Raising Capital in India: Private Placement vs. Preferential Allotment

Companies in India have two primary options for raising capital without a public offering: private placement and preferential allotment. While both methods involve issuing new securities to investors, they differ in purpose, investor pool, regulations, pricing, and process. Understanding these distinctions helps companies choose the most suitable method for their specific needs.

Purpose:

• Private Placement: Primarily used to raise capital from a select group of qualified institutional buyers (QIBs) or high net-worth individuals (HNIs).

• Preferential Allotment: Can be used for capital raising, but also for strategic reasons like rewarding existing shareholders, bringing in specific expertise, or consolidating control.

Process:

Here's a breakdown of the process for both methods as per the Companies Act, 2013 (as amended):

I.  Private Placement:

1. Identify Investors: The company identifies potential investors who meet their eligibility criteria, such as QIBs or HNIs.

2. Negotiate Terms: The company negotiates investment terms with each investor, including price, conditions, and subscription details.

3. Offer Letter and Subscription: An offer letter outlining terms and conditions is prepared for each investor. Investors who agree submit a subscription form.

4. Board Meeting and Allotment: The board approves the allotment upon receipt of subscription money. Shares are allotted within two months from the date of board meeting (Section 61(10)).

5. Filing and Compliance: The company files a copy of the offer letter and the record of offers with the Registrar of Companies (RoC) within 30 days of circulation (Clear Tax, 2024).

• Additional compliances may apply based on the type and value of securities issued.

1. Valuation Report: For private placement, a valuation report from a registered valuer is required to determine the fair price of the shares.

II. Preferential Allotment:

1. Board Meeting: The board approves the issuance of shares through preferential allotment, sets the price, and determines other terms.

2. Notice to Shareholders: A notice is sent to existing shareholders informing them of the preferential allotment, the price, and their pre-emptive rights to subscribe to the new shares (Section 62(1)(c)).

3. Subscription Period: Existing shareholders are given a specified period to subscribe to the new shares.

4. Un-subscribed Shares: Any shares not subscribed by existing shareholders can be offered to new investors, following the private placement process outlined above.

5. Allotment: Shares are allotted to subscribing existing shareholders and new investors (if applicable).

6. Filing and Compliance: Similar to private placement, the company files necessary documents with the RoC within 30 days (Clear Tax, 2024).

Additional Considerations:

• Valuation Report: For preferential allotment, a valuation report from a registered valuer is required to determine the fair price of the shares (Section 62(1)(c)).

• Foreign Exchange Management (FEMA): Companies raising capital through either method involving foreign investors need to comply with FEMA regulations for foreign exchange remittance, repatriation of profits, and hedging mechanisms (Reserve Bank of India).

Choosing the Right Method:

• Private placement is a quicker and more flexible option for raising capital from a select group of investors. Negotiation plays a bigger role.

• Preferential allotment offers existing shareholders the right to maintain their ownership stake.

Private Placement vs. Preferential Allotment (Indian Company Law 2013)

Feature

Private Placement

Preferential Allotment

Purpose

Raise capital

Reward existing investors or strategic partners

Securities Issued

Equity shares, debentures, convertible instruments,bonds.

Equity shares or convertible instruments only

Investors

Any person identified by the Board (typically institutional investors or HNIs)

Existing shareholders, employees, or other persons

Pricing

Negotiated price

May be at a premium, discount, or market price

Regulation

Section 42 & Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014

Section 62(1)(c) & Rule 13 of Companies (Share Capital and Debentures) Rules, 2014

Prospectus Requirement

Not required

May be required depending on the discount offered

Compliance Checklist:

For Both Methods:

• Board Meeting: Convene a board meeting to approve the issuance of securities, set the price, and determine other terms.

• Company Secretary: Ensure the company secretary prepares and maintains all necessary records and documents as per the Companies Act.