UNDERSTANDING

PREFERENTIAL
ALLOTMENT
OF SECURITIES

WHAT IS PREFERENTIAL ALLOTMENT?

An issue by a company
of
Equity shares / Securities convertible into
equity/
FCDs/Warrants/PCDs/
Convertible Preference Shares
pursuant to a resolution u/s. 81(1A) of Act,
to any select group of persons
by way of private placement.

ADVANTAGE OF
PREFERENTIAL ALLOTMENT
Simple way to raise capital of the Company
No need to appoint Merchant Banker.
Economical way to raise capital.
Minimum Formalities.

GOVERNING LAW
The Companies Act, 1956.
Chapter XIII of SEBI (Disclosure and Investor
Protection) Guidelines, 2000.
Unlisted Public Companies (Preferential
Allotment)
Rules, 2003.
SEBI (SAST) Regulations, 1997.

THE COMPANIES ACT, 1956

Section 81(1A)
of the Companies Act,1956 provides
Special Resolution
OR
Ordinary resolution and approval of Central
Govt.
is required for giving the equity shares or security
convertible into equity shares at a later date to a
selected group of persons instead of existing
shareholders.

SEBI
(DISCLOSURE
AND
INVESTOR
PROTECTION)
GUIDELINES,
2000

DIP GUIDELINES PROVISIONS

Pricing

Currency of Shareholders Resolution

Lock-in Requirements
Restrictions

PRICING OF
PREFERENTIAL ISSUE
Security
Shares

Minimum Price
Higher of the average of weekly
high/low of closing prices during:
6 months prior to,
OR
2 weeks prior to
Relevant Date = 30 days prior to
the date of EGM/AGM where
resolution u/s 81(1A) is passed.

PRICING.. Contd
Security

Minimum Price

Shares
arising
out of
Warrant
/FCD/
PCD

Higher of the average of weekly

high/low of closing prices during:
6 months prior to, OR
2 weeks prior to
Relevant Date = 30 days prior to
the date of EGM/AGM where
resolution u/s 81(1A) is passed.
OR
as at Companys option-a date 30
days prior to date of exercise of
warrants/FCDs.

DIFFERENCE BETWEEN PRICING OF EQUITY

SHARES & WARRANTS
SHARES

WARRANTS/FCDs/PCDs

Relevant Date
30 days prior to the
date of EGM/AGM
where resolution
u/s 81(1A) is
passed

Relevant Date
30 days prior to the date
of EGM/AGM where
resolution u/s 81(1A) is
passed.
OR
as at Companys option-a
date 30 days prior to date
of exercise of
warrants/FCDs

Queriescontd

A Company decided to allot shares on

preferential basis to certain persons in Jan
2005. The relevant date was fixed on 28th
December.
In
the
meanwhile,
SEBI
notification came in & pursuant to that,
limit of 55% was imposed. However, in the
present case, the shareholding of the
person was crossing the limit of 55%
marginally. The question is - Whether
there is any violation of law?
Can SEBI provide for that the meeting
should be held again taking the new
relevant date, when the market is high?

LOCK IN REQUIREMENTS
SITUATIONPROMOTERS

LOCK-IN PERIOD

Allotment
to 3 years from the date of
promoters is to be allotment.
locked in.
Subject to maximum
of 20% of the total
capital
of
the
Company.

Lock-in requirements.. Contd

SITUATIONLOCK-IN PERIOD
PROMOTERS/ NON
PROMOTERS
1 year from the date of
Additional issue
to promoters or any allotment.
issue to any person

Lock-in requirements.. Contd

SITUATION
Shares acquired
conversion
warrants /FCDs.

LOCK-IN PERIOD
on Reduced by earlier
of lock-in period of
warrants /FCDs.

RESTRICTIONS
Proposed preferential issue allottees
who have sold any shares in the listed company
within 6 months prior to the allotment
then they are not eligible for the allotment

Restrictions.contd

A preferential issue cannot be made unless

the issue is in compliance with the
conditions for Continuous Listing, such as
Clause 40A of the Listing Agreement.

Restrictions.contd
Entire shareholding of the
proposed allottees
in the company is held by them in
DEMATERIALIZED FORM

TIME PERIOD

Shareholders Resolution must be implemented

within 15 days
except in case of pending regulatory approvals.

EXPLANATORY STATEMENT
REQUIREMENTS
Objects of the issue
Example:
a) To augment long term resources by infusing
fresh equity.
b) To raise funds for corporate actions viz., Capital
Expenditure, replacing high cost debt and general
corporate purposes.

Explanatory statement requirements(contd)

Intention of the Promoters/ directors/ key

personnel to subscribe the issue.
Example:
Neither any of the promoters nor any of the
Directors, key employees, except Mr. A and Mr. B,
have any direct or indirect intention to acquire
these further shares in any manner.

ISSUE OF WARRANTS, FCDs ON

PREFERENTIAL BASIS
Conversion of warrants, FCD, etc., must be within
18 months of allotment.
In case of warrants, minimum 10% must be paid
upfront on allotment.
If option to convert the warrants into equity
shares is not exercised, then the upfront
payment received shall be forfeited.

Preferential Allotment Viz a Viz Takeover Code.

REGULATION 10 & 11 OF SEBI (SAST) PROVIDES
No acquirer shall acquire shares or voting rights,
through market purchases and preferential
allotment
entitle such acquirer to exercise more than
fifty five per cent of the voting rights in the
company.

LIMITS OF
PREFERENTIAL
ALLOTMENT
CONSIDERING
TAKEOVER CODE

Limits of the Preferential Allotment

are calculated taking into account the
EXPANDED CAPITAL of the Company
& not the EXISTING CAPITAL of the
Company.

Acquirer
(holding 20%)
Through
Preferential
Allotment

Acquirers holding cannot

exceed 24.99% of Expanded
Capital.

Acquirer
(holding 5 %)
Through
Preferential
Allotment

Acquirers holding cannot

exceed 14.99% of Expanded
Capital.

Acquirer
(holding 0%)
Through
Preferential
Allotment

Acquirers holding cannot

exceed 14.99% of Expanded
Capital.

Example:

Category

Existing
shares
&%

Maximum
Allotment in
Preferential
allotment.

Shares &
% of Expanded
Capital

NonPromoter

14.99%

1764700
(14.99% of the
Expanded
Capital)

Present capital= 1 cr

Expanded capital=11764700

QUERIES

What is the exact formula for calculating

the % of shareholding, in case of issue of
warrants? At what point of time, the
number of warrants would be taken into
account on the day of issuing warrants or
on the date of conversion of warrants into
shares?

Queriescontd

Q. Suppose the present holding of a promoter is

54% and after preferential allotment the
holdings of the promoter remains same as
that of 54% of the expanded capital. The
question is whether any disclosure or
compliance required in the present situation?
What, if, the same question arises in case the
promoter is holding 60%? The issue is as
there is acquisition of shares but such
acquisition has not change the voting rights.
The question is what is relevant in terms of
takeover code, acquisition or voting rights?

Queriescontd

Q. Suppose a Promoter is holding 5% shares in a

company. What is the limit of acquisition in
preferential allotment to the promoter? Is it 5%
or 10%?

Queriescontd

Q. Suppose the present holding of a promoter

is 54% and after preferential allotment the
holdings of the promoter remains same as
that of 54% of the expanded capital. The
question is whether any disclosure or
compliance required in the present situation

Queriescontd

Q. What is the maximum limit of preferential

allotment?
Can
a
Company
through
preferential allotment expand its capital
without any limit?

RECENT PREFERENTIAL
ALLOTMENT
1. Energy Development Company Ltd.
2. Rellic Technologies Ltd
3. Magma Leasing Ltd
4. Indo Count Ltd
5. International Hometex Ltd.
6. Mannappuram General Finance & Leasing
Ltd.
7. Visesh Infotecnics Ltd.
Source: BSE Website

CHECKLIST ON
PREFERENTIAL
ISSUE OF
SECURITIES

S.N

1.

2.

Points to consider

Hold Board Meeting

preferential issue.

to

consider

the

Inform the Stock Exchange by fax/

letter/telegram within 15 minutes of
conclusion of Board meeting as per the
stipulation of Listing Agreement. {Clause
22(a) of Listing Agreement}

S.N

Points to consider

3.

Dispatch the general meeting notice

together with explanatory statement at
least 21 clear days before the date of
general meeting.

4.

3 copies of notice of the meeting should

be sent to Stock Exchange at the same
time of dispatch to shareholders. (Clause
31(c)- Listing Agreement)

S.N

Points to consider

5.

General meeting shall be held to pass a

Special resolution for issue of securities
on preferential basis.

6.

The Company shall apply for in principal

approval in terms of clause 24(a) of the
listing Agreement.

S.N

Points to consider

7.

The copy of the proceedings of the

general meeting shall be forwarded to
Stock exchanges promptly. (Clause 31(d)
of Listing Agreement)

8.

Form no 23 shall be filed to ROC within 30

days of passing of resolution along with
the requisite fees.

S.N

9.

Points to consider

Allotment pursuant to resolution passed

at a meeting of shareholders of a co
granting consent for preferential issues
shall be completed within 15 days from
the date of passing of resolution except in
the case of pending regulatory approvals

The currency of the instrument like

10. warrants/FCDs/PCDs shall not exceed
beyond 18 months from the date of issue
of relevant instrument.

S.N

Points to consider

A return of allotment in Form No. 2 shall

11. be filed within 30 days of allotment with
the concerned Registrar of Companies
after paying the requisite fees
Disclosure in Balance Sheet:
12. The details of the money utilized out of
the preferential issue shall be disclosed
under the appropriate head in the balance
sheet of the Company indicating the
purpose for which such monies have been
utilized.

13.

Allotment to promoters up to 20% of

the
total
capital
(including
the
preferential issue) 3 years from
allotment.
Additional issue to promoters or any
issue to any person - 1 year from
allotment.
The entire pre-preferential capital
held by the allottees - 6 months
from the allotment.

12.

File documents for final listing of

shares with the Stock Exchange