All about Preferential Issue of Shares

1. Introduction

As per the Company Act 2013, the companies in India can raise funds through different methods including preferential allotment, right issue, IPOs, employee stock option plan (ESOP), and sweat equity shares. Among all these methods preferential allotment is most suitable fundraising option for unlisted companies when existing shareholders are not intended to infuse more capital in the company.
 
Preferential Issue as the name suggests, is raising funds from a select group of persons including individuals, venture capitalists, companies, or any other person (who may or may not be the existing shareholders) and not exceeding 200 persons in aggregate in a financial year.

2. Key points to be considered for preferential issue of shares

1. In case of listed company, price worked out in accordance with relevant SEBI Guidelines;
2. In case of unlisted company, valuation done as per any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a Chartered Accountant or a Securities and Exchange Board of India registered Merchant Banker or a practicing Cost Accountant

3. Procedure for preferential issue of shares

Section 62 read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 and Section 42 read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes the procedures and provisions applicable on preferential allotment of shares.
 

1. Convening a Board Meeting: The following matters shall be transacted at the Board Meeting:

• Consideration of Valuation Report
• Approval for issue of shares on preferential allotment basis [For draft Resolution -Refer Annexure 1]
• Finalization of list of proposed allottees and the offer period
• Fixation of day, date, time and venue of General Meeting for seeking approval of Members for the proposed issue of shares
• Approval of draft Offer cum Application Letter
• Approval for opening of bank account

2. Opening a separate Bank Account: The company is required to open a separate bank account for receiving the amount of consideration in respect of the shares proposed to be issued by way of preferential allotment.

3. Convening a General Meeting: A general meeting of members is required for seeking approval of members by way of special resolution for issuance of shares on preferential allotment basis. For Draft Resolution -Refer Annexure 2

4. Filing of Form MGT-14: Within 30 days from the date of passing of special resolution, Form MGT-14 is required to be filed with the Registrar of Companies.

5. Circulation of letter of offer in PAS-4: After Form MGT-14 has been filed with the Registrar, letter of offer in Form PAS-4 is required to be circulated by the company to all the proposed allottees. For Draft Refer Annexure 3

6. Payment of consideration: After receipt of letter of offer, the allottees will make payment for the consideration amount in the bank account opened by the company specifically for this purpose.

7. Convening Board Meeting for allotment of shares: Within 60 days of the receipt of application money, a board meeting shall be conducted for allotment of shares to those shareholders who have accepted the offer. For Draft Resolution -Refer Annexure 4

8. Filing Return of Allotment: Within 15 days of passing of board resolution for allotment of shares, a return of allotment in Form PAS-3 shall be filed with the Registrar of Companies.

9. Filing Form FC-GPR: Within 30 days of passing of board resolution for allotment of shares, Form FC-GPR is required to be filed with RBI in case any of the proposed allottee is a person resident outside India.

10. Issuance of Share Certificates and payment of stamp duty: The Company shall issue share certificates to all the allottees within 2 months of allotment of shares and make payment of stamp duty on such share certificates within 30 days of issuance thereof. For format of Share Certificate- Refer Annexure 5 

Annexure 1

Specimen of Board Resolution for Issuance of Capital Instruments
 
“RESOLVED THAT pursuant to the provisions of Sections 42 and other applicable provisions, if any, of the Companies Act, 2013 read with the allied Rules and in accordance with the provisions of the Memorandum and Articles of Association of the Company and subject to the approval of Members of the Company, consent of the Board be and is hereby accorded to create, issue and offer _____________ (Number of Shares) ______________________ (Type of Shares) (in one or more tranches) of the Company of the face value of Rs. __________ each on private placement basis, at a price of Rs. ________________ (Issue Price) (including a premium of Rs. ____________) per Equity Share aggregating to Rs. ____________________ to the following subscribers:

 
RESOLVED FURTHER THAT ______________________ (Type of Shares) to be issued pursuant to this resolution shall be subject to the provisions of the Memorandum and Articles of Association of the Company and shall rank pari-passu with the existing security holders of the Company (of the same class) in all respects.
 
RESOLVED FURTHER THAT pursuant to the provisions of the Companies Act, 2013, (i) the names of the Subscribers be recorded for the issue of invitation to subscribe to the ______________________ (Type of Shares); and (ii) a Private Placement Offer Letter in Form No. PAS-4 together with an application form be issued to the Subscribers inviting the Subscribers to subscribe to ______________________ (Type of Shares).
 
RESOLVED FURTHER THAT the monies received by the Company from the Subscriber for application of ______________________ (Type of Shares) pursuant to this private placement shall be kept by the Company in a bank account maintained by the Company with ______________________________ (Name and address of the Bank) and shall be utilized by the Company in accordance with the provisions of Section 42 of the Companies Act, 2013.
 
RESOLVED FURTHER THAT for the purpose of giving effect to this resolution, Mr. _____________ (Name of the Director) (DIN: ________), Director of the Company be and is hereby authorized to do all such acts, deeds, matters and things as they may in their absolute discretion deem necessary and desirable for such purpose, including without limitation, deciding the offer period, circulation of letter of offer to the proposed allottees, preparing, signing, executing, and filing of various documents/ forms with appropriate authorities without being required to seek any further consent or approval of the Board (wherever required).
 
RESOLVED FURTHER THAT for the purpose of giving effect to the resolution, the Board be and is hereby authorized to engage bankers and other consultants and to remunerate them by way of fees and/or other charges and also to enter into and execute all such arrangements, agreements, etc. with such agencies, as may be required and as permitted by law.”
 

Annexure 2

Specimen of Special resolution for Issuance of Capital Instruments
 
“RESOLVED THAT pursuant to the provisions of Sections 42 and other applicable provisions, if any, of the Companies Act, 2013 read with the allied Rules and in accordance with the provisions of the Memorandum and Articles of Association of the Company, the consent of the Members of the Company be and is hereby accorded to create, issue and offer _____________ (Number of Shares) ______________________ (Type of Shares) (in one or more tranches) of the Company of the face value of Rs. __________ each on private placement basis, at a price of Rs. ________________ (Issue Price) (including a premium of Rs. ____________) per Equity Share aggregating to Rs. ____________________ to the following allottees:

 
RESOLVED FURTHER THAT ______________________ (Type of Shares) to be issued pursuant to this resolution shall be subject to the provisions of the Memorandum and Articles of Association of the Company and shall rank pari-passu with the existing security holders of the Company (of the same class) in all respects.
RESOLVED FURTHER THAT pursuant to the provisions of the Companies Act, 2013, (i) the names of the Subscribers be recorded for the issue of invitation to subscribe to the ______________________ (Type of Shares); and (ii) a Private Placement Offer Letter in Form No. PAS-4 together with an application form be issued to the Subscribers inviting the Subscribers to subscribe to ______________________ (Type of Shares) and (iii) consent of the Company is hereby accorded to the issuance of the same to the Subscribers inviting the Subscribers to subscribe to ______________________ (Type of Shares).
 
RESOLVED FURTHER THAT the monies received by the Company from the Subscriber for application of ______________________ (Type of Shares) pursuant to this private placement shall be kept by the Company in a bank account maintained by the Company with ______________________________ (Name and address of the Bank) and shall be utilized by the Company in accordance with the provisions of Section 42 of the Companies Act, 2013.
 
RESOLVED FURTHER THAT for the purpose of giving effect to this resolution, Mr. _____________ (Name of the Director) (DIN: ________), Director of the Company be and is hereby authorized to do all such acts, deeds, matters and things as they may in their absolute discretion deem necessary and desirable for such purpose, including without limitation, deciding the offer period, circulation of letter of offer to the proposed allottees, preparing, signing, executing, and filing of various documents/ forms with appropriate authorities without being required to seek any further consent or approval of the members or otherwise.”
 
 

Annexure 3

 
FORM NO PAS-4
SPECIMEN PRIVATE PLACEMENT OFFER LETTER
[Pursuant to section 42 and rule 14(1) of Companies (Prospectus and Allotment of Securities) Rules, 2014]
The Private Placement Offer Letter shall contain the following:

1. GENERAL INFORMATION
2. Name, address, website and other contact details of the company indicating both registered office and corporate office;
3. Date of incorporation of the company;
4. Business carried on by the company and its subsidiaries with the details of branches or units, if any;
5. Brief particulars of the management of the company;
6. Names, addresses, DIN and occupations of the directors;
7. Management’s perception of risk factors;
8. Details of default, if any, including therein the amount involved, duration of default and present status, in repayment of –

1. statutory dues;
2. debentures and interest thereon;
3. deposits and interest thereon;
4. loan from any bank or financial institution and interest thereon. h. Names, designation, address and phone number, email ID of the nodal/ compliance officer of the company, if any, for the private placement offer process;

1. PARTICULARS OF THE OFFER
2. Date of passing of board resolution;
3. Date of passing of resolution in the general meeting, authorizing the offer of securities;
4. Kinds of securities offered (i.e. whether share or debenture) and class of security;
5. price at which the security is being offered including the premium, if any, alongwith justification of the price;
6. name and address of the valuer who performed valuation of the security offered;
7. Amount which the company intends to raise by way of securities;
8. Terms of raising of securities: Duration, if applicable, Rate of dividend or rate of interest, mode of payment and repayment;
9. Proposed time schedule for which the offer letter is valid;
10. Purposes and objects of the offer;
11. contribution being made by the promoters or directors either as part of the offer or separately in furtherance of such objects;
12. Principle terms of assets charged as security, if applicable;

1. DISCLOSURES WITH REGARD TO INTEREST OF DIRECTORS, LITIGATION ETC.
2. Any financial or other material interest of the directors, promoters or key managerial personnel in the offer and the effect of such interest in so far as it is different from the interests of other persons.

1. details of any litigation or legal action pending or taken by any Ministry or Department of the Government or a statutory authority against any promoter of the offeree company during the last three years immediately preceding the year of the circulation of the offer letter and any direction issued by such Ministry or Department or statutory authority upon conclusion of such litigation or legal action shall be disclosed
2. remuneration of directors (during the current year and last three financial years);
3. Related party transactions entered during the last three financial years immediately preceding the year of circulation of offer letter including with regard to loans made or, guarantees given or securities provided
4. Summary of reservations or qualifications or adverse remarks of auditors in the last five financial years immediately preceding the year of circulation of offer letter and of their impact on the financial statements and financial position of the company and the corrective steps taken and proposed to be taken by the company for each of the said reservations or qualifications or adverse remark
5. Details of any inquiry, inspections or investigations initiated or conducted under the Companies Act or any previous company law in the last three years immediately preceding the year of circulation of offer letter in the case of company and all of its subsidiaries. Also if there were any prosecutions filed (whether pending or not) fines imposed, compounding of offences in the last three years immediately preceding the year of the offer letter and if so, section-wise details thereof for the company and all of its subsidiaries
6. Details of acts of material frauds committed against the company in the last three years, if any, and if so, the action taken by the company

1. FINANCIAL POSITION OF THE COMPANY

(a) the capital structure of the company in the following manner in a tabular form-

1. (a) the authorised, issued, subscribed and paid up capital (number of securities, description and aggregate nominal value);

(b) size of the present offer;
(c) paid up capital
 (A) after the offer;
(B) after conversion of convertible instruments (if applicable)
(d) share premium account (before and after the offer)

1. the details of the existing share capital of the issuer company in a tabular form, indicating therein with regard to each allotment, the date of allotment, the number of shares allotted, the face value of the shares allotted, the price and the form of consideration.

 
Provided that the issuer company shall also disclose the number and price at which each of the allotments were made in the last one year preceding the date of the offer letter separately indicating the allotments made for considerations other than cash and the details of the consideration in each case;
 
(b) Profits of the company, before and after making provision for tax, for the three financial years immediately preceding the date of circulation of offer letter;
 (c) Dividends declared by the company in respect of the said three financial years; interest coverage ratio for last three years (Cash profit after tax plus interest paid/interest paid)
 (d) A summary of the financial position of the company as in the three audited balance sheets immediately preceding the date of circulation of offer letter;
(e) Audited Cash Flow Statement for the three years immediately preceding the date of circulation of offer letter;
(f) Any change in accounting policies during the last three years and their effect on the profits and the reserves of the company.
 
5. A DECLARATION BY THE DIRECTORS THAT-

1. the company has complied with the provisions of the Act and the rules made thereunder;
2. the compliance with the Act and the rules does not imply that payment of dividend or interest or repayment of debentures, if applicable, is guaranteed by the Central Government;
3. the monies received under the offer shall be used only for the purposes and objects indicated in the Offer letter;

 
 I am authorized by the Board of Directors of the Company vide resolution number ___________ dated ___________ to sign this form and declare that all the requirements of Companies Act, 2013 and the rules made thereunder in respect of the subject matter of this form and matters incidental thereto have been complied with. Whatever is stated in this form and in the attachments thereto is true, correct and complete and no information material to the subject matter of this form has been suppressed or concealed and is as per the original records maintained by the promoters subscribing to the Memorandum of Association and Articles of Association.
 
 
It is further declared and verified that all the required attachments have been completely, correctly and legibly attached to this form.
 
 
Date:                                                                                                               Signature:
Place:
 

Annexure 4

 
Specimen of Board Resolution for allotment of shares
 
“RESOLVED THAT pursuant to the provisions of Sections 42 and other applicable provisions, if any, of the Companies Act, 2013 read with the allied Rules (including any statutory modification or re-enactment thereof for the time being in force), consent of the Board be and is hereby accorded to allot ______________  (Number of Shares) ______________________ (Type of Shares) of the face value of Rs. ______________ each on private placement basis at a price of Rs. _____________ (Issue Price) (including a premium of Rs. _________________ per ___________ (Type of Shares) to the following allottee (who has accepted the offer):

 
RESOLVED FURTHER THAT ___________________ (Type of Shares) to be allotted pursuant to this resolution shall be subject to the provisions of the Memorandum and Articles of Association of the Company and shall rank pari-passu with the existing security holders of the Company (of the same class) in all respects.
RESOLVED FURTHER THAT the share certificate be issued pursuant to the provisions of Section 46 of the Companies Act, 2013 read with the allied Rules in Form SH-1 in respect of securities allotted as aforesaid under the signature of Mr._______________ (DIN:**) and Mr. __________ (DIN:**), Directors of the Company.
 
RESOLVED FURTHER THAT any of the Director of the Company be and is hereby authorized to record the name of the allottee in the requisite Register and also to file Form PAS-3 with the Registrar of Companies and Form FC-GPR with the Reserve Bank of India and to do such other acts, deeds and things as may be deemed necessary for the purpose of giving effect to this resolution.”

 

Annexure 5

 
Format of Share Certificate
 
 FORM NO. SH-1
SHARE CERTIFICATE
[Pursuant to sub-section (3) of section 46 of the Companies Act, 2013
 and Rule 5(2) of the Companies (Share Capital and Debentures) Rules 2014]
________________________LIMITED/ PRIVATE LIMITED
(CIN: ________________________)
(Incorporated under the Companies Act, 2013)
Registered Office: ___________________________________________________________________________
This is to certify that the person(s) named in this Certificate is / are the Registered Holder(s) of the within mentioned share(s) bearing the distinctive number(s) herein specified in the above named Company subject to the Memorandum and Articles of Association of the Company and the amount endorsed herein has been paid up on each such share.

 
Given under the common seal of the Company this ________ day of ____________________ , __________

_________
Director
_______
Director
_______________________________
Secretary/ any other authorized person

[Note: No transfer of the Share(s) comprised in the Certificate can be registered unless accompanied by this Certificate]