Preferential Allocation of Shares

Preferential Allocation of Shares

Preferential allotment is a method that involves allocating shares to a certain company. It is also allocated to a group of people. 

Companies that are interested in it get the utmost priority when receiving it. 

It gets completed for a certain fee. It excludes the following:

  • shares or other securities get through a rights issue
  • public offering,
  • employee stock purchase plan
  • employee stock option plan
  • sweat equity share or bonus share issue
  • depository receipts issued in a nation outside of India
  • and foreign securities.

Preferential allocation describes the bulk issuance of freshly issued shares by an organization. 

It is provided to investors, companies, and other parties. Done at a predetermined price. 

A corporation would typically give those who want to buy a strategic position within the organization. 

This comprises those who want to increase their stake. It consists of Venture capitalists, shareholders, buyers, sellers, etc. Preferential allocation enables the company to acquire equity participation. 

Gained from those whom it considers to be significant shareholders. Any Company, whether a Private Limited Company or a Public Company, listed or unlisted and even Section 8 Companies, is eligible for preferential allocation.

The Preference Shares are ownership interests in the Company. It gives their owners the exclusive right to profit from the Company before other normal shareholders. 

The preferential shareholders will get the reimbursement of their capital if the company fails or shuts down. As a result, there is far less risk of loss.

When a business issues securities or shares to a certain group of investors, this is known as a preferred issue. 

The Preferential Issue is not a Right Issue or a Public Issue. The Preferential Issue of Shares is a unique means of raising money compared to other methods.

Advantages of Preferential Allocation 

  • Capital owned by preference stockholders is always secure. Preference investors will receive payment first if the company fails or declares bankruptcy. 
  • There are no trading costs. When the business is profitable, preferred shareholders are paid before common shareholders.
  • Shareholders have the right to request a dividend in the years that follow if a company does not pay one this year.
  • Raising money through a preference issue is more cost- and time-effective than a public issue.
  • More importantly, retail investors may only be willing to participate in the issuance if the firm in question currently needs funds. In this situation, preferential allotment of shares benefits the company.

Reasons for the Company's Preferential Allotment of Shares

  • Assist the company in obtaining equity participation.
  • To help the company raise funds.
  • Preferential Allotment increases capital flow in the economy.
  • Increase in the stake of venture capitalists, buyers, sellers, promoters, suppliers, etc.

Process for Preferential Allotment of Shares

  • Arrangement of the Company's Board Meeting Process for Preferential Share Allotment

Section 173 of the Companies Act of 2013 requires the Board Meeting notice to be distributed to all members seven days in advance. The notice of the meeting should contain the agenda for the board meeting. The notification should also include a draft of the board meeting's resolution.

  • At the Board Meeting, the pursuing agendas will be taken into consideration:
  • To grant the ability for any Director to convene an EGM.
  • The evaluation of the valuation report.
  • A specific number of allocate allottees be present.
  • A resolution that permits the issue of preferred shares.
  • The time, place, date, and day of the Extraordinary General Meeting (EGM) will all be fixed.
  • The template of the offer letter will be created.
  • Both the Explanatory Statement and the EGM notification will be finished.
  • It will be decided to approve the offer letter resolution.
  • Offering letter

Following the passage of the Special Resolution by the EGM members, the authorized Letter of Offer will be distributed. 

An application form that is serially numbered and specifically addressed to the person to whom the offer of Preferential Shares is made and included with the Letter of Offer. 

The offer letter must be typewritten or electronically filed. The Letter of Offer shall be issued not later than 30 days following the EGM.

  • Submitting Form MGT 14

To be sent to the Registrar of Companies is Form MGT-14 (RoC). The Form MGT-14 must be submitted within 30 days of the Company's passing the Special Resolution in the EGM. 

The following attachments should be created using the MGT-14 Form:

  • The EGM notice and a justification.
  • The minutes from the extraordinary general meeting are accessible here.
  • The exact certified copy of the Special Resolution adopted at the EGM by the Company.
  • Different Bank Account

The opening of a separate bank account is advised for the reasons listed below:

  • The person who is subscribing to the securities should use their bank account to pay for subscriptions.
  • The Company should monitor the bank account that receives payments for subscriptions to securities.
  • Submitting a form to the ROC

The Form will be delivered to the Registrar of Companies after the Letter of Offer has been distributed. 

Within 30 days of the distribution of the Letter of Offer, the form must be turned in.

  • Form PAS 3 submission

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

  • The entire list of allottees.
  • The explanatory statement was passed along with the actual certified copy of the Special Resolution.
  • A genuine certified copy of the Share Allotment Resolution of the Board of Directors.
  • The original contract copies.
  • Certificate of Participation

The shareholders will receive their Share Certificates within two months of the date of share allotment. 

Local laws must pay stamp duty. The Members' Register should be updated following the distribution of share certificates to shareholders.

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CONCLUSION

This article attempts to cover provisions and procedures applicable to companies, particularly unlisted companies (because listed companies must follow additional procedures by SEBI guidelines), when issuing securities through preferential allotment.

The process of allocating preferential shares to a specific group of investors is known as the issue of preferential shares. 

Preferential Share Allotment differs from other approaches in that the entire allocation is provided to a predefined group of people at a predetermined price. 

The capital of the company is raised through a preferential share issue. The process of issuing preferential shares takes time and effort.

I hope this information is useful to you in your professional endeavours. If you have any questions or need more information, don't hesitate to get in touch with us at https://especia.co.in/

FAQ’S

Q1. What do you mean by Preferential Allotment?

Ans. Preferential allotment is a method that involves allocating shares to a certain company or group of persons. Companies that are interested in it are given priority when receiving it.

Q2. Are Preferential shares of allocation good?

Ans. If the company can secure equity participation, it will bring enormous capital into the company. These preferential shareholders will become assets of the company in the long run.

Q3. What is the main advantage of Preferential allocation?

Ans. There are no trading costs. When the business is profitable, preferred shareholders are paid before common shareholders.

Q4. Who is eligible for Preferential shares?

Ans. Anyone is eligible. If authorized by Special Resolution, including those allotted shares under right issue or ESOP, it is eligible to receive securities under preferential allotment.

If you are looking for any Employee stock option plan ESOP services or consultants in Noida, Delhi, Gurgaon or anywhere in India, write to us at accounts@especia.co.in. Or Call On :(+91)-9711021268 +91-9310165114

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