Preferential Issue vs. Private Placement under the Companies Act, 2013

Raising capital is crucial for companies to expand their business and achieve growth objectives. The Companies Act, 2013, provides a well-defined legal framework for Indian companies to raise funds through various means. Among the different methods available, two of the most popular are the Preferential Issue and Private Placement. While both methods involve raising funds from a select group of investors, they differ significantly in their process, regulatory requirements, and objectives. This article will provide an in-depth comparison of these two mechanisms to help understand their distinct features and implications.

1. Preferential Issue

A Preferential Issue refers to the allotment of shares or other securities to a specific group of investors, which may include promoters, directors, or external entities, on a preferential basis. The primary advantage of this method is that it allows a company to raise funds without making a public offer. This method is particularly suited for bringing in strategic investors or converting existing debt into equity.

Key Provisions

• - Governing Section: Section 62(1)(c) of the Companies Act, 2013, read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.
• - Resolution Requirement: A special resolution must be passed in the general meeting of the shareholders.
• - Valuation: The price of shares or other securities offered must be determined by a registered valuer or a SEBI-registered merchant banker to ensure fairness.
• - Disclosures: Detailed disclosures must be made to shareholders, including the identity of the allottees, purpose of the allotment, and the price at which shares are issued.
• - Lock-In Period: Securities issued under a preferential issue are typically subject to a lock-in period ranging from 1 to 3 years, depending on the type and category of the investors.
• - SEBI Regulations: For listed companies, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, will apply, adding additional layers of compliance.
• - Utilization of Funds: The company must ensure that the funds are used only for the specific purpose disclosed at the time of the issue.

Process for Preferential Issue

1. Board Meeting: Call a Board Meeting to approve the proposal for the preferential issue.
2. Shareholders’ Approval: Obtain shareholders' approval through a special resolution in a General Meeting.
3. Determine Price and Allotment: Based on a valuation report, determine the price and allotment terms.
4. Form Filing: File necessary forms like PAS-3 with the Registrar of Companies (RoC) within 30 days of the allotment of shares.
5. Compliance with SEBI Regulations (for listed companies): Adhere to additional SEBI requirements.

2. Private Placement

A Private Placement refers to any offer or invitation to subscribe to securities to a select group of persons, not exceeding 200 in a financial year, excluding Qualified Institutional Buyers (QIBs) and employees offered securities under the Employee Stock Option Plan (ESOP). This method is generally used when a company wants to raise funds from specific investors without resorting to a public issue.

Key Provisions

• - Governing Section: Section 42 of the Companies Act, 2013, read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
• - Resolution Requirement: A special resolution is required for each offer or invitation of securities.
• - Offer Letter: The company must issue a private placement offer letter (PAS-4) to the identified investors.
• - Number of Persons: The offer can be made to a maximum of 200 persons in a financial year, excluding QIBs and employees under ESOP.
• - Utilization of Funds: The funds raised through private placement must be used only for the purpose disclosed in the offer letter.
• - Separate Bank Account: The application money received must be kept in a separate bank account until the securities are allotted.
• - Return of Allotment: After the allotment, the company must file a return of allotment with the RoC within 15 days of allotment using Form PAS-3.

Process for Private Placement

1. Board Meeting: Call a Board Meeting to approve the issue and draft the private placement offer letter.
2. Issue Offer Letter: Issue the private placement offer letter (PAS-4) to identified investors.
3. Collection of Application Money: Collect the application money through a separate bank account dedicated to this purpose.
4. Allotment of Securities: Complete the allotment of securities within 60 days of receiving the application money.
5. Form Filing: File the return of allotment (PAS-3) with the RoC within 15 days of allotment.

3. Key Differences Between Preferential Issue and Private Placement

The following table highlights the key distinctions between a Preferential Issue and a Private Placement under the Companies Act, 2013:

Conclusion

Both Preferential Issues and Private Placements are effective methods for companies to raise capital under the Companies Act, 2013, depending on their specific needs and objectives. While a preferential issue is typically used for strategic purposes such as infusing funds from promoters or converting debt into equity, a private placement is a more flexible route for raising capital from external investors. Understanding the nuances of each method, including their compliance requirements and restrictions, is crucial to choosing the right path for capital infusion.

Companies must ensure strict adherence to the provisions of the Companies Act, 2013, and other applicable regulations to avoid penalties and legal complications. Proper compliance and timely disclosures will contribute to smooth fundraising and strengthen investor confidence.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.