Preferential Allotment vs Private Placement: A Comprehensive Guide for
When businesses in India look to raise capital, they often weigh two popular options: preferential allotment and private placement. Both methods are governed by the Companies Act, 2013 and the regulations laid down by the Securities and Exchange Board of India (SEBI). While both approaches allow companies to raise funds without going through the complex and time-consuming process of a public issue, they differ in terms of procedure, eligibility, pricing, and regulatory compliances.
For startups, SMEs, and large corporations, understanding the differences between preferential allotment and private placement is crucial to making the right fundraising decision. In this article, we will dive into the meaning, process, regulations, advantages, disadvantages, and practical implications of each method.
What is Preferential Allotment?
Preferential allotment refers to the issue of shares or convertible securities to a select group of investors (whether individuals, venture capitalists, institutional investors, or existing shareholders) on a preferential basis.
Key Features of Preferential Allotment:
- Issued to a specific group of investors chosen by the company.
- Governed under Section 62(1)(c) of the Companies Act, 2013.
- Subject to SEBI (ICDR) Regulations, 2018, in case of listed companies.
- Pricing is often determined by valuation norms specified under law.
- Can be used for raising funds quickly for expansion, acquisitions, or debt repayment.
Example:
A listed company may issue equity shares at a premium to an institutional investor through preferential allotment to fund its new project.
What is Private Placement?
Private placement is the issue of securities to a selected group of identified investors (up to 200 in a financial year), other than by way of a public offer.
Key Features of Private Placement:
- Defined under Section 42 of the Companies Act, 2013.
- Maximum of 200 investors (excluding QIBs and ESOPs) can be offered securities in one financial year.
- Requires filing of Private Placement Offer Letter (Form PAS-4) with the Registrar of Companies (RoC).
- Subscription money must come through banking channels (no cash).
- Securities can include equity shares, preference shares, or debentures.
Example:
A private limited company raising ₹20 crore by offering shares to 50 HNIs through private placement to expand operations.
Key Differences Between Preferential Allotment and Private Placement
AspectPreferential AllotmentPrivate PlacementGoverning SectionSection 62(1)(c), Companies Act, 2013; SEBI RegulationsSection 42, Companies Act, 2013InvestorsSpecific group (can include promoters, institutional investors, or others)Restricted to 200 identified persons (excluding QIBs & ESOPs)Valuation & PricingDetermined by valuation norms; regulated by SEBI for listed companiesPrice determined through valuation report by a registered valuerOffer DocumentPreferential issue resolution passed; no PAS-4 requiredPrivate Placement Offer Letter (Form PAS-4) mandatoryPayment ModeThrough cheque, demand draft, or banking channelsStrictly through banking channels, no cashTimeframeSecurities must be allotted within 60 days of receiving fundsSecurities must be allotted within 60 days of receiving fundsRegulatory OversightHigher for listed companies (SEBI regulations)More suited for private/unlisted companiesFlexibilityBroader, can be issued to promoters or strategic investorsMore restricted, capped at 200 investors
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