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Sakshi Sharda
| Updated: 29 Mar, 2020 | Category: Compliances, Event Based Compliances

Issue of shares on Preferential Basis: A Complete Procedure

Issue of Shares on Preferential Basis

Under Companies Act, 2013, Company can raise funds via preferential allotment, employee stock option plan, sweat equity shares and right issue. Issue of Shares through preferential basis is the fastest way to raise capital after availing company registration for the establishment. Section 62 (Allotment of Shares) and Section 42 (Allotment of Securities) of Companies Act, 2013, provides for the Issue of Shares on Preferential Basis. In this article, the procedure for the Issue of Shares on Preferential Basis will be discussed.

What is the Preferential Issue of Shares?

The Preference Shares are those shares of the Company which are owned by the persons who have the exclusive right to receive the profits of the Company before the other ordinary shareholders of Company. Furthermore, if the Company has to close down or fails in future, the Preference Shareholders have the right to have their capital repaid. Hence, this significantly reduces the risk of loss.

A Preferential Issue is the Issue of Shares or Securities by Company to a selected group of investors. The Preferential Issue is not a Right Issue or Public Issue. The Preferential Issue of Shares is a unique method of fundraising as compared to the other methods. In Preferential Issue of Shares, the entire Allotment of Shares is made to a pre-identified person, who may be or not the existing shareholders of the Company.

Why Companies exercise the Issue of Shares through Preferential Basis?           

The Allotment of Shares through preferential basis is the widely used option by the Companies to provide a way for those shareholders who were not able to buy a large number of Shares during initial public offerings at reasonable prices. The preferential shareholders are not given any exclusive voting rights and are only paid when the Company makes profits.

The other persons associated with the Company like Financial Institutions, the present shareholders, Promoters of the Company, the Venture Capitalists all are given an opportunity to raise their stakes in the Company by exercising the option of Allotment of Shares through Preferential Basis. The Company believes that a certain number of Shareholders are value Shareholders, the Company can secure the equity participation of those shareholders exercising the option of Issue of Shares on Preferential Basis.

After exercising the Preferential Issue of Shares option, the funds raised by the Company are if raised in an efficient manner, then there is a high possibility for the improvement of Companies overall performance. Additionally, if the veteran investors have invested in Company during the Issue of Shares on Preferential Basis, this will increase the growth of the business of the Company in the near future.      

What legal Provisions are associated with the Issue of Shares on Preferential basis?

The legal provisions associated with the Issue of Shares on Preferential Basis are as follows:

legal provisions associated with the Issue of Shares
  • Section 62 (Allotment of Shares) of the Companies Act, 2013.
  • Section 42 (Allotment of Securities) of the Companies Act, 2013.
  • Rule 13 of Companies (Share Capital and Debentures) Rules, 2014.
  • Rule 14 of Companies (Share Capital and Debentures) Rules, 2014.
  • Specific Provisions of SEBI (ICDR) Regulations, 2018.

Read our article:Issue of Preference Shares without Public Offer: A Complete Procedure

What are the benefits for Preference Shareholders after Issue of Shares on Preferential Basis?

The benefits of Issue of Shares on Preferential basis to the Preference Shareholders are as follows:

  • The claim of Dividend by the preference shareholders can be made in the subsequent year if the preference shareholders are not given any dividend for any particular year.
  • The capital of the preference shareholders is always safe. If the Company fails or gets bankrupt, the preference shareholders are always first as compared to the other ordinary shareholders of the Company.
  • The preference shareholders are paid by the Company directly without any brokerage cost while allotment of Shares through preferential basis.

What are the key considerations for Issue of Shares on Preferential Basis?

The Company has to comply with the following conditions while making an Issue of Shares on Preferential Basis:

  • The Articles of Association (AoA) should authorize for the Issue of Shares on Preferential Basis through PAS. If the authorization is absent from the AoA, the amend the Articles of Association accordingly.
  • Letter of Offer should be sent to persons either in writing or in electronic Form.
  • The Company can come for the new offer of Issue of Preference Shares on once the earlier offer is completed as per Section 42 of the Companies Act[1]. There is no requirement under the law regarding the minimum gap between the two offers.
  • No advertisement should be done in public at large for the offer made for the Issue of Preference Shares by the Company.
  • The issue of only fully paid-up securities and shares can be done
  • The approval of shareholders of the Company should be taken for the Issue of Shares on Preferential Basis.
  • Separate Bank Account should be opened for Issue of Preference Shares and Securities.
  • The price of the Shares and other Securities to be issued on preferential basis should be calculated as per the price determined in the valuation report of a registered valuer.
  • The offer shall be attached with the application form. The Form should be serially numbered and should be addressed to the person to whom the offer is made for the Issue of Preference Shares.
  • The PAN card of each Allottee should be there.

What is the Procedure of Issue of Shares on Preferential Basis?

The procedure followed for the Issue of Shares on Preferential Basis is as follows:

Procedure of Issue of Shares on Preferential Basis

Call Board Meeting

The notice for the Board Meeting should be issued as per Section 173 of the Companies Act, 2013, to all the members 7 days before the Board Meeting. The notice of the Board Meeting should hold the agenda of the Board Meeting. The draft resolution of the Board Meeting should also be attached with the notice.

Hold Board Meeting

The Quorum of the meeting is first checked. In the Board Meeting, Resolution for the approval of Shares on Preferential Basis will be passed, and the following agendas will be discussed:

  • The evaluation of the Valuation report
  • The number of Allottees will be fixed.
  • The time, date, place and day of the Extraordinary General Meeting (EGM) will be fixed.
  • The draft of the Offer Letter will be prepared.
  • The notice of EGM, along with the Explanatory Statement, will be finalized.
  • The Resolution for the approval of the Offer Letter will be passed.
  • To authorize any Director to issue the notice for EGM.

Call for Extra Ordinary General Meeting

The notice for EGM will be sent to all members, Directors and Auditors of Company along with agenda of the EGM. The notice should be sent at least 21 days before the date of the EGM.

Hold Extraordinary General Meeting

Firstly, the Quorum of the Meeting is checked. The EGM will be held for the following purpose:

  • To present the Letter of Offer in PAS-4 Form to all the members of the Company
  • To pass a Special Resolution for the Shares Issue on Preferential Basis.

Circulation of Letter of Offer

After the passing of the Special Resolution by the members in the EGM the approved Letter of Offer will be circulated. The Letter of Offer accompanied with an application form serially numbered and specifically addressed to the person to whom the offer of Shares Issue on Preferential Basis is made. The Letter of Offer should be sent in writing or electronic Form. The Letter of Offer should be issued within 30 days of the EGM.

File Form MGT-14

Form MGT-14 should be filed with the Registrar of Companies (RoC). The Form MGT-14 should be filed within 30 days from the date of passing of the Special Resolution in EGM by the Company. The following attachments should be made with the MGT-14 Form:

  • The notice of EGM with the explanatory statement.
  • The minutes of the EGM.
  • The true certified copy of the Special Resolution passed in the EGM by the Company.

Open Separate Bank Account

A Separate Bank Account should be opened for the following purposes:

  • The payment for the subscription for securities should be made from the bank account of the person subscribing for the securities.
  • The Company should maintain the bank account from where the payment for the subscription for securities is received.

File Form to RoC

After the circulation of Letter of Offer, the Form GNL-2 will be filed with the Registrar of Companies. The GNL-2 should be filed within 30 days of the circulation of the Letter of Offer. The GNL-2 Form should be attached to the following:

  • Letter of Offer in PAS-4 Form.
  • A Complete record of Private Placement in PAS-5 Form.

Call for Second Board Meeting

The notice for the second Board Meeting will be issued at least 7 days before the date of the Board Meeting. The agenda of the Board Meeting should be attached with the notice pf the second Board Meeting. The second Board Meeting should be held within 60 days of the receipt of the Allotment money.

Hold Second Board Meeting

The Second Board Meeting will be held for the following purpose:

  • To present the list of all the Allottees
  • To pass Resolution for the Allotment of Shares.
  • To pass Resolution for the Issue of Share Certificate to all the shareholders,
  • To authorize any two Directors and an authorized person to sign on the Share Certificates to be issued to the Shareholders. 

File Form PAS-3        

After the second Board Meeting, Form PAS-3 will be filed to the Registrar of Companies (RoC). The Form PAS-3 should be passed within 15 days of the date of second Board Meeting. The Form PAS-3 should be attached with the following attachments:

  • The list of all the Allottees
  • The copy of the contract
  • The true certified copy of the Special Resolution passed along with the explanatory statement.
  • A true certified copy of the Board Resolution for the Allotment of Shares.

Issue Share Certificate

The Share Certificates will be issued to the shareholders within 2 months from the date of Allotment of Shares. The Stamp duty should be paid as per the provisions of the State. The Register of the Members should be updated after the Issue of Share Certificate to the shareholders.

Conclusion

Issue of Shares on Preferential Basis is a process by which the shares and securities are allotted on a preferential basis to a specific selected group of investors. The Preferential Allotment of Shares is a different method than other methods as the entire allotment is made to predetermined people at a predetermined price. The preferential Issue of Shares is done to raise the capital of the Company. The process of Shares Issue on Preferential Basis is time-taking and lengthy. We at Corpbiz have experienced professionals who will assist you with the process of Issue of Shares on Preferential Basis. Our professionals will help you and will ensure the successful completion of your work.

Read our article:Buyback of Shares and other Securities: A Complete Overview

Sakshi Sharda

Sakshi Sharda has done BBALLB(HONS) and holds a strong knowledge on the matters pertaining to finance and law. From the past one year she is working as a legal advisor and in her leisure time she works on improvising her knowledge. Sakshi is spreading her knowledge by writing for Corpbiz.

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