Preferential issue is one of the fastest ways of raising capital by the company. As per Regulation 2(1)(nn) of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, (hereinafter referred as ‘ICDR Regulations’) Preferential Issue means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis and does not include an offer of specified securities made through employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities.
Requirements for Preferential Issue
As per Regulation 160 of ICDR Regulations, listed entity making a preferential issue of specified securities shall ensure that:
- Equity shares allotted by way of preferential issue shall be made fully paid up at the time of the allotment;
- Special resolution has been passed by its shareholders;
- Equity shares by the proposed allottees are in dematerialised form;
- Permanent Account Numbers of the proposed allottees has been obtained
- Listed Entity is in compliance with the conditions for continuous listing of equity shares
Promoters: Locked-in period for specified securities allotted on preferential basis to promoter or promoter group and the equity shares allotted pursuant to exercise of options attached to warrants issued on preferential basis to promoter or promoter group, shall be three years from date of trading approval granted for the specified securities or equity shares allotted pursuant to exercise of the option attached to warrant, as the case may be.
Other than Promoters: Locked-in period for specified securities allotted on preferential basis to persons other than promoter and promoter group and the equity shares allotted pursuant to exercise of options attached to warrants issued on preferential basis to such persons shall be one year from the date of trading approval.
Time Period for Completion of Allotment for Listed Entities
Within a period of fifteen days of passing special resolution allotment shall be completed.
However, if within fifteen days from the date of special resolution, allotment of the specified securities is not completed then a fresh special resolution shall be passed and the relevant date for determining the price of specified securities shall be taken with reference to the date of the latter special resolution.
Communications to Stock Exchange
As per Regulation 29(1) (d) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed entity shall give prior intimation to stock exchanges, at least two working days in advance, excluding the date of the intimation and date of the meeting, about the meeting of the board of directors in which proposal for fund raising by way of Preferential Issue and for determination of issue price is to be considered.
As per Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, read with Para A of Part A of Schedule III, the listed entity shall intimate outcome of board meeting to stock exchange within 30 minutes of the closure of the meeting in which decision with respect to fund raising has be taken.
Approvals/Application to Stock Exchange
As per Regulation 28(1) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, listed entity shall obtain In-Principle approval from stock exchanges before issuing securities of preferential basis (i.e. before allotment of securities on preferential basis).
As per Regulation 108(2) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, issuer company shall, make an application for listing, within twenty days from the date of allotment, to stock exchange(s) along with the documents specified by stock exchange(s) from time to time.
Penalty for delay in making listing application
As per Regulation 108(3) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, where there is a delay in making listing application beyond twenty days from the date of allotment, the issuer company shall pay penal interest to allottees for each day of delay at the rate of at least 10% per annum from the expiry of thirty days from date of allotment till the listing of such securities to the allottees
Trading Approval: The securities shall be listed and traded on the Stock Exchange after the grant of trading approval from the Stock Exchange(s).
Preferential Issue under Companies Act, 2013 (‘the Act’)
Under the Act, Section 62(1)(c) needs to be complied with in case of preferential issue.
Applicability of Section 42 of the Act: As per Section 62(1)(c) read with Rule 13(1) of the Companies (Share Capital and Debentures) Rules, 2014, if authorised by a special resolution passed in a general meeting, shares may be issued in any manner whatsoever, including by way of a preferential offer, to any persons whether or not those persons include the equity shareholders or the employees (under ESOP) and such issue on preferential basis should also comply with conditions laid down in Section 42 of the Act.
Thus, in case of issue of shares on preferential basis Section 42 also becomes applicable.
Time Period for Completion of Allotment for Unlisted Entities
The allotment of securities on a preferential basis made pursuant to the special resolution shall be completed within a period of twelve months from the date of passing of the special resolution.
However, if the allotment of securities is not completed within twelve months from the date of passing of the special resolution, then another special resolution shall be passed for the company to complete such allotment thereafter.
Section 62 (i.e. Further Issue of Share Capital) of the Companies Act, 2013, does not prescribe any penal provision for contravention of the said section. However section 450 of the Companies Act, 2013 will be applicable. Accordingly, the punishment for contravention, the company and every offer of the company who is in default shall be punishable with a fine upto Rs.10,000, if the contravention continues then the fine shall be Rs. 1,000 every day after the first during which the contravention continues.
This Article has been Compiled by Swati Garg (Senior Associate)
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