A preferential allotment is an issue of shares to any person, whether or not an existing shareholder, on a preferential basis. Section 62(1)(c) governs the route, and Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 supplies the pricing and valuation discipline.
The Valuation Requirement
Rule 13(3) mandates that the price of shares issued on a preferential basis shall not be less than the price determined on the basis of a valuation report of a registered valuer. The valuation is a floor, not a ceiling: the company can issue at a higher price, but not below the registered valuer’s price. The ROC has adjudicated penalties where shares were allotted below the registered valuer’s price, treating the shortfall as a contravention of Rule 13(3).
The Approval Sequence
The preferential allotment requires a special resolution of the shareholders, with the explanatory statement disclosing the objects, the price, the valuation basis and the identity of the allottees. The board approves the allotment, and MGT-14 is filed with the special resolution. The PAS-3 return of allotment is filed within 30 days of the allotment.
Non-Cash Consideration
Section 62(1)(c) permits an issue for consideration other than cash. The non-cash consideration can be tangible assets, intangible assets, services or debt extinguishment. The valuation report must justify the basis of pricing, and the accounting treatment depends on the nature of the consideration. The company should document the asset transfer, the valuation and the board’s determination that the consideration is adequate.
The Penalty Exposure
A preferential allotment that bypasses the valuation report, the special resolution or the PAS-3 filing is exposed to penalty under Section 42(9) and Section 450, and the allotment can be challenged. The registered-valuer report is the core safeguard against undervaluation and minority dilution; a company that treats it as a formality is exposed to a ROC penalty and to a shareholder challenge.
Call to Action: We advise companies on preferential allotment structuring, registered-valuer valuation and the special-resolution and PAS-3 sequence. For a preferential-allotment review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.