What is preferential issue?
Preferential issue means issuance of equity
shares to the promoters, promoter group or
selected group of persons or any investor(s)
on private placement basis.
 Thus if offer is made to1. Persons ,who are not members of Company
2. Selected members of Company
3. members in disproportionate manner(not pro
rata)
Such an offer shall be called Preferential issue.
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Who can be Investors?
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Institutional Investor
Private equity investors
High net worth individuals or Companies
Regulatory Framework
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For making a preferential issue, listed companies shall
be governed by the provisions contained in Chapter
XIII and Chapter XIII-A of the SEBI (Discloser and
Investor Protection ) Guidelines,2000.
certain provisions of:Securities Contracts(regulation) Act, 1956
Listing Agreement
Indian Stamp Act 1899
Companies Issue of Share Certificate) Rules 1960
SEBI(Substantial Acquisition of shares and Takeover)
Regulations 1997
In-Principle approval from Stock
Exchange
Clause 24(a) of the listing agreement says
prior to the preferential issue of shares, the
Company shall obtain an ‘In-Principle’ approval
from BSE
 for grant of ‘in principal’ approval, Stock
Exchange insist upon production of specific
identity of the proposed allottees
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Authorization in the Articles &
Resolution requirement
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A company shall be authorized by its Article to
issue shares on preferential basis.
A Company can offer further shares to any
person, whether they are shareholder or not, if a
special resolution to that effect has been
passed in the general meeting.
If company fails in getting Special Resolution
but get Ordinery resolution then C.G approval
shall also be required.
Allotment
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Allotment by the Board pursuant to any
resolution passed at a meeting of shareholder of
a Company granting consent for preferential
issues of any financial instrument, shall be
completed within a period of fifteen days from
the date of passing of the resolution.
Where the allotment on preferential basis is
pending for want of any approval for such
allotment by CG, the allotment shall be
completed within 15 days from such approval
Restriction on number of offerees
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Offer or invitation of preferential issue can’t be made
to 50 persons or more. Section 67 of the Act
prescribes that private placement made by companies ,
other than non- banking financial companies and
public financial institutions, to 50 persons or more will
be deemed to the public issue.
However ,Shares issued to certain category of person
under Employee Stock option Scheme or Employee
Stock Purchase Scheme or Sweat Equity Shares shall
not be reckoned for calculating this limit.
Pricing of the issue
at a price higher of the following
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Avg weekly high / low closing prices of shares
quoted in STX during 6 months preceding the
relevant date
OR
Avg weekly high / low closing prices of shares
quoted in STX during 2 weeks preceding the
relevant date
Explanation
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"relevant date" means the date 30 days prior to
the date on which the meeting of general body
of shareholders is held, in terms of Section
81(1A) to consider the proposed issue.
A listed company shall not make any preferential
issue unless it has obtained the PAN of the
proposed allottees.
Example of Pricing
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Date of meeting : 31st Oct2009
Relevant date :1st Oct 2009
Average of weekly high & low of closing price
During preceding 6
During preceding
month of relevant date 2 weeks of
relevant date
Case 1
Case 2
15
26
19
24
Price (Rs.)
19
26
Lock-in period for promoter/s
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The instruments allotted on a preferential basis to the promoter
/ promoter group, shall be subject to lock-in of 3 years from the
date of their allotment
In any case, not more than 20% of the total capital of the
company, including capital brought in by way of preferential
issue, shall be subject to lock-in of three years from the date of
allotment.
In addition to the requirements for lock in of instruments
allotted on preferential basis to promoters/ promoter group the
instruments allotted on preferential basis to any person including
promoters/promoters group shall be locked-in for a period of 1
year from the date of their allotment
Auditor’s Certification
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In case of every issue of shares or other
financial instruments having conversion option,
the statutory auditors of the issuer company
shall certify that the issue of said instruments is
being made in accordance with the requirements
contained in these guidelines
Copies of the auditors certificate shall also be
laid before the meeting of the shareholders
convened to consider the proposed issue
If shares are issued for consideration
other than cash
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valuation of the assets in consideration for which
the shares are proposed to be issued shall be done
by an independent qualified valuer and
the valuation report shall be submitted to the BSE
‘Valuer” means C.A or merchant banker
appointed to determine the value of intellectual
property rights or other value addition.
Proceed from issue
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The details of all monies utilised out of
preferential issue proceeds shall be disclosed
under appropriate heads in B/S indicating the
purpose for which such monies have been
utilised.
The details of un utilised monies shall also be
disclosed under a separate head in the B/S
indicating the form in which such unutilised
monies have been invested.
Details can be given in the notes to accounts
Clause 43(a)of listing agreement
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Every Company shall furnish on a quarterly
basis statement to the Exchange indicating the
variation between projected utilisation of funds
and/or projected profitability statement made by
it in its object/s stated in the explanatory
statement to the notice for the general meeting
for considering preferential issue of shares and
the actual utilisation of funds and/ or actual
profitability.
Clause 43(b) of listing agreement
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The statement referred to above shall be given
for each of the years for which projections are
provided in its object/s stated in explanatory
statement to the notice for considering
preferential issue of shares and shall published
in newspapers with the unaudited /audited
financial result as required under clause 41 .
Clause 43 (C ) of listing agreement
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If there are material variation between the
projections and the actual utilisation/profitability
,the Company shall furnish an explanation therefor
in the advertisement and shall also provide the
same in the Director’s Report.
49(IV) (D) of the listing agreement
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Every company shall disclose to the Audit
committee, the uses applications of fund by
major category ,quarterly
Further on annual basis ,the Company shall
prepare a statement of funds utilised for the
purposes other than those stated in the notice
and place it before audit committee shall make
appropriate recommendation to the board to
take up steps in this matter. This statement shall
be certified by the Statutory auditors of the
Company.
SEBI (substantial Acquisition of
shares and takeover regulation)
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Any new acquirer who is allotted shares having
voting rights on a Preferential basis shall make a
Public Announcement under reg.11 in case
shares allotted to him to exercise 15% or more
but less than 55% of total voting right either
himself or together with person acting in
concert, or in case of beyond 55% of paid up
post preferential equity
If preferential issue is made to QIBs
Equity share shall be:
1. Of the same class and listed on stock exchange
2.
In compliance with the prescribed minimum
public shareholding requirement of the listing
agreement.
Note:
Shares issued under QIP are not subjected to lockin.
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QIBs means
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Public financial Institution as defined in 4A of the Act
Scheduled Commercial bank
Mutual fund
Foreign Institutional Investor registered With SEBI
Multilateral and bilateral development financial Institution
Venture Capital fund with SEBI
Foreign Venture Capital registered with SEBI
State industrial development corportions
Insurance companies registered with IRDA
Providend funds with minimum corpus Rs 25 crore
Pension Fund with minimum corpus of Rs. 25 crore
Public financial Institution u/s 4A
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ICICI
IFCI
IDBI
LIC
UTI
IDFC
Placement Document
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is mandatory to be provide to select investors through
serially numbered copies. The placement document
shall contain all material information
It should also be posted on website of BSE and of
company with disclaimer to
the effect that it is in connection with an issue to QIBs
and that no offer is being made to public or to any
other category of Investors.
A copy of placement document shall be filed with
SEBI with in 30 days of the allotment
Resolution & Allotment
Requirements
A company can make a
preferential issue to QIBs if a
special resolution to that effect
has been passed.
 The placement made pursuant
to authority of same
shareholder's resolution shall
be separated
by at least six months between
each placement.
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Allotment shall be completed
in within 12 months from
the date of passing of the
resolution
Allotment to mutual Funds
Mutual fund shall be alloted a
minimum of 10 % of
specified securities. If no
mutual fund is agreeable to
take up the minimum portion
or any part then such
minimum portion may be
allotted to other QIBs
Restriction on allotment
No allotment shall be made ,either directly or indirectly,
to any QIB being a promoter or any person related to
promoter/s
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QIBs who has all over or any of the following rights shall
be deemed to be related
1.
Rights under a shareholder’s agreement or voting
agreement entered in to with promoters
2.
Veto right
3.
Right to appoint any nominee director
Note :- A QIB who does not hold any shares in the issuer
and who has acquired the aforesaid rights in the capacity
of a lender shall not be deemed to be a person related to
promoter/s
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Number of allottees
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2 where the issue size is less than o equal to
Rs.250 crore,
5, where the issue size is greater than 250 crore.
No single allottee shall be allotted 50 % of the
issue size.
QIBs under the samegroup shall be single
allottee.
Investors shall not allowed to withdraw their
bids after the closure of issue.
Obligations of Merchant Banker
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Any issue and allotment to QIBs shall be
managed by Merchant Banker(s) registered with
SEBI.
The M.B shall give due diligence certificate to
BSE
M.B shall also furnish any document
,undertaking etc required for the purpose of
seeking In principal approval and final
permission from BSE
Restrictions on amount raised
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The aggregate of the proposed placement and
all previous placement made in the same
financial year to QIBs shall not exceed five times
the networth of issuer as per audited balance
sheet of previous financial year.