Guidelines for the Issuance of Shares on Preferential Basis in Accordance with the Companies Act

In compliance with the Companies Amendment Act 2017, companies have several avenues to raise capital, with Private Placement/ Preferential Allotment being one of the prominent methods. This article delineates the procedural framework under Section 62(1)(a) for companies seeking to increase their subscribed capital through the issuance of shares to existing equity holders. The preferential allotment of paid-up share capital necessitates the dissemination of offer letters to potential shareholders prior to issuance.

Exploring Preferential Allotment of Equity Shares

Expansion endeavors of existing companies in India can be financed through various means, including the issuance of rights shares, bonus shares, initial public offerings (IPOs), and preferential allotments. Preferential allotment, specifically, involves offering shares to select individuals at predetermined prices, thereby enabling the company to secure equity participation from strategically identified stakeholders.

Eligible Companies and Rationale for Preferential Allotment

Entities eligible for preferential allotment include private limited companies, public limited companies, listed and unlisted companies, as well as Section 8 companies. This method proves beneficial for facilitating shareholder access, raising funds, enhancing capital flow, and increasing the company’s share capital. Moreover, it provides opportunities for stakeholders like promoters, venture capitalists, financial institutions, buyers, suppliers, and others to augment their stake in the company.

Legal Provisions and Benefits

The issuance of shares on a preferential basis is governed by various legal provisions, including Sections 62 and 42 of the Companies Act 2013, alongside specific regulations such as SEBI (ICDR) Regulations 2018. The advantages associated with preferential allotment encompass cost-efficiency, preference to shareholders during liquidation, right to claim unpaid dividends, and enhanced security compared to equity shares, particularly during bankruptcy proceedings.

Key Considerations and Procedural Requirements

Companies opting for preferential allotment must adhere to several conditions, including authorization within the Articles of Association, issuance of offer letters, shareholder approval, and establishment of a separate bank account for transactional purposes. Moreover, pricing of shares should be determined based on valuations conducted by registered valuers, and compliance with regulatory filings such as Form MGT-14 and Form PAS-3 is imperative.

Procedure for Issuance

The issuance process entails convening board meetings to pass resolutions, calling extraordinary general meetings (EGMs) for shareholder approval, circulating offer letters post-EGM, filing requisite forms with the Registrar of Companies (RoC), and issuing share certificates to allottees within stipulated timeframes. Adherence to statutory timelines and meticulous documentation ensures the seamless execution of the preferential allotment process.

Conclusion

In essence, preferential allotment serves as a strategic mechanism for companies to allocate shares to identified stakeholders, fostering equity participation and capital infusion. While navigating through the intricacies of this process demands substantial effort and compliance, the potential benefits in terms of stakeholder engagement and financial augmentation make it a viable avenue for corporate growth and expansion.