Difference between Private Placement and Preferential Allotment

difference between private placement and preferential allotment

The unlisted companies first time raise share capital by issuing IPO to the general public/ investors, however, issuing an IPO involves various strict rules and regulations and being, complicated procedures the mediocre or newly establish enterprises sometimes unable to raise funds through an initial public offering. Therefore, such companies which don’t want to go into public or unable to fulfil the guidelines of SEBI (Securities and Exchange Board of India) can also raise funds through private placements or preferential allotment.

In this article, we will discuss the meaning of private placement as well as preferential allotment and how these two terms are different from each other.

Private Placement vs Preferential Allotment (Comparison Table)

BASIS OF DISTINCTIONPRIVATE PLACEMENTPREFERENTIAL ALLOTMENT
MeaningIt is an offer or invitation to subscribe the securities, issued to select group of persons.It is the issues and allotment of shares and other securities to a select group of persons.
Regulating ActSection 42 of Companies Act, 2013Section 62 (1) (c) of Companies Act, 2013
or
Provisions as per SEBI Act and Rule
InstrumentsDefined in Securities Contracts Regulation ActEquity shares or any other securities convertible to equity shares
ConsiderationSecurities shall be exchanged through banking channels.Shares or other securities shall be exchanged even for consideration other than cash.
AllotmentWithin 60 days from the date of receipt of application moneyWithin 12 month from the passing of resolution, but within 60 days from the receipt of application money.
Offer DocumentPrivate Placement Offer Letter (PPOL)No such offer letter

Private Placement and Preferential Allotment:

As per Section 42 of the Companies Act, 2013 private placement can be defined as an offer to subscribe the securities of the company to a selected group of persons with a motive for fundraising other than the public offering.

In other words, A Private Placement refers to the offer of placement financial securities such as stocks, bonds or debentures to the selected investors or group of investors bypassing the capital market issues.

Such offers to subscribe the company’s securities can be given to a maximum of 200 persons in a financial year, other than QIB (Qualified Institutional Buyer) and ESOP (Employee Stock Ownership Plan) and these persons will be calculated separately for each kind of securities (equity shares, preferred shares, debentures or bonds).

Moreover, there is a norm of minimum subscriptions of securities (Face value of Rs. 20,000/-) and the company shall maintain or keep the bank account details of each investor.

Read also, Difference between Primary Market and Secondary Market 

On the other hand, preferential allotment refers to the allotment/ issues of shares or other securities to the selected group of individuals or organisations on a preferential basis. It doesn’t include right issues, bonus issues, public issues, issue of sweat shares, ESOP, depository receipts or foreign securities. The securities which are issued in the preferential allotment are equity shares, fully convertible debentures (FCDs), partially convertible debentures (PCDs) or those securities which are convertible to equity shares later on a future specified date.

Preferential allotments are governed under Section 62 (1) (c) of Companies Act 2013. Any company whether it public or private can raise funds through preferential issues by passing a special resolution by the members in general meeting. Such shares can be issued to any person including existing shareholders and employees of the company.

Moreover, if the securities of the company are listed in any recognised stock exchanges, the preferential allotment must comply with the guidelines of SEBI Act and Regulations, otherwise, provisions of the Companies Act and rules shall be applicable.

Now let’s discuss what are the key differences between private placement and preferential allotment in brief.

Difference between Private Placement and Preferential:

The private placements are broad concept whereas preferential allotment is a narrow concept, in other words, we can say, preferential allotment is the subset of a private placement, however, they can be distinguished based on following aspects.

1) Meaning:

A private placement is an offer/ invitation to subscribe the company’s securities (shares) to a selected group of investors other than the public issues, on the other hand, the preferential allotment is the allotment process of company’s securities to a selected group of investors on a preferential basis.

2) Instruments:

Private placement includes the securities which are defined in the Securities Contract Regulation Act such as equity shares, preference shares, PCDs, FCDs, NCDs etc. whereas preferential issue includes equity shares and other securities which are convertible to equity shares. 

3) Offer Document:

The offers or invitation made by the companies during private placements is known as Private Placement Offer letter (PPOL) in a prescribed format (PAS 4) as per Section 42, on the other hand, there is no need to issue such offers in preferential allotments.

4) Regulating Act:

The private placements are performed as per Section 42 of The Companies Act, 2013 whereas preferential allotments are governed under Section 62 (1) (c) of The Companies Act, 2013.

5) Mode of Payment:

In case of a private placement, the funds can be received from the investors only by cheques, demand drafts or other bank transfers, except cash, on the other hand, during preferential allotment funds can be received in cash.

6) Allotment:

In private placement, securities must be allotted within 60 days from the date of receipt of application money, however, in preferential issues, within 12 months from the date of passing the resolution but within 60 days from the receipt of application money.

7) Consideration:

The securities shall be exchanged through banking channels in private placements, on the other hand, in the preferential allotment, shares or other securities shall be exchanged even for consideration other than cash and receipt shall be through banking channels only.

In private placements, the companies must maintain the bank accounts of each investor individually whereas there are no such criteria in preferential allotments.

Conclusion:

Hope this article would have been cleared all your doubts regarding the difference between private placement and preferential. In a nutshell, we can conclude the lesson this way, in fact, the key difference lies in their definition of these two terms that is a private placement is an invitation to buy the shares of an unlisted company for the purchase of fundraising, on contrary private placements are the procedure of allotment of shares of a listed or unlisted company to specific investors on a preferential basis.

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Primary market and Types of Issues

Capital Market | Capital Market Instruments

 

References:  (1) mca.gov.in (source) (2) India code (source)

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