Preferential Allotment Under the Companies Act, 2013 – Step By Step Procedure

Company is one of the most sought-after business models for growth and expansion. However, this growth and expansion often require capital infusion. Often companies resort to external funding either through debt from financial institutions or the public or through the issue of equity. When it comes to the issue of equity, following are some of the prominent methods that the companies have:

• Initial Public Offer: Initial Public Offer (IPO) is the process whereby a company issues its shares to the public at large first time through listing on a   recognized stock exchange.
• Further Public Offer: Further Public Offer (FPO) is the process of subsequent issue of shares to the public at large through recognized stock exchange.
• Preferential Allotment: Preferential allotment is the issue of equity shares to a select group of investors on a preferential basis.

While Initial Public Offer (IPO) or Further Public Offer (FPO) are the common ways for issuing capital, companies don’t always prefer a public offer. The long and expensive process as well as multiple regulatory approvals, compliances and filings are some of the significant reasons for the same. Alternatively, companies prefer raising capital from existing investors or a select group of investors. This is a prominent method and is known as a preferential allotment of securities. Section 62 of the Companies Act, 2013 primarily deals with the further issue of share capital including allotment on a preferential basis. Let’s understand what is preferential allotment and what are the compliances associated with the same. 

What is Preferential Allotment Under Companies Act, 2013?

As the name suggests, preferential allotment is issuing equity shares to the shareholders on a preferential basis. In legal terms, preferential allotment is the allotment of equity shares to a select group of investors on a preferential basis at a predetermined price. Companies can go for preferential allotment by passing a special resolution in the general meeting of the company. However, it does not include securities or shares issued through public issues, ESOPs, right issues, issue of sweat equity shares, bonus issues or issue of depository receipts.

Section 62(1)(c) of the Companies Act 2013 deals with the preferential allotment of securities. The following are the securities that can be issued on a preferential allotment basis:

•  Equity shares
•  Preference shares
•  Partly convertible debentures
•  Fully convertible debentures
•  Any other security that can be converted at a future date

Why Preferential Allotment?

Companies often resort to raising capital through preferential allotment due to the following reasons:

•  Lesser Compliances: The compliances involved in the case of preferential allotment are far lesser as compared to the initial public offer or further   public   offer of shares. It further helps avoid a lot of documentation hassle for the company.
•  Raising Funds: It meets the company’s objectives of raising funds from investors and raising its capital.
•  Increase Stake of Existing Shareholders: Preferential allotment is the most preferred method to increase the stake of the existing shareholders of the   companies. This can primarily include the promoter group, venture capitalists, financial institutions, angel investors or any other key shareholder.
•  Cost Effective: Preferential allotment is one of the most cost-effective methods of raising equity funding as compared to the other methods.
•  Multiple Modes of Raising Capital: It is not necessary to issue equity shares only. Companies can also prefer raising preference shares, partly   convertible debentures, fully convertible debentures or any other convertible security through preferential allotment.

In a Nutshell

The preferential allotment under Companies Act, 2013 is one of the prominent ways through which companies resort to further issue their equity shares. Companies resort to this method when it wants to raise a specific amount of capital without going through the long procedure of IPO or FPO. Preferential allotment allows companies to raise capital from a select group of investors. In case you need any assistance in relation to the preferential allotment under Companies Act, 2013, feel free to contact the ASC Group.

Also Read - Bonus Issue of Shares in India – A Complete Guide

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