Issue of Shares by way of Right Issue or Preferential Allotment or Private Placement
Issue of Shares and Allotment of Shares:
Several companies in India explore and choose from the different available options like Public Deposits, Issue of Shares, Debentures, Loans from Banks and Lending Institutions and various other sources for investing more funds in the operation of the business. One of the most common way is the Issue of Equity shares through which they get necessary funding. While dealing with equity funding through issue of equity shares, there are many phases as well as modalities like Private Placement, Preferential allotment and Right issue etc. through which the allotment of shares takes place in a company.
Allotment of Issue of Shares on various basis:
The below table explains the detail of the parameters in line with the Companies Act, 2013 read with applicable rules made there under-
- Right Issue: Under Section 62(1)(A) of the said act, the allotment of shares is provided to the existing shareholders of the company. An approval from the board is required for the same whereas no prior approval from the shareholders is mandatory. While issuing shares through Right Issue, a valuation certificate from a practising Chartered Accountant is usually required by the company. Public companies who File the Form MGT-14 within 30 days of passing of Board Resolution are required to file other forms with the same as well and other companies does not have to fill in the same. A letter of offer is not applicable in this case neither there is a fixed format prescribed by the act for this purpose. The Right of Renunciation has been provided for it. The company is not needed to open a separate bank account for the same and can utilise the money without any restriction or bounded time period. The time period for the allotment of shares has been prescribed as 60 days from the date of receipt of application money. If a person wants to return the allotment the same can be done by applying through Form PAS-3 within 30 days from the date of allotment. There is no restriction on number of persons to whom the offer can be made. Also, the price of Issue of Shares under this can be sold at the Face Value of the shares. The company has to send a notice through registered post or speed-post or e-mail or hand delivery at least 3 days before the day of the issue of the shares.
- Preferential Allotment: Section 62(1)(c) & Section 42 read with the Rule 13 of the Companies (Share Capital & Debentures) Rules, 2014 and Rule 14 of the Companies (Prospectus & Allotment of Securities) Rules, 2014, provides with the allotment of shares to the persons that are preferred over existing customers by the company. It is also called as Preferential Allotment. Such an allotment requires prior approval of the board of directors and the shareholders through a special resolution authorizing the transaction. A valuation Certificate from a Registered Valuer is mandatory for the same. The company is required to file MGT-14 with the ROC along with other necessary forms within 30 days of passing of the special resolution. If the company has made an offer to allot shares to other persons other than existing members then an offer letter is required in a prescribed format in Form PAS-4. The Right of Renunciation is not available to the company in this case. Also, the company is required to open a separate bank account to carry forward such transactions. It cannot utilize the money from issuing shares unless and until the shares are not allotted. The time period for the allotment of shares has been prescribed as 60 days from the date of receipt of application money. If a person wants to return the allotment the same can be done by applying through Form PAS-3 within 30 days from the date of allotment. However, in a financial year the number of persons to whom a company can make an offer is limited and restricted to up to an aggregate of 200. The issuing price of the shares cannot be more than valuation price made in case of preferential allotment. The company is required to send a notice to the such persons within 30 days of their name recording either through e-mail or speed post or courier, etc.
- Private Placement: Section 42 & Rule 14 of the Companies (Prospectus & Allotment of Securities) Rules, 2014, provides with the private placement while allotment of shares. It means that the company has made an offer to some specific investors for investment funding. A prior approval of the shareholders through special resolution and the board is mandatory in this case. It also requires a valuation certificate from the Registered Valuer. Any company having a private placement for the share issuing is bounded to file Form MGT-14 along with the other compliant forms with the ROC within 30 days of passing the special resolution. An offer letter in the prescribed format in Form PAS-4 is to be issued as well. The companies do not enjoy the Right of Renunciation in such a case of allotment of shares. A separate bank account is to opened for carrying on such transactions. The companies cannot utilize the amount received for the issued shares until and unless the shares are not allotted. The time period for allotment of shares through a private placement is fixed as within 60 days of the receipt of the application money. If a person wants to return the allotted shares, then the same can be done through filing Form PAS-3 within 15 days of the allotment made. A company cannot make offer in this case to more than 200 persons in aggregate during a particular financial year. The issue price of such shares cannot exceed the valuated price. The company is required to send a notice of allotment of shares to the person whose name has been recorded within 30 days of such a record through courier, e-mail, post, etc.