“What is Preferential Allotment and What is Preferential Issue of Shares?” And Process for Preferential Allotment of Shares

Introduction

Existing businesses in India have three options for expanding their operations and raising money. Existing shareholders may receive right or bonus shares in proportion to the number of shares they own, as well as an initial public offering and preferential allotment. In this article information on “What is Preferential Allotment?”, “What is Preferential issue of Shares?” And other information on Preferential Allotment of Shares According to Company Law is discussed.

What is Preferential Allotment?

Preferential allocation refers to a company’s bulk allotment of newly issued shares to individuals, venture capitalists, and businesses at a pre-determined price. Typically, a corporation will provide people who wish to buy a strategic position in the company with preferential treatment.

This includes existing shareholders who desire to grow their position in the company, such as venture capitalists, financial institutions, promoters, suppliers, or buyers. As a result, preferential allotment enables the company to obtain equity participation from individuals who it regards to be valuable shareholders. Preferential allotment is available to any Firm, whether Private Limited Company or Public Company, listed or unlisted, and even section 8 Companies.

What is Preferential Issue of Shares?

The Preference Shares are the Company’s shares held by individuals who have the sole right to enjoy the Company’s profits before the company’s other regular shareholders. Furthermore, the Preference Shareholders have the right to have their capital reimbursed if the Company has to close down or fails in the future. As a result, the danger of loss is greatly reduced.

A preferred issue is when a company issues shares or securities to a chosen set of investors. It is neither a Right Issue or a Public Issue that the Preferential Issue is. In comparison to other fund-raising approaches, the Preferential Issue of Shares is a one-of-a-kind method. The whole Allotment of Shares is made to a pre-identified person, who may or may not be existing shareholders of the Company, in a Preferential Issue of Shares.

Forms that are filed for Preferential Allotment of Shares

Reasons for Preferential Allotment of Shares by Company 

• Help in the company in securing equity participation.

• To assist the company in raising funds.

• Preferential Allotment increases the flow of capital in the economy.

• To provide an option for venture capitalists,  promoters,  financial institutions, suppliers, or buyers to increase their stake in the company.

Advantages of Preferential Allotment of Shares

• Preference stockholders’ capital is always safe. If the company fails or goes bankrupt, than preference stockholders will be compensated first among all other shareholders.

• There are no trading fees, and preferential shareholders get paid first when the company makes a profit, followed by regular shareholders.

• If a corporation does not pay a dividend this year, shareholders have the right to demand it in subsequent years.

• Raising money through a preference issue saves money and time compared to a public issue.

• More importantly, if the company in question is not doing well at the time but requires capital, retail investors may be hesitant to take part in the issue, at that time Preferential Allotment of shares proves advantageous for the company.

Process for Preferential Allotment of Shares

• Arrange Company’s Board Meeting

The notice for the Board Meeting shall be sent to all members seven days before the meeting, as required by Section 173 of the Companies Act, 2013. The agenda for the Board Meeting should be included in the notification of the meeting. The notice should also include a draught resolution from the Board Meeting.

The following agendas will be considered at the Board Meeting:

1. To provide any Director the authority to call an EGM.

2. The valuation report’s evaluation.

3. There will be a set number of allotees.

4. Resolution authorising the issuance of preferential shares.

5. The Extraordinary General Meeting (EGM) will be scheduled for a specific time, date, location, and day.

6. The Offer Letter Draft will be prepared.

7. The EGM notification, as well as the Explanatory Statement, will be completed.

8. The approval of the Offer Letter Resolution will be passed.

• Letter of Offer

The authorised Letter of Offer will be circulated after the members of the EGM pass the Special Resolution. The Letter of Offer is accompanied by an application form that is serially numbered and addressed particularly to the person to whom the offer of Preferential Shares is made. The offer letter should be written or submitted electronically. Within 30 days of the EGM, the Letter of Offer should be issued.

• Filing of Form MGT 14

The Registrar of Companies should receive Form MGT-14 (RoC). Within 30 days of the Company’s passing of the Special Resolution in EGM, the Form MGT-14 must be filed. The MGT-14 Form should be used to make the following attachments:

1. The EGM notice, along with an explanation.

2. Extraordinary General Meeting minutes are available here.

3. The authentic certified copy of the Company’s Special Resolution passed at the EGM.

• Separate Bank Account

For the following reasons, a separate bank account should be opened:

1. Payment for securities subscriptions should be done from the individual who is subscribing to the securities’ bank account.

2. The Company should keep track of the bank account where payments for securities subscriptions are made.

• Filing of Form with ROC

Following the distribution of the Letter of Offer, the Registrar of Companies will receive the Form. The form must be submitted within 30 days of the Letter of Offer’s distribution.

• Filing of Form PAS 3

Form PAS-3 will be filed with the Registrar of Companies after the second Board Meeting (RoC). Within 15 days after the second Board Meeting, the Form PAS-3 should be approved. The following attachments should be attached to the PAS-3 form:

1. The complete list of all allottees.

2. The explanatory statement was passed along with the actual certified copy of the Special Resolution.

3. A real certified copy of the Board of Directors’ Share Allotment Resolution.

4. The contract’s original copy.

• Share Certificate

Within two months of the date of the allotment of shares, the shareholders will get their 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.

Conclusion

The process of allotting shares and securities on a preferential basis to a specified group of investors is known as the issue of preferential shares. Preferential Allotment of Shares differs from other approaches in that the full allocation is provided to predefined people at a predetermined price. The Company’s capital is raised through a preferential issue of shares. The procedure of issuing shares on a preferential basis takes time and effort.