PRIVATE PLACEMENT AND PREFERNTIAL ALLOTMENT

PRIVATE PLACEMENT AND PREFERNTIAL ALLOTMENT

A final draft submitted in partial fulfilment of the course Company Law-1,
Semester — VI during the Academic Year 2020— 21.

Submitted by
Sanjeev Kumar, 1558
BA.LLB

Submitted to:-
Mrs Nandita S Jha

September 2019

Chanakya National Law

University

Nyaya Nagar, Mithapur

800001, Patna

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ACKNOWLEDGEMENT
I am highly elated to have worked on my research topic “CONDITION OF
THE MEMBERSHIP TO THE UN” under the guidelines of Mrs. Nandita
Jha, (Faculty of COMPANY Law). I am very grateful to her for the
proper guidance.
I would like to take this opportunity to express my profound gratitude and
deep regard to her for his exemplary guidance, valuable feedback and
constant encouragement throughout the duration of the project.

Her valuable suggestions were of immense help throughout my project work.

Her perceptive criticism kept me working to make this project in a much

better way. Working under him was an extremely knowledgeable experience
for me.

Apart from all these I would like to give special regard to the librarian and
other staffs of the library of my university who made a relevant effort
regarding to provide the materials to my topic and also assisting me.

THANK YOU,

Sanjeev kumar
Roll no. - 1558
4th year B.A., LL.B. (Hons)

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Hypothesis
The researcher believes that private placement is available to juristic as well
as natural persons while preferential allotment is available to institutions
only (public financial institutions, mutual funds etc).

Aims and Objective

The researcher intends to analyse
 The concept of private placement
 The concept of preferential allotment of shares
 The differences that arise between the both of them

Research Methodology
The researcher has adopted doctrinal method of research. The researcher
has made extensive use of the library at the Chanakya National Law
University and also the internet sources.

Source of data
The following are primary source of data:-
1. Legislative provision

The following are secondary source of data:-

1. Books
2. Website
3. Newspapers
4. Journals

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 PRIVATE PLACEMENT AND PREFERNTIAL ALLOTMENT

Chapterisation
1. Introduction……………………………………………….05
2. What is private placement………………………………...07
3. What is preferential allotment……………………………...10
4. Difference between Private and Preferential allotment …..12
5. Conclusion…………………………………………………13
6. Bibliography……………………………………………….14

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 PRIVATE PLACEMENT AND PREFERNTIAL ALLOTMENT

Chapter 1: Concept of Raising of Capital

Every company needs capital to either start its business or to stay in business
depending upon the need.

Raising of capital in simple terms can be defined 1 as

“The ability of an individual to obtain money/funds in order to get the business off
the ground or help in the daily operations of the business such as the purchase of
materials and payment of wages etc. is known as his capital raising skills.”

Having an idea is useless if one does not have enough capital to translate it into a
reality. It is believed that a business is almost impossible to start without money.
Yet, ironically enough, you cannot get money until your business is successful
enough. Using up your savings is one option but savings will typically run out.
Therefore, raising funds through other sources is important in order to finance all
the business activities.

Choosing the right sources is, however, the next critical step in the process of
capital-raising because it is invariably the determinant of the success and growth
of any business. Extraordinary capital raising skills are required for obtaining
funds quickly and efficiently, through the most appropriate sources.

Methods of raising capital

A company may raise funds2 for different purposes depending on the time periods
ranging from very short to fairly long duration. The total amount of financial
needs of a company depends on the nature and size of the business. The scope of
raising funds depends on the sources from which funds may be available. The
business forms of sole proprietor and partnership have limited opportunities for
raising funds. They can finance their business by the following means :-

 Investment of own savings

1
https://www.cleverism.com/skills-and-tools/capital-raising-skills/
2
https://archive.india.gov.in/business/starting_business/methods_raisingcapital.php

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 PRIVATE PLACEMENT AND PREFERNTIAL ALLOTMENT

 Raising loans from friends and relatives

 Arranging advances from commercial banks

 Borrowing from finance companies

Companies can Raise Finance by a Number of Methods. To Raise Long-Term and

Medium-Term Capital, they have the following options:-
Issue of Shares

It is the most important method. The liability of shareholders is limited to the face
value of shares, and they are also easily transferable. A private company cannot
invite the general public to subscribe for its share capital and its shares are also
not freely transferable. But for public limited companies there are no such
restrictions. There are two types of shares:-

 Equity shares:- the rate of dividend on these shares depends on the profits
available and the discretion of directors. Hence, there is no fixed burden on the
company. Each share carries one vote.

 Preference shares :- dividend is payable on these shares at a fixed rate and is

payable only if there are profits. Hence, there is no compulsory burden on the
company's finances. Such shares do not give voting rights.3

3
Bucha F. Guzdar v. Commissioner of Income Tax 1955 AIR 740.

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Chapter 2: What is Private Placement?

Raising adequate capital is integral to building and growing a business, and
companies usually go the initial public offering (IPO) route. An alternative is the
capital raising event known as a private placement. 4A private placement involves
the sale of securities to a relatively small number of select investors. Investors
targeted include wealthy accredited investors, large banks, mutual funds,
insurance companies and pension funds. A private placement is different from a
public issue in which securities are made available for sale on the open market to
any type of investor.

IMPORTANT PROVISIONS PERTAINING TO PRIVATE PLACEMENT

Section 42 of the Companies Act, 2013 read with Rule 14 of the Companies Rule
2014.

“Private Placement” means any offer of securities (Not Only Shares) or invitation
to subscribe securities to a select group of persons by a company through issue of
a private placement offer letter and which satisfies the conditions specified in
section 42 of the Act.

It is also to be noted that the provisions for private placement applies to the issue
of "securities" and not "shares". Thus the new provisions have widened the scope
and cover a whole host of instruments such as shares, bonds, debentures and other
marketable securities etc. The Act, 2013 under section 42(4) mandates a company
to comply with the provisions of SEBI Act & SCRA, if any offer or invitation is

4
https://www.investopedia.com/terms/p/privateplacement.asp

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 PRIVATE PLACEMENT AND PREFERNTIAL ALLOTMENT

not in compliance with the provisions of the section and such offer or invitation
shall be treated as a public offer.5

The section stipulates that all monies payable towards subscription of securities by
private placement shall be paid through cheque or demand draft or other banking
channels but not by cash and also all the securities under private placement are to
be allotted within a period of 60 days from the receipt of application money. If the
company is not able to allot the securities within the specified period, the
application money is to be refunded within a period of 15 days from completion of
60 days time.6 The money raised by the issue of offer or invitation shall be in a
separate bank account and cannot be used until allotted. Every company making
any allotment under the said section shall submit with the Registrar the particulars
of every private offer within 30 days of circulation of offer letter.

Special Resolution for Private Placement

The offer should be previously approved by the shareholders of the company, by

a Special Resolution, for each of the offers or invitations.

In case of offer or invitation for non-convertible debentures, it shall be sufficient

if the company passes the Board Resolution each time if such issue is within the
borrowing limit specified under Section 180(1)(c) of the Companies Act. However,
borrowing limits are to be approved by the shareholders of the issuer company
first.

A company shall issue private placement offer cum application letter only after the
relevant special resolution or Board resolution has been filed in the ROC.

PROCEDURAL ASPECT OF PRIVATE PLACEMENT

6
Ibid.

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1) Hold Board Meeting:

 To grant in-principle approval for issue of securities on private placement basis;

 To identify persons to whom securities be allotted;
 To approve draft private placement offer letter and record of private placement;
 To open separate bank account for receiving money;
 To approve notice of GM for approval of members;
2) Confirm whether Letters from all proposed allotees giving consent to subscribe
the issue are received or not.

3) Prepare the List of allotees along with all the required details as per the format
prescribed under the Form PAS-5.

4) Hold General Meeting and pass special resolution along with resolutions to
approve the offer letter and authorize an officer of the company to give effect to
the Private Placement.

5) File MGT-14 alongwith special resolution and explanatory statement.

6) Dispatch private placement offer letter alongwith application form to the

proposed allotees.

7) Receive application money against issue of securities in bank account opened in

scheduled bank.7

8) Hold Board Meeting for Allotment of Securities and allot securities within 60
days of receiving application money.

9) File Form PAS-3 within 15 days of the allotment of securities alongwith Special
Resolution and List of allotees.

10) Issue corresponding Share Certificates; make respective entries in Register of

Members along with confirming the Distinctive numbers and Certificate Numbers
of the Shares allotted.8

7
defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009
8
https://taxguru.in/company-law/private-placement-securities-companies-act-2013.html

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CHAPTER-3 PREFENTIAL ALLOTMENT OF SHARE

Preferential Allotment is used to mean the issue of specified securities by a

company listed on a recognized stock exchange, to any select person or group of
persons, on preferential basis. The offer is subject to the rules and regulations
made by Securities and Exchange Board of India, in this regard. However, when
an unlisted company goes for preferential allotment the rules of the Companies
Act, 2013 will apply.9

Benefits of preference shareholders

1) No brokerage costs is incurred and preferential shareholders get paid first when
company earns profit and after them other share holders are paid.

2) If any company has not paid dividend in present year then shareholders has
right to claim this dividend in the next years.

3) Capital of preference shareholders is always safe. If in case company fails or

gets bankrupt then preference shareholders will be paid first among all.

9
https://www.akmllp.com/insights

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Along with these advantages it has some drawbacks as well. No voting rights are
issued here and it is risky than bonds. Also when company gets bankrupts they are
paid after NCD (Non Convertible Debentures).

Applicable Rules and Sections of Companies Act, 2013

Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 lays down
conditions to be complied with for preferential offer of shares or other securities
by unlisted companies.

Such issue on preferential basis should also comply with conditions laid down in
section 62 and 42 of the Companies Act, 2013.

Special Resolution
For the purpose of clause (c) of sub-section (1) of section 62, if authorized by a
special resolution passed in a general meeting, shares may be issued by any
company in any manner whatsoever including by way of a preferential offer, to
any persons whether or not those persons include the persons referred to in clause
(a) or Clause (b) of sub-section (1) of section 62.

Conditions to be fulfilled for preferential offer

1. The issue is authorized by its articles of association
2. The issue has been authorized by a special resolution of the members
3. Securities allotted by way of preferential offer shall be made fully paid up at the
time of their allotment

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4. The company shall make the specified disclosures in the explanatory statement to
be annexed to the notice of the general meeting.10

Why company go for preferential allotment of shares

When a company wants to raise funds it can do so by issuing new shares to public
or bulk allotment of shares. The main reason behind preferential allotment of
shares is to facilitates shareholders who are unable to buy large chunk of shares
from market as it is too costly or unfeasible for them. But these shareholders do
not get any voting rights and they are paid only when company earns profit.11

Chapter-4 Differences Between Private Placement

and Preferential Allotment
The points presented below explains the difference between private placement and
preferential allotment:

1. Private Placement can be described as an offer or invitation to offer made

to specified investors by issuing securities, so as to raise funds. On the
contrary, Preferential Allotment is the issue of shares or debentures to a
particular group of persons is made by a listed company, to raise funds.

2. Private Placement is governed by section 42 of the Companies Act, 2013.

Conversely, in the case of Preferential Allotment section 62 (1) of the
Companies Act, 2013 will apply.

3. In the case of private placement, ‘Private placement offer letter’ is sent to

the investors for inviting them to subscribe for shares. As against, in the case
of preferential allotment, no such offer document is issued to people.

10
Ibid.
11
www.corporatelaws.in

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4. In private placement, application money can be received through cheques,

demand draft or any other banking modes but not cash. Unlike, preferential
allotment in which the money is received in cash or kind.

5. In private placement, the application money is kept in the separate bank

account of a scheduled commercial bank. On the contrary, no such account
is required in case of preferential allotment.12

6. The private placement must be authorized by the articles of association of

the company. In contrast, no such authorization is required in case of
preferential allotment.13

CONCLUSION

Both Private placement and Preferential allotment require special resolution, to

be passed at the company’s general meeting. Further, in both the cases, the
company does not make an advertisement to the general public. Many times, the
investment bankers suggest the firms wanting to go public, to make a private
placement, because the public issue requires a critical mass, to justify an Initial
Public Offering.

Though private placement and preferential allotment appears to be similar, there

are differences between them. Section 42 is drafted carefully after a highly
controversial litigation on the subject of private placement namely SEBI vs
Sahara. Section 42 and 62 of the Companies Act, 2013 is applicable to private
companies as well thereby bringing them under the close regulatory oversight and
reducing the differences between private and public companies with regard to
compliance. Private companies will now be required to file returns on who the
offers were made and also maintain a record of private placements made.All these
provisions ensure transparency and thereby achieving the ultimate objective of
good corporate governance.

12
G.K Kapoor & Sanjay Dhamija, Company Law A Comprehensive Text Book on Companies Act 2013 195
(20 th ed. 2017).
13
Ibid.

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Bibliography

Book

Taxmann, Company law A Comprehensive Text Book on Companies Act 2013

Website

https://www.inniaccounts.co.uk

mca.gov.in

https://www.lexisnexis.com

www.legalserviceindia.com

www.taxguru.in

www.legistify.com

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