What is Preferential Allotment?
Preferential allotment (also called preferential issue or private placement) is the issuance of shares or convertible securities by a company to a select group of identified persons on a preferential basis. This is governed by Section 62(1)(c) of the Companies Act 2013 (for preferential issue) and Section 42 (for private placement).
Key Features of Preferential Allotment
- • Offered to specific identified persons (not to public)
- • Requires special resolution with specific disclosures
- • Pricing must be fair and in compliance with regulations
- • Can be to promoters, strategic investors, or financial investors
- • Lock-in period applies to certain allottees
- • Valuation by registered valuer required for related party transactions
Why Companies Opt for Preferential Allotment
Strategic Investment
Bring in strategic partners with industry expertise and network.
Private Equity
Raise capital from PE/VC firms without public offering process.
Promoter Contribution
Promoters infuse fresh capital to strengthen financial position.
Faster Process
Quicker than public issue or rights issue with less regulatory burden.
Legal Framework
Companies Act 2013
Section 62(1)(c) - Preferential Issue
- • Special resolution required
- • Issue to any persons (whether shareholders or not)
- • On terms not more favorable than rights issue
- • Price determined by valuation report (if applicable)
Section 42 - Private Placement
- • Offer to select group of persons (not public)
- • Maximum 200 investors in aggregate in a financial year
- • Minimum investment of ₹20,000 per person
- • Private placement offer letter in prescribed form
- • Allotment within 60 days of receipt of money
SEBI ICDR Regulations (for Listed Companies)
Chapter VII
Preferential issue of specified securities by listed companies.
Chapter VIII
Qualified Institutions Placement (QIP) regulations.
Types of Preferential Issues
1. Preferential Allotment to Promoters
- • Strengthen promoter holding
- • Infuse fresh capital
- • 3-year lock-in requirement
- • Pricing at higher of 10% discount or 6 months/2 weeks average
2. Preferential Allotment to Strategic Investors
- • Bring industry partners
- • Technology/know-how transfer
- • Market access
- • 1-year lock-in requirement
3. Preferential Allotment to Financial Investors (PE/VC)
- • Growth capital
- • Pre-IPO investment
- • 1-year lock-in requirement
4. Qualified Institutions Placement (QIP)
- • For listed companies only
- • To qualified institutional buyers (QIBs) only
- • Faster process
- • Pricing floor based on 2 weeks/6 months average
5. Convertible Securities
- • Compulsorily convertible debentures (CCDs)
- • Compulsorily convertible preference shares (CCPS)
- • Warrants with right to convert
Preferential Allotment Process
Step 1: Board Meeting
- • Approve preferential issue in principle
- • Identify proposed allottees
- • Proposed pricing
- • Fix date for EGM
Step 2: Valuation
- • Appoint registered valuer
- • Obtain valuation report
- • Determine fair value
Step 3: Identifying Allottees
- • Finalize list of proposed allottees
- • Check eligibility (not non-bank defaulters)
- • Ensure compliance with maximum 200 limit
Step 4: Special Resolution
- • Pass SR with specific disclosures
- • Objects of the issue
- • Pricing details
- • Particulars of proposed allottees
Step 5: Private Placement Offer (if applicable)
- • Issue private placement offer letter in Form PAS-4
- • Maintain record in Form PAS-5
- • Payment to be made through banking channels
Step 6: Allotment
- • Board resolution for allotment
- • Issue shares within 60 days of receipt of money
- • Issue share certificates / credit to demat
Step 7: Post-Allotment Compliance
- • File PAS-3 within 30 days
- • File MGT-14 for special resolution
- • Update register of members
- • Intimate stock exchanges (listed companies)
- • Issue lock-in period compliance for promoters
Pricing Guidelines
SEBI ICDR Regulations (Listed Companies)
Floor Price
The price shall not be less than the higher of:
- • Average of weekly high and low of closing prices during 6 months preceding relevant date
- • Average of daily high and low of prices during 2 weeks preceding relevant date
For promoter/pre-promoter group: Not less than higher of 10% discount to floor price or above two averages
For Unlisted Companies
- • No statutory pricing floor
- • Price must be fair and reasonable
- • Valuation by registered valuer recommended
- • Must not be prejudicial to minority shareholders
- • FMV considerations for tax purposes
Related Party Transactions
For preferential issue to related parties:
- • Valuation by registered valuer mandatory
- • Price not less than fair value
- • Arm's length price to be justified
- • Higher governance standards apply
Exemptions and Exceptions
Preferential Issue Not Applicable To
- • Public issue
- • Rights issue
- • Bonus issue
- • ESOPs
- • Sweat equity shares
- • Conversion of loans/debentures (in certain cases)
Private Placement Exemptions
Section 42 exemptions apply to:
- • Non-convertible debentures issued to banks/financial institutions
- • Issue to employees under ESOP
- • Issue to QIBs under QIP (subject to ICDR)
- • Issue in accordance with foreign investment guidelines
Lock-in Requirements
SEBI Lock-in Requirements
| Category of Allottee | Lock-in Period |
|---|---|
| Promoters/Promoter Group | 3 years from date of allotment |
| Non-promoters (strategic/others) | 1 year from date of allotment |
| QIP allottees | 1 year from date of allotment |
| Preferential to lenders (debt conversion) | 1 year from date of allotment |
Lock-in Compliance
- • Lock-in recorded in depository system
- • Separate ISIN for locked-in shares
- • Endorsement on share certificates (if physical)
- • Compliance certificate to stock exchanges
Accounting Treatment
On Receipt of Application Money
Dr. Bank Account
Cr. Share Application Money Account
On Allotment
Dr. Share Application Money Account
Cr. Equity Share Capital Account (face value)
Cr. Securities Premium Account (premium, if any)
Issue Expenses
Issue expenses can be:
- • Charged to Securities Premium Account (first charge)
- • Or written off over period of benefit
- • Or expensed in P&L (if not significant)
Tax Implications
For the Company
- • No tax on issue of shares
- • Securities premium credited to separate account
- • Stamp duty on share certificates
- • ROC filing fees
For Allottees
- • No tax on acquisition of shares
- • Cost of acquisition = Amount paid per share
- • Period of holding starts from allotment date
- • On sale: Capital gains taxed based on holding period
Section 56(2)(viib) - Angel Tax (Startups)
For unlisted companies (other than startups):
- • If issue price > Fair Market Value (FMV), excess is taxable as income
- • Rate: 30% plus applicable surcharge and cess
- • FMV to be determined as per Rule 11UA
- • Startups registered with DPIIT are exempt subject to conditions