PRIVATE PLACEMENT AND PREFERENTIAL ALLOTMENT: AN ANALYSIS

The two concepts of private placement and preferential allotment seem to be similar and we end up landing in confusion.

Companies fulfil their funding requirements through various ways, it may be through raising of fund by way of loans or it may opt for issue of equity shares, preference shares, debentures or any other securities.

Most of the time, we face difficulty to find the difference between the meaning of private placement under section 42 and preferential allotment under section 62(1)(c) of the Companies Act, 2013 (‘Act’). Let’s try to analyse the same.

When a company seeks to raise funds, without making a public issue, then it has the option of either private placement or preferential allotment.

Let’s begin with the definition of these terminologies

Definition of Private Placement

The private placement implies selling of securities (the term “securities” has the same meaning as assigned to it under the Securities Contract (Regulation) Act, 1956), to private investors, with the aim of raising funds for the company.

According to section 42 of the Act, the private placement is one in which a company makes an offer to selected persons such as mutual funds or insurance companies by issuing a Private Placement Offer Letter and satisfying the conditions specified therein.

Definition of Preferential Allotment

Preferential Allotment is used to mean the issue of specified securities, i.e. equity shares or convertible securities, by a company 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 the case of listed entities and Companies (Share Capital and Debentures) Rules, 2013, in the case of unlisted entities.

The offer can be made to any person whether they are equity shareholders and employees of the company or not.

Analysis

In both the cases of Private Placement and Preferential Allotment the procedures remain the same. In fact, as per Rule 13 of the Companies (Share Capital and Debentures) Rules, 2013 it is stated as follows

“…such issue on preferential basis should also comply with conditions laid down in section 42 of the Act”

This makes it clear that Section 42 provides for a general provision regarding allotment of securities of any kind whereas Section 62(1)(c) provides for a specific provision of allotment of equity shares or convertible securities. Any procedural compliance under Section 62 shall be in addition to that of Section 42 but not in substitute of the same.

To conclude, the term “Securities” play a crucial role in interpretation of these two sections. Allotment of any kind of security on a private basis attracts Section 42, whereas allotment of equity shares or convertible securities attracts both Section 42 and 62(1)(c).

To summarise, Preferential Allotment means Private Placement of equity shares or convertible securities.