Objectives & Agenda : One of the most popular forms of raising funds by a Company is the preferential issue of securities. Such issue can be done both by private and public companies. There are various procedures and compliances under the Companies Act, 2013. The webinar covers the procedural aspects to be followed in issuing securities on a preferential basis, compliance formalities and caveats relating to such issue.

1. Preferential issue of securities under
Companies Act, 2013
CS Meenakshi Jayaraman
DVS Advisors LLP
India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com

2. Credits and Acknowledgments
Sundar Rajan S

3. Legends used in the presentation
Act Companies Act, 2013
AOA Articles of Association
AS Accounting Standards
BOD Board of Directors
FCD Fully Convertible Debentures
HFC Housing Finance Companies
KMP Key Managerial Personnel
NBFC Non Banking Finance Companies
NCD Non-convertible Debentures
NHB National Housing Bank
PCDs Partly Convertible Debentures
PPOL Private Placement Offer Letter
RBI Reserve Bank of India
RSE Recognised Stock Exchange
SEBI Securities and Exchange Board of India

4. Presentation Schema
Preferential issue
Principal Provision under
the Act
Private placement vs
preferential issue
Conditions to be fulfilled
Additional conditions Secretarial Compliance Contravention Judicial precedents

5. Preferential issue
Issue of shares or other securities by a Company
To a select person or a group of persons on a preferential basis
Does not include rights issue, bonus issue, public issue, ESOP, issue of
sweat equity shares, depository receipts or foreign securities
Shares or other securities shall mean equity shares, FCDs, PCDs and other securities that are convertible into equity shares at a later date

6. Principal provision – Section 62(1)(c)
Any Company, private or public, shall raise funds by way of preferential issue of shares or other securities
Such issue to be authorised by a special resolution passed by members in general meeting
Such shares could be issued to any person including existing shareholders and employees of the Company either
for cash or for a consideration other than cash
The price of such shares or other securities shall be determined by the valuation report of a registered valuer*
Issue shall also be in accordance with the provisions of Section 42 of the Act
*In case of preferential issue by a listed Company, valuation report of a registered valuer is not required

7. Applicability of provisions of the Act
Whether the
shares or other
securities are
listed on RSE?
Provisions as per
SEBI Act and
Regulations are
applicable
Provisions as per
Companies Act
and Rules are
applicable
YES NO

8. Private placement vs. Preferential Allotment
Basis of distinction Private placement Preferential Allotment
Meaning Offer or invitation to subscribe securities, issued
to a select group of persons
Issue and allotment of shares or other securities to a
select group of persons
Instrument Securities as defined in Securities Contracts
Regulation Act (which includes equity and
preference shares, FCDs, PCDs, NCDs, etc.)
Equity Shares or any other securities convertible into
equity shares
Consideration Securities shall be exchanged through banking
channels
Shares or other securities shall be exchanged even
for consideration other than cash (receipt shall be
through banking channels only)
Allotment Within 60 days from the date of receipt of
application money for such securities
Within 12 months from the date of passing special
resolution for approving such issue. But, within 60
days from receipt of application money
Private placement is a broader concept whereas Preferential issue is a specific concept relating to equity shares
In other words, preferential issue is a subset of private placement

9. Conditions to be fulfilled
Preferential issue shall be authorised by Company’s AOA
Special resolution to be passed by the members in general meeting
Obtain valuation report from a registered valuer. Price of shares or other securities issued shall not be less than the price
given in the valuation report
Necessary disclosures in explanatory statement annexed to the notice should be given (discussed in subsequent slides)

10. Contd. Valuation report to be
obtained in the below cases
Pricing shares or other
securities to be issued on
preferential basis
Determining conversion price of
convertible securities issued on
preferential basis either,
Justifying the consideration value
received for issue of shares or other
securities on preferential basis for
consideration other than cash
Valuation shall be done by an independent merchant banker registered with SEBI or an independent practising CA having
minimum experience of 10 years if there is no registered valuer in the Company
At the time of offer of
such securities
At a time not earlier than
30 days to the date when
holder becomes eligible
to apply for shares*
OR
*In such a case, the valuation report shall not be given earlier than 60 days from the date when holder is entitled to apply for shares

11. Contd.
Allotment of securities on preferential basis shall be completed within 12 months from the date of passing special resolution
Another special resolution shall be passed if allotment is not completed within the time mentioned above
Where preferential offer is made for non-cash consideration, it shall be treated as follows in the books of accounts of Company:
If non-cash consideration is any other item other than above, it shall be expensed as provided in the AS
If the non-cash consideration is a depreciable or amortisable asset, it shall be carried to the balance
sheet in accordance with the AS

12. Disclosures in Explanatory Statement
Objects of the issue
Total number of shares or
other securities to be
issued
Price or price band
at/within which the
allotment is proposed
Basis on which the price
has been arrived at along
with valuation report
Relevant date with
reference to which the
price has been arrived at*
Class of persons to whom
the allotment is proposed
to be made
Intention of promoters,
directors or KMP to
subscribe to the offer
Proposed time within
which the allotment shall
be completed
Names of the proposed
allottees and the % of post
preferential offer capital
that may be held by them
Change in control, if any, in
the company that would
occur consequent to the
preferential offer
Quantum and price of
securities allotted already
on preferential basis during
the year
Justification for the
allotment proposed to be
made for consideration
other than cash backed by
valuation report
*Disclosure regarding when the conversion price shall be determined for issue of convertible securities on preferential basis

13. Contd.
Pre and post issue shareholding pattern of the Company in the following format:

14. Additional conditions
Private placement offer-cum-application letter shall be issued in Form PAS-4 to the offeree*
Such letter shall be issued within 30 days of recording the names of the offerees in Form PAS-5
Special resolution or Board resolution has to be passed for approving such letter
Application (Form PAS-4) shall be serially numbered and addressed specifically to the offeree
Such offer cum application letter shall be sent either in physical or electronic form
* In case of preferential issue made to existing members of the Company, private placement offer letter need not be issued

15. Contd.
Preferential issue shall be made to not more than 50 persons at a time and not more than 200 persons in aggregate in
a financial year*
Separate bank account has to be opened for receiving the money raised through preferential issue
Company shall maintain separate record of private placement offers in Form PAS-5
*Such limit shall not be applicable to securities issued to qualified institutional buyers and employees covered under ESOP
*Such limit shall also not be applicable to securities issued by NBFCs and HFCs if they are complying with the regulations made by
RBI and NHB on private placement

16. Secretarial compliance
Notice for Board meeting for
preferential issue should be
issued to the Directors atleast 7
days before the date of
meeting – Section 173(3)
Pass BOD resolutions for
approving such issue along with
PPOL, considering the valuation
report, considering the records
maintained in PAS-5, notice for
general meeting, etc.
File MGT-14 within 30 days of
passing BOD resolution. Also,
prepare minutes of BOD meting
Issue notice along with
explanatory statement to
members for convening general
meeting
Pass special resolution for
getting approval from members
for preferential issue
File MGT-14 within 30 days of
passing special resolution. Also,
prepare minutes of members’
meeting
i. For approval of preferential issue:

17. Contd.
ii. For allotment of shares or other securities through preferential issue:
Notice for Board meeting for
allotment of shares or other
securities should be issued to the
Directors atleast 7 days before
the date of meeting – Section
173(3)
Pass BOD resolutions for
allotment of shares or other
securities to specific persons
through preferential issue
Draft minutes of BOD meeting for
allotment of shares or other
securities through preferential
issue
File Form PAS-3 within 15 days
from the date of allotment of
shares or other securities
Mandatory attachments to Form
PAS-3 shall be list of allotees,
certified copy of BOD resolution,
record of private placement
offers in PAS-5, valuation report,
etc.

18. Contravention
Contravening the provisions of private placement other than the limit of offers that shall be made in a financial year (maximum of 200 persons):
Company, its directors and promoters shall be liable to
Rs. 2 Crores OR Amount raised through private placement
Whichever is lower
In case the limit of maximum offers exceed 200 in a financial year, then such private placement shall be deemed to be public issue

19. Contd.
Default in filing Form PAS-3 within 15 days from the date of allotment of shares or other securities
Company, its directors and promoters shall be liable to
Rs. 1000 per day of continuing default subject to a maximum of Rs. 25 Lakhs

20. Caveats
PPOL shall not be issued unless Form MGT-14 has been filed for BOD resolution approving preferential issue
Form MGT-14 for BOD resolution is mandatory even for private Companies since Rule 14* specifically mentions
Money shall be received only through banking channels and not by cash
Unless Form PAS-3 is filed, Company shall not utilise the money received except for allotment or repayment
PPOL shall not carry any right of renunciation
*Rule shall mean Companies (Prospectus and Allotment of Securities) Rules

21. Judicial Precedents
Mrs. Proddaturi Malathi vs. SRP Logistics (P.) Ltd. – [2018] 96 taxmann.com 565 (NCL-AT)
Directors increased share capital of company and further allotted shares of company to a director and to outsider at par
by preferential allotment/private placement
However procedure for issuing shares on preferential basis has not been followed like obtaining valuation report,
disclosures in explanatory statement, etc.
Hence, the increase in share capital and subsequent allotment of shares is treated as invalid

22. Thank You
DVS Advisors LLP
India-Singapore-London-Dubai-Malaysia-Africa
www.dvsca.com
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