Issuing shares is at the heart of company law, which allows companies to garner finance from investors. Shares are ownership interests in a company, and their issuance could be done in several ways depending on different legal principles in different jurisdictions, different organisational structures, and different capital raising needs of the firm. The main streams through which shares are commonly issued are public issues, private placements, rights issues, bonus issues and preferential allotments.
A public offer of shares is made available to the public through an initial public offer (IPO) and/or further public offer (FPO), with private placement being its polar opposite, where shares are sold through private offers to a small number of investors like financial institutions or wealthy individuals. With rights issues, existing shareholders are given the opportunity to purchase shares at cheaper rates, while bonus shares allow the existing shareholders to make use of the company’s surplus by being given shares free of cost. Shares are allotted under preferential allotment to select investors at a fixed rate.
All of these methods must comply with the relevant regulations for the sake of transparency and the protection of investor interests.
What is Private Placement?
In placing a private company according to section 42 of Companies Act, 2013 and Companies (Prospectus and Allotment of Securities) Rules, 2014, the company puts shares or securities for a few selected investors rather than to the general public.
A letter of offers regarding private placement has to be issued (PAS-4) in respect of the securities being offered to certain classes of persons such as institutional investors, venture capitalists, or high-net-worth individuals. The company, however, cannot issue shares to more than 200 persons in a financial year, unless the share is a qualified institutional buyer (QIB) or is offered through an employee stock option scheme.
The main requisites for private placements are:
- Shareholder Consent: A special resolution has to be sanctioned by a general meeting.
- The firm has to release an offer letter (PAS-4) and file PAS-3 with the Registrar of Companies (ROC) within 15 days from the date of allotment.
- Subscription via Channel of Banking: Investors have to make payments in the form of bank transfers since cash payments cannot be accepted.
- Minimum Investment and Lock-in: There could be a required minimum investment value and lock-in of the securities.
Private placement is an effective mechanism for corporations to raise funds with the guarantee that there is compliance with the regulations and avoiding the intricacies of public offers.
What is Preferential Allotment?
A preferential allotment is allocating shares or other securities by a company to a specific class of investors at a fixed price. It is governed by the Companies Act, 2013: Sections 62(1)(c) and 42, as well as the Companies (Share Capital and Debentures) Rules, 2014. Preferential allotment is considered targeted compared to a public offering and allows companies to raise funds more efficiently and in a better-controlled way without diluting control.
Some key features of preferential allotment are:
- Eligible Investors: The shares may be allotted to the promoters, existing shareholders, institutional investors, and other defined parties.
- Requirement of Approval: Approval of shareholders by a special resolution at a general meeting must be sought by the company.
- Pricing Guidelines: The securities would be priced according to the SEBI valuation norms for listed companies or in consonance with a report from a registered valuer for unlisted companies.
- Mode of Payment: Payment must be made by account payee cheques/demand drafts or banking channels. Cash would not be accepted.
- Lock-in Period: Securities so issued under preferential allotment would have a lock-in period mandatorily applied, depending on whether the company is listed or unlisted.
- Compliance: The company shall file Form PAS-3 with the Registrar of Companies (ROC) within 15 days after the allotment.
Preferential allotment is a rather quick and tactical method firms usually prefer in raising capital, thus making it a favorite means among those seeking to approach primary investors or promoters without losing control.
Private Placement Vs. Preferential Allotment
The Private Placement and Preferential Allotment of Shares for a Private Company under the Companies Act of 2013 are available methods of raising capital. Though both ways involve offering securities to a limited number of investors instead of the general public, they differ from each other in their objectives, processes, and regulatory environments. Both methods are good for companies to raise funds while still controlling the selection of investors. Private placements are basically for a large range of securities proposed for institutional or selected investors, while preferential allotment is primarily meant to issue shares to promoters or strategic investors at a certain price. There is a lot more flexibility in private placement, while preferential allotment usually has tighter pricing and lock-in conditions that apply to publicly listed companies.
Organisations have to think seriously about these methods according to capital requirements, investor representations, and regulatory mechanisms for access to health in compliance and finances.
1. Definitions and Explanation
- Private Placement means that for the limited number of investors, not exceeding 200, from among any of the following, except Qualified Institutional Buyers (as defined by SEBI) and Employee Stock Option Plans (ESOPs), securities such as shares or debentures are issued under Section 42 of the Companies Act, 2013.
- The Companies Act, 2013, in Section 62(1)(c), defines preferential allotment as the issuance of shares or convertible instruments to identified classes of persons at a fixed price, usually meant for shares distribution to promoters, strategic investors, and financial institutions.
2. Objective
- Private Placement is a method of raising capital from institutional investors, venture capitalists, or private persons without going in for a public issue.
- Preferential allotment is utilised to increase promoter control, entice strategic investors, or introduce capital into a firm while ensuring control.
3. Investor Limitations
- Private placements are limited to 200 persons in a financial year, other than Qualified Institutional Buyers (QIBs) and Employee Stock Ownership Plans (ESOPs).
- Preferential Allotment: It is available to chosen persons, promoters, or institutions, without any limit on the number of investors.
4. Approval Process
- Private placement requires a special resolution of a general meeting and filing of PAS-4 (Offer Letter) and PAS-3 (Return of Allotment) with the Registrar of Companies (ROC).
- In the case of publicly listed companies, preferential allotment involves a special resolution and adherence to SEBI pricing guidelines. Unlisted companies need to get a valuation report from a certified valuer.
5. Security Pricing
- Pricing for Private Placement is decided by mutual consent between the investors and the company.
- In case of preferential allotment, the pricing is ruled by SEBI guidelines in case of listed companies or decided by a registered valuer for unlisted companies.
6. Mode of Payment
- For private placement, the payment is to be made by cheque, demand draft, or electronic funds transfer. Cash is not acceptable.
- For preferential allotment, the payment has to be done by banking channels, as cash payment is disallowed.
7. Lock-in Period
- The securities issued through private placement are not subject to lock-in under the Companies Act.
- Securities allotted on a preferential basis have a lock-in period: For listed companies, SEBI rules mandate a lock-in period of one year for non-promoters and three years for promoters for allotments of more than 20% of the post-issue capital. Unlisted companies can place restrictions according to their company policies, though not mandated by the Companies Act.
8. Regulatory and Compliance Submissions
- Private Placement requires giving a Private Placement Offer Letter (PAS-4) and filing PAS-3 with the Registrar of Companies (ROC) within 15 days from allotment.
- For preferential allotment, Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, with a valuation report and PAS-3 filing with the ROC, is required.
9. SEBI and ROC Guidelines
In case of private placement, only ROC requirements are to be followed by unlisted companies. SEBI rules are to be followed by all listed entities.
SEBI’s ICDR Regulations are to be complied with by listed companies for preferential allotment, pricing, transparency, and lock-in period.
10. Advantages and Disadvantages
Private Placement
- Advantages: The procedure is usually faster and simpler than public issues. It is especially apt for startups and individual companies that require immediate investment. There is less regulatory pressure compared to initial public issues (IPOs).
- Disadvantages – The size of the investors is limited, with a maximum of 200 participants. Companies can be forced to issue securities at a discount to attract prospective investors.
Preferential AllotmentÂ
- Benefits: This route enables companies to increase promoter shareholding and avoid the threat of hostile takeovers. It draws in strategic investors who bring with them expertise that is applicable. It offers a mechanism to raise finances without drastically diluting control.
- Drawbacks: There are strict pricing and compliance rules that have to be followed. The interests of current shareholders can be diluted.
Conclusion
Private placement and preferential allotment are two efficient ways for firms to raise capital without the complexities involved in public issues. Private placement is a more general mechanism that allows companies to issue securities to a small set of investors (limited to 200 per year), allowing for an easier process of money raising. By contrast, preferential allotment is primarily used to issue shares to promoters, existing stakeholders, or strategic investors at a fixed price, coupled with a lock-in period for the sake of financial stability.
Though private placement has greater freedom in choosing the investors, preferential allotment is subject to stricter pricing and regulatory guidelines, especially in the case of listed companies regulated under SEBI regulations. Both approaches require shareholder approval and ROC disclosure compliance.
In order to maximise the capital acquisition with control and transparency maintained, all the corporate organisations need to carefully consider their capital requirements, regulatory obligations, and long term ownership structure and accordingly comply with all applicable and relevant rules and regulations.
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