Difference between Private Placement and Preferential Allotment



Difference between Private Placement and Preferential Allotment


Private placement refers to ‘offer of securities or any invitation to subscribe to securities’ by any company to a selected group of investors. Preferential allotment, on the other hand. refers to 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, employees 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.

Private placement is typically used to raise capital from a small number of high net worth individuals or institutional investors, while preferential allotment is typically used by companies to raise capital from existing shareholders.

Section 42, in conjunction with Section 62 of the Companies Act, 2013 lays down the framework for private placement of securities. Section 42, read with Rule 14 of Companies (Prospectus and Allotment of Securities), Rules, 2014 governs the Private placement of Securities, However, Section 62 read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, governs preferential allotment and provide that issue on preferential basis should also comply with conditions laid down in section 42.

Important Provisions of Private Placement of Securities:

  • The issue has to be approved by the shareholders by way of special resolution.
  • The company while making a private placement has to issue a ‘private placement offer letter’(Form PAS – 4) instead of a prospectus. The offer letter should be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made. No person other than the one for whom the offer letter is addressed shall apply for the shares of the company.
  • An offer to be made only to a selected group of persons as identified by the Board whose number not to exceed 200.
  • Allotment has to be made with in sixty days from the date of receipt of the application money failing which the company is liable to pay interest at the rate of 12% per annum from the expiry of sixtieth day.
  • The Company to file return of allotment (Form PAS – 3) within 15 days of allotment and can use the money only if the Form PAS-3 has been filed.
  • The Company also has to maintain a complete record of private placement offers in Form PAS – 5.
  • Monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than for adjustment against allotment of securities or for the repayment of monies where the company is unable to allot securities.

Preferential Allotment of Specified Securities:

  • Preferential issue of share should also comply with the conditions of Section 42 pertaining to private placement.
  • Such issue should be authorized by the Articles of Association and approved by shareholders by way of passing a special resolution.
  • Securities can be issued to existing members, employees or to outsiders also.
  • The prices at which the securities are allotted shall be determined on the basis of valuation report of a registered valuer.
  • Allotment shall be completed within a period of 12 months from the date of passing special resolution.

Key Differences Between Private Placement and Preferential Allotment

  • In Private Placement any security including Equity shares, Preference shares or Debentures can be issued. In Preferential Allotment, only Equity shares and other securities convertible into Equity shares can be issued.
  • Private Placement can be made to any person as identified by the Board, on the other hand Preferential Allotment can be made to members, employees or any other persons.
  • Offer Letter for Private Placement shall be in prescribed format i.e. Form PAS – 4 but not such any format has been prescribed for Preferential Allotment.
  • The payment of subscription of securities in Private Placement can be made through any banking channel but not in cash but in Preferential Allotment payment can be made through cash or for consideration other than cash.
  • Time limit for allotment of securities in Private Placement is within 60 days of receipt of subscription money and in Preferential Allotment equity shares and convertible securities shall be issued within 12 months from the date of passing Special Resolution.
  • Private placement offer and application shall not carry any right of renunciation. But there is no such restriction in preferential allotment.

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