Any offer of securities or invitation to subscribe to securities to specified private investors not exceeding 200 members in a financial year is a private placement under section 42 of the Companies Act, 2013. Private placement differs from a Rights Issue which is an offer of securities made to the existing shareholders of the company. The offer or invitation to subscribe for securities can be made up to 200 persons or less, in a financial year, not including qualified institutional buyers and securities issued to employees by way of Employees Stock Option Plan (ESOP). Every private placement must be made through the issuance of an offer letter the prescribed format. Payment can be made by way of cheque, demand draft or other electronic banking modes except cash. The company making private placement has to make allotment of securities to the investors within 60 days from the date of receipt of the application amount, or else it has to refund the same within 15 days to the investors.
Preferential Allotment is used to mean the issue of specified securities by a company listed on a recognized stock exchange, to any select person(s) or group of persons, on preferential basis under section 62 of the Companies Act (CA) 2013. Preferential allotment of shares does not include shares or other securities offered through a public issue, rights issue, ESOP, issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities. Through preferential allotment of shares, a company can issue equity shares, fully or partly convertible debentures, and any other securities convertible into equity shares. Preferential allotment of shares must be approved by the shareholders through a special resolution.
The allotment of shares/ securities is made to strategic investors including high networth individuals, companies, venture capitalists or any other person, desirous of increasing its stake, through a fresh issue of shares. The allotment must be made in compliance with the rules and regulations made by SEBI. However, when an unlisted company opts for preferential allotment, the rules of the CA, 2013 will apply. In case of preferential allotment, no such offer letter is required to be issued. Payment can be made either through cash or in kind. The securities issued through preferential allotment should be fully paid-up. As per SEBI takeover code, a preferential allotment exceeding 25% of equity capital shall trigger an open offer to the existing shareholders by the acquirer.