Private Placement and Preferential Allotment

Concept
• Private Placement:
The private placement implies selling of securities to private investors, with the aim
of raising funds for the company, by making an offer to selected persons such as
mutual funds or insurance companies by issuing a Private Placement Offer Letter and
satisfying the conditions specified therein (S. 42, CA, 2013)
• Preferential Allotment:
Preferential Allotment is used to mean the issue of specified securities, i.e. equity
shares or convertible securities, by a company to any select person or group of
persons, on preferential basis, as per S. 62(1)(c) of CA, 2013.

Securities
• Private Placement:
Securities (as defined under Section 2(81) of Companies Act, 2013) which says
“Securities means the Securities defined in clause (h) of Section 2(81) of Securities
Contracts (Regulation) Act, 1956.
• Preferential Allotment:
the expression, “shares or other securities” means equity shares, fully convertible
debentures, partly convertible debentures or any other securities, which would be
convertible into or exchanged with equity shares at a later date. [Rule 13(1)
Companies (Share Capital and Debentures) Rules, 2014]

Allottees
• Private Placement:
To be made only to a select group of persons as identified by the Board, whose
number not to exceed 200 in aggregate during a Financial Year [Rule 14 (2),
Companies (Prospectus and Allotment of Securities) Rules, 2014]
• Preferential Allotment:
Can be issued to existing members, employees, or outsiders too, and any person
mentioned in clause (a) or clause (b) of sub-section (1) of section 62, CA, 2013.

Offer Document
• Private Placement:
Prescribed Document i.e. Private Placement Offer Letter (PAS 4)
• Preferential Allotment:
No prescribed format

Consideration
• Private Placement:
All monies payable shall be paid through cheque or demand draft or other banking
channels but not by cash. {S.42(5) CA, 2013}
• Preferential Allotment:
Can be issued for cash or for consideration other than cash. [Rule 13(2)(g) Companies
(Share Capital and Debentures) Rules, 2014].

1
Authorisation by AOA
• Private Placement:
No authorization needed.
• Preferential Allotment:
Need to be authorized by AOA [Rule 13(2)(a) Companies (Share Capital and
Debentures) Rules, 2014]

Allotment
• Private Placement:
Within 60 Days of receipt of Application money. {S.42(6) CA, 2013}
• Preferential Allotment:
Allotment shall be made within 12 months of passing the Special Resolution. [Rule
13(2)(e) Companies (Share Capital and Debentures) Rules, 2014]

Status of PP vis a vis PA

Rule 13(1), Companies (Share Capital and Debentures) Rules, 2014 provides that any
issue on preferential basis should also comply with conditions laid down in section 42
of the Companies Act, 2013, i.e. preferential allotment has to comply with provisions
for Private Placement as well.
This indicates that S.42 is more general in nature when compared to S.62(1)(c) which
provides for a specific type of allotment of equity shares or or convertible securities.
Procedural compliances under both S.62(1)(c) and S.42 have to be adhered to.