 62(1)(c) of the Companies Act, 2013 read with provisions of Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014 (‘Rules’ for short) before the Registrar of Companies, Karnataka.

The RoC issued a show cause notice, on the basis of the application filed by the company. The company did not file any reply to the notice and also attended the personal hearing offered to it. The Registrar of Companies, even after the rectification of mistake, after the allotment of shares, it amounts to violation of Section 62(1)(c) of the Companies Act and Rule 13. The Registrar of Companies imposed a penalty of Rs.10.000/- on the company and its two directors. Since the offence is a continuing one, the RoC imposed additional penalty Rs.2 lakhs on the company and Rs.50000/- on the directors of the Company.