The document discusses preferential allotment of securities under Indian law. It defines preferential allotment as an issue of equity shares, securities convertible to equity, or other instruments like FCDs/warrants/PCDs by a company to select investors through private placement under section 81(1A) of the Companies Act, 1956. It covers topics like pricing of shares under preferential allotment, lock-in periods for allotted shares, limits as per takeover regulations, and procedural requirements under SEBI guidelines.

1. UNDERSTANDING PREFERENTIAL ALLOTMENT OF SECURITIES Pavan Kumar Vijay

2. WHAT IS PREFERENTIAL ALLOTMENT? of An issue by a company Equity shares / Securities convertible into equity / FCDs / Warrants / PCDs / Convertible Preference Shares pursuant to a resolution u/s. 81(1A) of Act, to any select group of persons by way of private placement.

3. ADVANTAGE OF PREFERENTIAL ALLOTMENT Simple way to raise capital of the Company No need to appoint Merchant Banker. Economical way to raise capital. Minimum Formalities.

4. GOVERNING LAW The Companies Act, 1956. Chapter XIII of SEBI (Disclosure and Investor Protection) Guidelines, 2000. Unlisted Public Companies (Preferential Allotment) Rules, 2003. SEBI (SAST) Regulations, 1997.

5. THE COMPANIES ACT, 1956 Section 81(1A) of the Companies Act,1956 provides Special Resolution OR Ordinary resolution and approval of Central Govt . is required for giving the equity shares or security convertible into equity shares at a later date to a selected group of persons instead of existing shareholders.

6. SEBI (DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES, 2000

7. DIP GUIDELINES PROVISIONS Pricing Currency of Shareholders’ Resolution Lock-in Requirements Restrictions

8. PRICING OF PREFERENTIAL ISSUE Higher of the average of weekly high/low of closing prices during: 6 months prior to, OR 2 weeks prior to Relevant Date = 30 days prior to the date of EGM/AGM where resolution u/s 81(1A) is passed. Shares Minimum Price Security

9. PRICING….. Contd Higher of the average of weekly high/low of closing prices during: 6 months prior to, OR 2 weeks prior to Relevant Date = 30 days prior to the date of EGM/AGM where resolution u/s 81(1A) is passed. OR as at Company’s option-a date 30 days prior to date of exercise of warrants/FCDs. Shares arising out of Warrant/FCD/ PCD Minimum Price Security

10. IILUSTRATION: 2 weeks price calculation 47/2= 23.5 Average 47 Total 22 23 Weekly Low of closing price 23 24 Week 2 24 25 Week 1 Average Weekly high of closing price Week

11. IILUSTRATION: 26 weeks price calculation 93.5/26=… Average 93.5 Total 22.5 20 25 Week 26 24 21 27 Week 25 22 23 Weekly Low of closing price 23 24 Week 2 . . 24 25 Week 1 Average Weekly high of closing price Week

12. Pricing Schedule General Meeting 12.08.2005 Relevant Date 13.07.2005 30 days 2 weeks 6 months (27.06.05- 8.07.05) (10.01.05- 8.07.05)

13. DIFFERENCE BETWEEN PRICING OF EQUITY SHARES & WARRANTS Relevant Date 30 days prior to the date of EGM/AGM where resolution u/s 81(1A) is passed. OR as at Company’s option-a date 30 days prior to date of exercise of warrants/FCDs Relevant Date 30 days prior to the date of EGM/AGM where resolution u/s 81(1A) is passed WARRANTS/FCDs/PCDs SHARES

14. A Company decided to allot shares on preferential basis to certain persons in Jan 2005. The relevant date was fixed on 28th December. In the meanwhile, SEBI notification came in & pursuant to that, limit of 55% was imposed. However, in the present case, the shareholding of the person was crossing the limit of 55% marginally. The question is - Whether there is any violation of law? Can SEBI provide for that the meeting should be held again taking the new relevant date, when the market is high? Queries…contd

15. LOCK IN REQUIREMENTS 3 years from the date of allotment. Allotment to promoters is to be locked in. Subject to maximum of 20% of the total capital of the Company. LOCK-IN PERIOD SITUATION- PROMOTERS

16. Lock-in requirements….. Contd 1 year from the date of allotment. Additional issue to promoters or any issue to any person LOCK-IN PERIOD SITUATION- PROMOTERS/ NON PROMOTERS

17. Lock-in requirements….. Contd Reduced by earlier lock-in period of warrants /FCDs. Shares acquired on conversion of warrants /FCDs. LOCK-IN PERIOD SITUATION

18. Lock-in requirements….. Contd 6 months from the relevant date The entire pre-preferential capital held by the allottees (including promoters) . LOCK-IN PERIOD SITUATION

19. QUERIES 1. The SEBI (DIP) Guidelines provides for that the preferential allotment to promoters to be locked in for 3 years from allotment. However, not more than 20% of the total capital of the Company shall be locked in for 3 years. Suppose the shares of the promoters are locked in the public issue & the lock in period is still going on. Meanwhile the Company issues shares on preferential allotment to the tune of 40%. Now, as the DIP Guidelines provide that not more than 20% of total capital shall be locked in. The question is from what moment 3 years shall be reckoned- is it from the date of first lock in or 3 years from the date of preferential allotment?

20. Queries Q. A Company issues warrants on preferential allotment to a person who is already a shareholder of the Company. When would the lock in period of 6 months starts for the pre-preferential holding- is it on allotment of warrants or from the date of conversion of warrants into shares?

21. Q. The SEBI (DIP) guidelines, 2000 provides that the pre-preferential holdings of the allottees shall be locked in for 6 months from the date of relevant date. The question is whether the spouse/ PAC of the allottees can sell off their holdings? Queries…contd

22. RESTRICTIONS Proposed preferential issue allottees who have sold any shares in the listed company within 6 months prior to the allotment – then they are not eligible for the allotment

23. Restrictions….contd A preferential issue cannot be made unless the issue is in compliance with the conditions for Continuous Listing , such as Clause 40A of the Listing Agreement.

24. Restrictions….contd Entire shareholding of the proposed allottees in the company is held by them in DEMATERIALIZED FORM

25. TIME PERIOD Shareholders’ Resolution must be implemented within 15 days except in case of pending regulatory approvals.

26. EXPLANATORY STATEMENT REQUIREMENTS Objects of the issue Example: a) To augment long term resources by infusing fresh equity. b) To raise funds for corporate actions viz., Capital Expenditure, replacing high cost debt and general corporate purposes.

27. Explanatory statement requirements…(contd ) Intention of the Promoters/ directors/ key personnel to subscribe the issue. Example: Neither any of the promoters nor any of the Directors, key employees, except Mr. A and Mr. B, have any direct or indirect intention to acquire these further shares in any manner.

28. Shareholding Pattern before and after the issue as in Clause 35. No of Shares held Example Explanatory statement requirements…(contd) Name of shareholders Pre issue shareholding Post holding shareholding Stage I (after allotment of Equity shares) Post holding shareholding Stage II (after conversion of warrants) % of Shares No of Shares Held % of shares No of Shares Held % of share

29. Explanatory statement requirements … Identity of the allottees including the pre & post preferential issue. 300 100 200 Promoter Warrants Mr. B 200 200 0 Non-Promoter Equity shares Mr. A Post issue holding (No and %) Allotment under preferential Issue Pre Issue Holding (No and %) Category instrument Name of the proposed subscriber

30. ISSUE OF WARRANTS, FCDs ON PREFERENTIAL BASIS Conversion of warrants, FCD, etc., must be within 18 months of allotment . In case of warrants, minimum 10% must be paid upfront on allotment. If option to convert the warrants into equity shares is not exercised, then the upfront payment received shall be forfeited.

31. Time Line- Preferential Allotment Relevant Date 30 days General Meeting (12.08.2005) Filing of application of in-principal approval Despatch of Individual Notices 25 days 15 days Board Meeting Allotment of Shares

32. Preferential Allotment Viz a Viz Takeover Code. REGULATION 10 & 11 OF SEBI (SAST) PROVIDES No acquirer shall acquire shares or voting rights, through market purchases and preferential allotment entitle such acquirer to exercise more than fifty five per cent of the voting rights in the company.

33. LIMITS OF PREFERENTIAL ALLOTMENT CONSIDERING TAKEOVER CODE

34. Limits of the Preferential Allotment are calculated taking into account the EXPANDED CAPITAL of the Company & not the EXISTING CAPITAL of the Company.

35. Acquirer (holding 20%) Through Preferential Allotment Acquirer’s holding cannot exceed 24.99% of Expanded Capital.

36. Acquirer (holding 5 %) Through Preferential Allotment Acquirer’s holding cannot exceed 14.99% of Expanded Capital.

37. Acquirer (holding 0%) Through Preferential Allotment Acquirer’s holding cannot exceed 14.99% of Expanded Capital.

38. Example: Expanded capital=11764700 Present capital= 1 cr 1764700 (14.99% of the Expanded Capital) 14.99% 0 Non- Promoter Shares & % of Expanded Capital Maximum Allotment in Preferential allotment. Existing shares & % Category

39. Q What is the exact formula for calculating the % of shareholding, in case of issue of warrants? At what point of time, the number of warrants would be taken into account – on the day of issuing warrants or on the date of conversion of warrants into shares? QUERIES

40. Q. Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation? What, if, the same question arises in case the promoter is holding 60%? The issue is as there is acquisition of shares but such acquisition has not change the voting rights. The question is what is relevant in terms of takeover code, acquisition or voting rights? Queries…contd

41. Queries…contd Q. Suppose a Promoter is holding 5% shares in a company. What is the limit of acquisition in preferential allotment to the promoter? Is it 5% or 10%?

42. Q. Suppose the present holding of a promoter is 54% and after preferential allotment the holdings of the promoter remains same as that of 54% of the expanded capital. The question is whether any disclosure or compliance required in the present situation Queries…contd

43. Q. What is the maximum limit of preferential allotment? Can a Company through preferential allotment expand its capital without any limit ? Queries…contd

44. RECENT PREFERENTIAL ALLOTMENT Energy Development Company Ltd. Rellic Technologies Ltd Magma Leasing Ltd Indo Count Ltd International Hometex Ltd. Mannappuram General Finance & Leasing Ltd. Visesh Infotecnics Ltd. Source: BSE Website

45. CHECKLIST ON PREFERENTIAL ISSUE OF SECURITIES

46. Inform the Stock Exchange by fax/ letter/telegram within 15 minutes of conclusion of Board meeting as per the stipulation of Listing Agreement. {Clause 22(a) of Listing Agreement} 2. Hold Board Meeting to consider the preferential issue. 1. Points to consider S.N

47. 3 copies of notice of the meeting should be sent to Stock Exchange at the same time of dispatch to shareholders. (Clause 31(c)- Listing Agreement) 4. Dispatch the general meeting notice together with explanatory statement at least 21 clear days before the date of general meeting . 3. Points to consider S.N

48. The Company shall apply for in principal approval in terms of clause 24(a) of the listing Agreement. 6. General meeting shall be held to pass a Special resolution for issue of securities on preferential basis. 5. Points to consider S.N

49. Form no 23 shall be filed to ROC within 30 days of passing of resolution along with the requisite fees. 8. The copy of the proceedings of the general meeting shall be forwarded to Stock exchanges promptly. (Clause 31(d) of Listing Agreement) 7. Points to consider S.N

50. The currency of the instrument like warrants/FCDs/PCDs shall not exceed beyond 18 months from the date of issue of relevant instrument. 10. Allotment pursuant to resolution passed at a meeting of shareholders of a co granting consent for preferential issues shall be completed within 15 days from the date of passing of resolution except in the case of pending regulatory approvals 9. Points to consider S.N

51. Disclosure in Balance Sheet: The details of the money utilized out of the preferential issue shall be disclosed under the appropriate head in the balance sheet of the Company indicating the purpose for which such monies have been utilized. 12. A return of allotment in Form No. 2 shall be filed within 30 days of allotment with the concerned Registrar of Companies after paying the requisite fees 11. Points to consider S.N

52. Allotment to promoters up to 20% of the total capital (including the preferential issue) – 3 years from allotment. Additional issue to promoters or any issue to any person - 1 year from allotment.  The entire pre-preferential capital held by the allottees - 6 months from the allotment . 13.

53. File documents for final listing of shares with the Stock Exchange 12.

54. THANKS ….