ASSIGNMENT OF CORPORATE ACCOUNTING

Define preferential allotment of shares.

Write uses and abuses, including an
empirical study of a few recent
preferential allotments.
 MEANING OF PREFERENTIAL
ALLOTMENT OF SHARES

PREFERENTIAL ALLOTMENT OF SHARES REFERS TO THE PROCESS

THROUGH WHICH A COMPANY ISSUES NEW SHARES TO A
SELECTED GROUP OF INVESTORS, TYPICALLY EXISTING
SHAREHOLDERS OR STRATEGIC INVESTORS, AT A PREDETERMINED
PRICE.
USES OF PREFERENTIAL ALLOTMENT OF SHARES

 Cost-Effectiveness
This method is more cost-effective due to lower issuance costs. It avoids significant
expenses associated with public offerings, like underwriting fees, extensive marketing
campaigns, and various fees, Regulatory filing fees etc.
 Attracting Strategic Investors
Preferential allotment provides an opportunity to selectively bring in strategic investors,
such as venture capitalists, who can offer not just capital but also valuable industry
insights, management expertise, and business connections.
• Pricing Flexibility

Companies have a degree of flexibility in setting the issue price for shares,
within the confines of regulatory guidelines.

• Rapid Fundraising

Preferential allotment enables companies to raise funds more quickly than

public offerings. It bypasses the lengthy processes of IPOs, such as roadshows
and regulatory compliances,
DISADVANTAGES/ABUSES OF PREFERENTIAL ALLOTMENT

 Impact on Shareholder Value

If the allotment is done at a price lower than the market price, it can lead to a dilution
of the value for existing shareholders. This dilution might not be well-received and
could affect investor confidence.

 Limited Investor Base

Since the allotment is made to a selected group of investors, unlike an IPO or FPO
which is open to the public, the company might miss out on a broader investor base
and greater market exposure.
• Legal and Compliance Issues:

Preferential allotment can lead to legal and compliance issues if the terms and conditions of
the issuance are not properly followed.

• Limited Growth Potential:

Preferential allotment can limit the growth potential of companies by limiting the number of
shares that can be issued. This can limit the potential for raising capital and limit the growth
potential of the company.
STUDY OF A FEW RECENT PREFERENTIAL
ALLOTMENTS.

Food processing firm Megastar Foods Ltd plans to raise Rs. 42.38 crore through the issue of
preferential shares to re-pay debt and meet future requirements of funds. Megastar Foods has a wheat
processing plant in Punjab. Its turnover stood at Rs. 304.40 crore in the previous year. The company
would seek the approval of the shareholders at the extra ordinary general meeting. The proceeds of the
preferential issue will be utilised for prepayment of borrowings of the company, meeting future funding
requirements, working capital and other general corporate purposes of the company,. The equity shares
under this preferential issue would be made at an issue price of Rs. 326 per equity share.The company
intends to raise Rs 42.38 crore through this issue.
THANK YOU
Team members
 Ishmita kumari
 Harneet kaur
 Harpreet kaur
 Gursharan singh
 Hitesh kumar