Raising of Capital through Preferential Allotment by Listed Entity By CS Sana Sultan

Dear Professional Colleagues,

A Company can raise funds via three means: (1) Deposits (2) Loans (3) Capital. Under Companies Amendment Act 2017, A Company can raise funds or Capital in three ways: (1) Private Placement/ Preferential Allotment (2) Right Issue (3) Bonus Issue. Let’s discuss rising of fund or Capital through preferential allotment where a Company has to Comply with the conditions of the Private Placement.
 
Introduction:

If we focus on the term Preferential allotment the expression “PREFERENTIAL ALLOTMENT” means an issue of shares or other securities, by a Company to any select person or group of persons on preferential basis and does not include shares or other securities offered through a public issue, right issue, employee stock option scheme, employee stock purchase scheme or an sweet equity issue or bonus issue or depository receipts issued in a country outside India or foreign securities;
 
Applicable Sections of Companies Amendment Act, 2017 and SEBI ICDR Regulations 2009:

  • Preferential Allotment means an issue of shares by a body corporate under Section 62 (1) (c) of (Share Capital and Debenture) of the Companies Amendment Act, 2017.
  • SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
 
Conditions while making the preferential issue for a Company:

While making the Preferential issue a Company has to comply with the following conditions before issue:
  1. Approval from shareholders shall be taken, either though AGM or EGM or Postal Ballot.
  2. Ensure Issue to be authorized by Article of Association.
  3. Prepare a list of persons (not exceeding 200 in a financial year for each kind of security )to whom offer may be made. Get the Application letter and consent letter prepared and obtain the same from the proposed allottees before the board meeting to consider the Preferential issue.
  4. Separate Bank account in a Scheduled bank to be opened through which subscriber can subscribe its share, and money received in that account to be utilized for the allotment or return only.
  5. Value of offer/invitation per person not less than the 20,000/- of the face value of the Security.
  6. Only fully paid up securities to be issued.
For Listed Company existing proposed allottees shall have shares in dematerialised form.

  1. Shall not make preferential issue unless it:
  2. Is in compliance with the conditions of continuous listing
  3. Has obtained PAN of all the proposed allottees.
  4. Issuer Company cannot make the issue to any person who has sold any equity shares during the six months preceding the relevant date. (Explained below under the heading of the person ineligible for the issue)
(Relevant Date means a date 30 days prior to the date on which the general meeting of the Company is held)
 
Person Ineligible for the preferential issue:

  • The person belonging to promoter or promoter group who has sold his equity shares six months preceding the relevant date:
  • The person belonging to promoter or promoter group who have earlier applied for the warrant but failed to exercise it.
Lock-in requirement:

As per SEBI guidelines if shares are issued on preferential basis by listed entity then these shares to be locked in for certain period of time.
  • The specified securities allotted on preferential basis to promoter or promoter group shall be the lock-in for the period of 3 years from the date of trading approval.
  • Provided that not more than 20% of the total capital* of the issuer shall be locked in for three years from the date of trading approval.
  • Provided further that equity shares allotted in excess of 20% shall be locked in for 1 year from the date of trading approval.
  • Other than promoter and promoter group- lock-in for the period of 1 year from the date of trading approval.
  • The entire pre- preferential allotment shareholding of the allottee, if any, shall be locked in from the relevant date up to a period of six months from the date of trading approval.
*Total capital of the issuer means- equity share capital issued by way of the public issue or right issue including equity shares issued pursuant to the conversion of specified securities which are convertible; and specified securities issued on a preferential basis to promoter or promoter group.
 
Pricing for Preferential Issue& Valuation Report:

The price of shares or other securities to be issued on preferential basis shall not be less than the price determined on the basis of valuation report of a registered valuer or Independent Valuer having 10 years of experience.

For Listed Company, has to comply the following regulation as per SEBI Regulations.

a) Where the equity shares of the Company has been listed on a stock exchange for a period of equal to more than 26 weeks on the relevant date at a price not less than higher of the following:-

  • The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during
                                           26 weeks preceding the relevant date
                                                                   OR
                                            2 weeks preceding the relevant date

b) where the equity shares of the company have been listed on a stock exchange for a period of fewer than 26 weeks on the relevant date at a price not less than higher of the following:-
  • The price at which shares were issued by the company in its IPO or value arrived in compromise or arrangement.
  • The average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during 2 weeks preceding the relevant date
  • The average of the weekly high and low of the closing prices of the relevant shares quoted on the stock exchange during the period shares have been listed preceding the relevant date
Offer Letter:

The Company shall prepare the Offer letter in form PAS-4 and maintain the complete record of preferential allotment in PAS-5.
 
PROCESS FLOW:

The procedure for issue of shares or other securities on Preferential Basis is a long process and can be divided into three steps: (1) Board Meeting before issuance (2) General Meeting for issuance (3) Board Meeting for allotment.
 
BOARD MEETING:

Before Board Meeting the following points need to be considered for Preferential Issue

  • Ensure that no allotment against any previous offer/invitation of any kind of security is pending.
  • Intimate to all the stock exchanges at least 7 days in advance of the board meeting to consider Preferential Issue (if issuer Company is Listed Entity). Dispatch notices and agenda to all the directors in writing as well.
  • In case proposed allottees hold any shares in the company prior to preferential issue the same should be held by them in Demat form so in case of any physical holders get the shares dematerialized and to be the lock-in as per SEBI guidelines.
  • Hold the Board meeting and the get the Preferential Issue and increase in authorised capital if required approved by the Board.
 
Hold Board Meeting:

  • Check the quorum of Board Meeting.
  • Identify the person to whom you will issue shares.
  • Prepare the list of such persons.
  • Prepare Draft offer letter under PAS-4.
  • Pass Board Resolution for approval of offer letter.
  • Issue Notice of General Meeting. As per SS-2.
  • General Meeting Notice should contain Explanatory Statement for Preferential Issue as per Rule 13 of Companies Rule (Share capital & Debentures) Rules, 2014.
 
Post Board Meeting:

  • Within thirty minutes of the board meeting intimate the stock exchange about the outcome of the board meeting as regards to the decision of the board to issue shares on preferential basis, notice of EGM/AGM/Postal Ballot and increase in authorised share capital if required.
  • copies of the notice of EGM/AGM should be sent to the stock exchange, NSDL, CDSL, R& T Agents to all the shareholders as well also send the same to the auditors, Practicing Company Secretary, and directors.
  • However, In principle approval will be obtained by the company only after EGM/AGM is held as we have to submit EGM/AGM resolution for obtaining Prior Preferential Issue In principle approval.
 
General Meeting:

  • Book the meeting hall for EGM/AGM.Advertise the notice of AGM/EGM in the newspapers.
  • Check the quorum Meeting as per section 103.
  • Present Offer Letter in PAS-4 before the members of the meeting.
  • Pass Special Resolution for Preferential allotment of Shares.
 
After General Meeting and receiving Money hold Board Meeting for allotment of shares:

  • Issue Notice of Board Meeting to all the directors of the company at least 7 days before the date of Board Meeting.
  • Attach Agenda of Board Meeting along with Notice.
  • Hold the Board Meeting (Intimation of SE about holding of Board Meeting before 7 days of Board Meeting).
  • Proceeding of the Board Meeting to be sent to Stock Exchange as per LODR Regulations, 2015 for allotment of Shares to proposed allottees.
  • Share/ Share Certificates to be issued within 2 months of allotment.
  • Entry in Register of Members.
 
ROC Form:

  • MGT-14-Within 30 days of passing the Special resolution at the general meeting. (Attachment Special resolution for the issuance of equity shares on preferential basis)
  • GNL-2– Within 30 days of the offer letter. (Attachments PAS – 4 & PAS-5 - Issue an offer letter in form (If the shares are issued to existing members, then GNL-2 need not be sent).
  • PAS -3 -within 15 days of allotment (attachment List of Allottees and Board Resolution for allotment).
Notes (for Listed Entity only):

  • Apply for Post Preferential In principle Approval to Stock exchange(s) after Board Meeting of allotment of shares.
  • Co-ordinate with RTA for demat the shares and lock in of such shares as per SEBI norms.
 
Other Important Notes:

  • Money received shall not be utilized unless Return of allotment in e-form PAS-3 is filed with ROC.
  • As per Companies Amendment Act, 2017 Return of Allotment to be filed within 15 days instead of 30 days to synchronize with SEBI ICDR Regulations, 2009.
  • The requirement for filing of Private Placement offer Letter has been replaced by Private Placement Offer letter and application.
  • Every Company shall release any public advertisement or utilize any media to inform the public at large about such issue.
 


Author
CS Sana Sultan

 

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