In this Flash editorial, the author begins by referring the provisiosn of Section 62(1) (c) preferential allotment of shares, Rule 13 of Companies (Issue of Share Capital and Debentures) Rules, 2014 and Rule 14 of Companies( Prospectus and Allotment of Securities ) Rules, 2014 concerning to the Preferential allotment of Shares of the Company also makes an endeavor to light up on provisions and process of allotment of shares through Preferential allotment of shares, difference between Private Placement of Shares & Preferential allotment of shares etc.

This is article no. 222 of the series of editorials written by the author on corporate laws {including Companies Act, 2013, SEBI, RBI Regulations, IBC, LLP Act, 2008 etc.}.


There are many ways to issue shares like: Right Issue of Shares, Private Placement of Shares, ESOP, Sweat equity shares, preferential allotment of shares etc.

Ahead of starting the study on provisions of preferential allotment of shares (hereafter referred as “PAS”) we may understand meaning of PAS.  The expression ‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities.

Through preferential allotment of shares company can issue following type of shares / securities:
ü  Issuance of Equity shares.
ü  Issuance of Fully or partly convertible debentures
ü  Issuance of any other securities convertible into equity shares


A.    Offer to be previously approved by Special Resolution:
The proposed offer of shares  or invitation to subscribe shares has been previously approved by the shareholders of the company, by a Special Resolution, for each of the Offer of Invitation.

B.      [1]Authorization in Article of Association:
There should be authority in AOA of the Company to issue shares/ securities through PAS. If such power is absent then amend the clauses of AOA to insert power to PAS.

C.      Maximum No. of persons to whom offer can be made: 

·         An offer can be made under a Private Placement Offer Letter to not more than 200 people in a financial year.
·         Not just the limitation of allotment to 200 people but even an invitation to subscribe can’t be made to more than 200 people.
·         The 200 people limit excludes Qualified Institutional Buyers and Employees and the limit of 200 people is calculated individually for each kind of security.

The restriction of 200 member would be reckoned individually for each kind of shares / security i.e. (equity share, preference share or debenture).

D.     Finalization of name of Allottees:
As per rule 13(2)(d) Company have to mention the  the [2]names of the proposed Allottees and the percentage of post preferential offer capital that may be held by them in the explanatory statement to be issued for the General Meeting.

E.      Offer Letter (PAS -4):
The Company shall prepare the offer letter in form PAS-4 and maintain the complete record of PAS in form PAS-5. [3]In case of any preferential offer made by a company to one or more existing members only then no need to prepare offer letter in PAS-4 format and no need to prepare PAS-5.

F.      Time period for completion of the Allotment:
[4]The allotment of securities on a preferential basis shall be completed within a period of twelve months from the date of passing of the special resolution. If the allotment of securities is not completed within twelve months from the date of passing of the special resolution, another special resolution shall be passed for the company to complete such allotment thereafter.
The company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money. Whichever is earlier.

G.    Valuation report:
The price of shares or other securities to be issued on preferential basis shall not be less than the price determined on the basis of valuation report of a registered valuer.

H.    Application Form:
The offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the names of such persons at extra ordinary general meeting.

I.       No further offer till completion of earlier offer: The requirements or provision of sub-section (3) of Section-42 shall apply in respect of offer or invitation of each kind of Shares / security and no offer or invitation of another kind of security shall be made unless allotments with respect to offer or invitation made earlier in respect of any other kind of security in completed.

J.      Value of Offer and invitation: The value of the Offer per person shall not be less than INR 20,000 of ‘face value’ of securities. The shareholder can accept less value of shares.

K.     Separate Bank Account:
Except in case of issue of shares for cash or consideration other than cash the following provisions required to follow:
·        The payment for subscription should be through the bank account of the person subscribing to the Shares / security
·        The Company should keep a record of the bank account from where such payments have been received.
·        The money so received shall be kept in a separate bank account of the company and utilized only for allotment (or repayment).

L.     Other Conditions:
·        The offer letter shall be sent to persons, either in writing or in electronic mode
·        The Company shall not release any public advertisements or utilize any media, marketing or distribution channels or agents to inform the public at large about such an offer.
·        There is no condition in the Act or rule regarding minimum gap between two offers. A company can come with new offer after completion of earlier offer.
·        There is no condition in the Act or rule regarding maximum Number of Preferential allotment of shares in a financial year

Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be required to be complied with


Call Meeting of Board Director:
·         Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting as per SS-I.
·         Attach Agenda, Notes to Agenda & draft resolution of Board Meeting along with Notice.

Hold the Board Meeting:
·         Check the quorum of Board Meeting.
·         Identify the person to whom you will issue shares.
·         Prepare list of such persons.
·         Prepare Draft offer letter under PAS-4.
·         Pass Board Resolution for approval of offer letter.
·          Issue Notice of General Meeting. As per SS-II.

Hold Extra Ordinary general Meeting:
·         Check the quorum of Meeting.
·         Present Offer Letter in PAS-4 before the members of the meeting.
·         Pass Special Resolution for Preferential allotment of Shares.

Circulate Letter of Offer in form PAS-4:
·         Offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made.
·         Offer Letter sent either in writing or electronic mode.
·         Issue offer letter within 30 days of General Meeting/recording the name of such person.

File Form with Registrar:
·         File MGT-14 with Registrar within 30 days of passing of Special Resolution.
§  Notice of General Meeting along with Explanatory Statement.
§  Certified True copy of Special Resolution.
§  Minutes of General Meeting

Open Separate Bank Account:
·         The payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities.
·          The company shall keep the record of the Bank Account from where such payment for subscription has been received.

File Form with Registrar:
File two e-form GNL-2 with Registrar within 30 days of circulation of offer letter.
§  PAS-4 (Offer Letter).
§  PAS-5 (Complete record of Private Placement).

Call Board Meeting after receiving of allotment of money.
·         Issue Notice of Board Meeting to all the directors of company at least 7 days before the date of Board Meeting.
·          Attach Agenda of Board Meeting along with Notice.

Hold the Board Meeting:
·            Present List of Allottees before the Meeting.
·            Pass Board Resolution for allotment of shares (within 60 days of receiving of money).
·            Pass Resolution for issue of Share Certificate in same Meeting.
·            Authorize to two directors and a authorize person to sign share certificate.

File form with ROC:
File PAS-3 with Registrar of Company.
·         List of Allottees.
·         Board Resolution for allotment of Shares.

Issue Share Certificate:
Issue Share Certificate in Form- SH-1 (As per Section-56 with in 2 (two) months from the date of allotment of shares.

*       Renounce of Right: Right to acquire Shares under Preferential allotment can’t be renounce in favour of any other person. As per Rule-14sub-rule-1 proviso, No person other than the person so addressed in the application form shall be allowed to apply through such application form.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION. 

[1] In case of Private Placement authorization in AOA is not mandatory.
[2] This requirement is different from the Private Placement. In Case of Private Placement of share there is no need to decide the name of Allottees at or before the General Meeting.
[3] There is no such exemption in case of private placement of shares.
[4] The same in not prescribed under Private Placement of Shares.


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