All about Preferential Issue of Shares
1. Introduction
As per the Company Act 2013, the companies in India can raise funds through different methods including preferential allotment, right issue, IPOs, employee stock option plan (ESOP), and sweat equity shares. Among all these methods preferential allotment is most suitable fundraising option for unlisted companies when existing shareholders are not intended to infuse more capital in the company.
Preferential Issue as the name suggests, is raising funds from a select group of persons including individuals, venture capitalists, companies, or any other person (who may or may not be the existing shareholders) and not exceeding 200 persons in aggregate in a financial year.
2. Key points to be considered for preferential issue of shares
How to determine the price at which shares are to be issued?
The price of shares to be issued by way of preferential allotment shall be determined by a registered valuer in accordance with the provisions contained in the Companies Act, 2013. In addition, where any of the proposed allottee is a person resident outside India, then the following pricing guidelines as provided in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 shall apply:
- In case of listed company, price worked out in accordance with relevant SEBI Guidelines;
- In case of unlisted company, valuation done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant
Can shares be offered to existing shareholders under preferential allotment?
Although there is no restriction on offering shares to the existing shareholders under preferential allotment but it is generally advisable that in case the company wishes to issue shares to existing shareholders, then it shall opt for rights issue instead of preferential allotment as the compliance in case of rights issue is comparatively less.
Do we need to obtain shareholders’ consent for preferential issue?
In case of preferential issue, shares are generally offered to persons other the existing shareholders which leads to dilution of voting rights of the existing shareholders. Companies Act, 2013, thus, prescribes for obtaining shareholders’ consent by way of special resolution for preferential allotment of shares.
3. Procedure for preferential issue of shares
Section 62 read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 and Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes the procedures and provisions applicable on preferential allotment of shares.
1. Introduction
As per the Company Act 2013, the companies in India can raise funds through different methods including preferential allotment, right issue, IPOs, employee stock option plan (ESOP), and sweat equity shares. Among all these methods preferential allotment is most suitable fundraising option for unlisted companies when existing shareholders are not intended to infuse more capital in the company.
Preferential Issue as the name suggests, is raising funds from a select group of persons including individuals, venture capitalists, companies, or any other person (who may or may not be the existing shareholders) and not exceeding 200 persons in aggregate in a financial year.
2. Key points to be considered for preferential issue of shares
How to determine the price at which shares are to be issued?
The price of shares to be issued by way of preferential allotment shall be determined by a registered valuer in accordance with the provisions contained in the Companies Act, 2013. In addition, where any of the proposed allottee is a person resident outside India, then the following pricing guidelines as provided in Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017 shall apply:
- In case of listed company, price worked out in accordance with relevant SEBI Guidelines;
- In case of unlisted company, valuation done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant
Can shares be offered to existing shareholders under preferential allotment?
Although there is no restriction on offering shares to the existing shareholders under preferential allotment but it is generally advisable that in case the company wishes to issue shares to existing shareholders, then it shall opt for rights issue instead of preferential allotment as the compliance in case of rights issue is comparatively less.
Do we need to obtain shareholders’ consent for preferential issue?
In case of preferential issue, shares are generally offered to persons other the existing shareholders which leads to dilution of voting rights of the existing shareholders. Companies Act, 2013, thus, prescribes for obtaining shareholders’ consent by way of special resolution for preferential allotment of shares.
3. Procedure for preferential issue of shares
Section 62 read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 and Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes the procedures and provisions applicable on preferential allotment of shares.
- Convening a Board Meeting: The following matters shall be transacted at the Board Meeting:
- Consideration of Valuation Report
- Approval for issue of shares on preferential allotment basis [For draft Resolution -Refer Annexure 1]
- Finalization of list of proposed allottees and the offer period
- Fixation of day, date, time and venue of General Meeting for seeking approval of Members for the proposed issue of shares
- Approval of draft Offer cum Application Letter
- Approval for opening of bank account
