Preferential Issue of Shares by a Pvt Co- Detailed procedure

Preferential Issue of Shares by  a Pvt Co- Detailed procedure

Mrs. Jayalakshmi Srinivasan, Company Secretary, Chennai

Formalities to be complied by a Private Company wishing to issue shares on preferential basis to any person whether or not an employee or shareholder for cash or otherwise than on cash : 

Applicable sections 

Sec 62(c),42 & 

Companies (Share Capital and Debentures) Rules, 2014.

Applicability: To All Companies

Points to take care off:

a)    Check if the issue is authorized by its articles of association;

b)    Valuation report of the valuer subject to such conditions as may be prescribed

c)     Ensure the securities allotted by way of preferential offer shall be made fully paid up at the time of their allotment.

d)    A Special resolution is to be passed : The company shall make the following disclosures in the explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 of the Act:

(i) the objects of the issue;

(ii) the total number of shares or other securities to be issued;

(iii) the price or price band at/within which the allotment is proposed;

(iv) basis on which the price has been arrived at along with report of the registered valuer;

(v) relevant date with reference to which the price has been arrived at;

(vi) the class or classes of persons to whom the allotment is proposed to be made;

(vii) intention of promoters, directors or key managerial personnel to subscribe to the offer;

(viii) the proposed time within which the allotment shall be completed;

(ix) the names of the proposed allottees and the percentage of post preferential offer capital that may be held by them;

(x) the change in control, if any, in the company that would occur consequent to the preferential offer;

(xi) the number of persons to whom allotment on preferential basis have already been made during the year, in terms of number of securities as well as price;

(xii) the justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered valuer.

(xiii) The pre issue and post issue shareholding pattern of the company in the following format-

Sr. No.	Category	Pre Issue		Post Issue
		No of shares held	% of shareholding	No of shares held	% of shareholding
A	Promoters holding
1	Indian
	Individual
	Bodies Corporate
	Sub Total
2	Foreign Promoters
	Sub total(A)
B	Non promoters holding
1.	Institutional Investors
2.	Non-Institution :
	Private Corporate Bodies
	Directors and Relatives
	Indian Public
	Others(including NRIs)
	Sub total(B)
	Grand total

e)   Company shall make an offer in Form PAS 4.  A private placement offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the names of such persons in accordance with sub-section (7) of section 42:

f)    No person other than the person so addressed in the application form shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid. 

g)   no fresh offer or invitation of another kind of security shall be made unless allotments with respect to offer or invitation made earlier in respect of any other kind of security is completed  or that offer or invitation has been withdrawn or abandoned by the company.

h)   the value of such offer or invitation per person shall be with an investment size of not less than twenty thousand rupees of face value of the securities;    This will apply to non banking finance companies registered with RBI only if RBI has not prescribed similar rules(if RBI has prescribed rule the same will apply) This will not apply to housing finance companies registered with the National Housing Bank under National Housing Bank Act, 1987, if they are complying with regulations made by National Housing Bank in respect of offer or invitation to be issued on private placement basis

i)   the payment to be made for subscription to securities shall be made from the bank account of the person subscribing to such securities and the company shall keep the record of the Bank account from where such payments for subscriptions have been received:

j)   The company shall maintain a complete record of private placement offers in Form PAS-5. A copy of such record along with the private placement offer letter in Form PAS-4 shall be filed with the Registrar with fee as provided in Companies (Registration Offices and Fees) Rules, 2014

k)   the date of private placement offer letter shall be deemed to be the date of circulation of private placement offer letter.

l)  A return of allotment of securities under section 42 shall be filed with the Registrar within thirty days of allotment in Form PAS-3 and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of all security holders containing-

(i) the full name, address, Permanent Account Number and E-mail ID of such security holder;

(ii) the class of security held;

(iii) the date of allotment of security ;

(iv) the number of securities held, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash.

As per section 42 the Company making an offer or invitation shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent. per annum from the expiry of the sixtieth day:

Company shall keep 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—

(a) for adjustment against allotment of securities; or

(b) for the repayment of monies where the company is unable to allot securities.

Money can be used only after allotment.

The offer should be made in name and company shall keep records of such offers. All offers covered under this section shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and that such persons shall receive the offer by name, and that a complete record of such offers shall be kept by the company in such manner as may be prescribed and complete information about such offer shall be filed with the Registrar within a period of thirty days of circulation of  relevant private placement offer letter.

Letter of offer is to be sent to all shareholders specifying the number of shares and the time line within which the same is to be accepted.The time frame of not less than 15 days and not exceeding 60 days does not appear to be applicable.

The offer shall not be made to more than 200 persons [excluding qualified institutional buyers  as defined in SEB(Issue of Capital and Disclosure Requirments) Regulations, 2009 as amended from time to time )and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62], in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.This limit of 200 persons will apply to non banking finance companies registered with RBI only if RBI has not prescribed similar rules(if RBI has prescribed rule the same will apply) This will not apply to housing finance companies registered with the National Housing Bank under National Housing Bank Act, 1987, if they are complying with regulations made by National Housing Bank in respect of offer or invitation to be issued on private placement basis

 Any offer or invitation not in compliance with the provisions of the Act and rules  shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with. This is irrespective of the money having been received or not

All monies payable towards subscription of securities under this section shall be

paid through cheque or demand draft or other banking channels but not by cash.

No company offering securities under this section shall release any public

advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.

If a company makes an offer or accepts monies in contravention of this section,the company, its promoters and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.

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Note: The Second part of this series (Rights Issue by Pvt Companies) will be published soon...