A preferential allotment by a listed company is governed by two overlapping regimes. Section 62(1)(c) of the Companies Act, 2013, read with Section 42, prescribes the corporate approval and procedural requirements. Chapter V of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR”) prescribes the pricing, lock-in, and disclosure requirements. A preferential allotment that complies with one regime but not the other is invalid, and the consequences range from adjudication penalties to the unwinding of the allotment.
The Pricing Formula Under Regulation 164
The ICDR prescribes a floor price below which a preferential issue cannot be made. For a company whose equity shares have been listed for ninety trading days or more as on the relevant date, the floor price is the higher of the 90-trading-day volume weighted average price (“VWAP”) and the 10-trading-day VWAP preceding the relevant date. For a company listed for less than ninety trading days, the floor price is determined by reference to the price at which the equity shares were issued to the public in the initial public offering, or the book-built price, depending on the circumstances.
The “relevant date” is the date of the board meeting that approves the preferential issue, or, for convertible securities, the date on which the holders become entitled to apply for the equity shares. The relevant date must be stated in the special resolution. The “frequently traded shares” test is applied to determine the pricing methodology: shares are frequently traded if the traded turnover during the 240 trading days preceding the relevant date is at least ten per cent of the total number of shares of that class.
The Companies Act Requirements
Section 62(1)(c) requires the prior approval of the shareholders by a special resolution for a preferential allotment. The explanatory statement must disclose the objects of the issue, the identity of the proposed allottees, the pre- and post-issue shareholding pattern, the basis of the pricing, and the report of the registered valuer. Section 42 requires the offer to be made to a select group of identified persons, the allotment to be completed within sixty days of the receipt of the application money, and the filing of Form PAS-3 within thirty days of the allotment.
The allotment must also comply with the Companies (Prospectus and Allotment of Securities) Rules, 2014, and the company must file Form MGT-14 with the ROC within thirty days of the special resolution.
The Lock-In
The ICDR prescribes a lock-in for the allottees. The pre-preferential shareholding of the proposed allottees is locked in, and the shares allotted pursuant to the preferential issue are locked in for a specified period. The lock-in is designed to prevent the allottees from exiting at a profit immediately after the allotment, and it is a condition of the in-principle approval that the stock exchange grants before the allotment.
The Approval Architecture
The preferential allotment requires the board’s approval, the shareholders’ special resolution, the stock exchange’s in-principle approval, and the ROC filings. Where the allottees are non-residents, the FEMA pricing guidelines and the NDI Rules apply, and the allotment must comply with the sectoral caps and the reporting requirements.
A technically sound preferential allotment is structured from the relevant date, and the pricing, the lock-in, and the approvals are mapped to the statutory timeline.
Call to Action
Anuj Desai & Associates advises listed companies and investors on preferential allotments—from the ICDR pricing formula and the relevant date to the Section 62 and Section 42 approvals, the lock-in, and the stock exchange process. If you are planning a preferential issue, we can help you structure a compliant allotment.
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