Private placement and preferential allotment are two of the most terms that are juxtaposed. These two usually happen when the company seeks to raise funds without making it a public issue by way of Initial Public Offering-IPO.
The private placement has two types of qualified institutional placement and preferential allotment, Preferential allotment happens when a person receives securities from a person based on the company preferences.
Qualified institutional placement is a way used to raise capital without having to submit any legal paperwork to the market regulators. Preferential allotment offers company securities based on the preference basis to a select group of investors through a fresh issue of shares.
Private Placement vs Preferential Allotment
The main difference between Private Placement and Preferential Allotment is that private placement is the selling of company shares to private investors and not to the general public. The preferential allotment is the process of issuing shares to selected people based on criteria set by the company.
Both help the company to avoid going the IPO route to raise money.
Comparison Table Between Private Placement and Preferential Allotment
|Parameter of Comparison||Private Placement||Preferential Allotment|
|Meaning||The offering of securities by a company to a given group of specific investors||Issuing of share and other company securities to a person and is mainly based on a preferential basis.|
|Minimum Subscription Fee||Has a minimum subscription fee||Has no minimum subscription fee|
|Article Authorization||No authorization in AOA-Article of Authorization||Requires Authorization in AOA|
|Bank Account Required||Maintaining of a separate bank account for the keeping of the application money||Has no requirement for maintain a different bank account|
|Valuation Report Required||Needs a valuation report||No valuation report is required|
|Allotment Period||Has an allotment period of 60 days from the period of payment of the application money date||Has a 12-month period from the date of passing of the special resolution.
Listed companies have a 15-day period from the passing of a special resolution.
|Offer Letter||Private Placement offer letter should be available||Has no such Documentation|
|Governing Acts||Governed by section 42 of the companies Act,2013||This is governed by the company act 2013, section 62(1)c|
|Documents Involved||Documents shall be in form of a PAS 4||Has NO requirements for such|
|Documents Required||Requires a PAS 3, PAS 4 and a PAS 5||Only requires a PAS 3|
|Payment of Consideration||Payment is by Cheque, demand draft of by way of other approved banking channels||Cash payment can be issued or other consideration other than cash|
What is a Private Placement?
This is the offering of securities by a company to a given group of investors with the aim of raising finances. It is mainly used to avoid the IPO processes which are way time consuming and very costly. This allows for the selling of securities privately.
In a financial year, the private placement can be made up of up to 200 persons or less this is without the inclusion of qualified Institution players or security that is offered to company employees by way of ESOP.
If issuing the private placement shares is more than the predetermined number of 200 individuals, then it becomes a public issue making the company become regulated accordingly.
Allotment of securities is to be made to the investors within 60 days from the date of receipt issue or else a refund of 15 days must be made to the investors.
A defaulting company in returning the investor money with 15 days has a liability of paying back the entire sum of money with interest of 12% from the 60th day. There are two types of private placements, they include qualified institutional placement and preferential allotment.
What is Preferential Allotment?
This is the giving out of shares or issuing out of shares or company securities to a selected person based on a preferential basis. For a preferential allotment to happen, regulations must be complied with.
- Company articles of association must be authorized.
- A special resolution is to be approved by the central government for it to take place.
- Full payment should be given when the issuing of the securities
This helps in saving cost that is involved in the public issue of the securities.it is also a faster way of a company to raise capital through the issuing of share in bulk.
It may be used as a way of helping out a company that is trouble through some injection of capital in order to move the company out of a bad situation.
Main Differences Between Private Placement and Preferential Allotment
- The private placement is the invitation to offer securities to specific investors by issuing securities, to raise funds while preferential allotment id the issuing of shares to groups of people from a listed company with an aim of raising cash.
- Application money can be received through checks, draft and any other banking form but NOT CASH while in preferential allotment money can be received in cash or kind.
- The private placement must be authorized by an article of authorization in the company while in preferential allotment no such article of authorization is needed.
- A private placement is governed by section 42 of the companies act,2013 while preferential allotment is governed by section 62(1) of the companies Act,2013
- The documents required in private placement include the PAS 3-return of allotment securities form, PAS 4-The private placement offer letter, PAS 5-A complete record of the private placement to be maintained by the company while preferential allotment the company shall only sign the PAS 3-return of allotment forms.
- Preferential allotment requires a valuation report while in private placement there is no valuation report that is needed
- The allotment shall be made in 60 days of the receipt application money while in the preferential allotment, allotment shall be made within 12 months from the date of passing of the special resolution but in a case of a listed company, allotment shall be made within 15 days of passing of the special resolution.
Frequently Asked Questions (FAQ) About Private Placement and Preferential Allotment
Is a valuation report required for private placement?
Private placement means when a company offers or invites a group of people to subscribe to security by issuing shares along with specific conditions. Documentation work is required for the private placement and a valuation report is a part of that documentation.
A valuation report should be made by a Chartered Accountant or by a merchant banker who is registered with SEBI on the date of allotment.
Is private placement debt or equity?
A private placement is either debt or equity or it could be both. Private sources of debt/equity provide financial support to companies when their internal funds and bank debt are not sufficient for their growth.
Insufficient funds may hinder the growth of a company that’s why private placement is necessary for such businesses, especially in SMEs and startups.
Can a public company go for private placement?
Private placement is the method of issuing equity shares to raise the business capital for a company. Public companies can go for private placements. In a public company, the security owners may face short-term loss but they can also get long-term gains.
If a public company invests the capital properly, it would result in gains for the company and would increase the company’s evaluation which in turn would benefit the shareholders.
Do preference shares increase in value?
Yes, preference shares increase in value when the interest rates fall but they also get decreased when the interest rates rise. Preference shares give constant dividends to the shareholders. Dividends are entirely dependent on the face value of the share.
When dividends are paid, preference shareholders are paid before common shareholders. However, preference shareholders do not enjoy voting rights like other shareholders.
Why do companies issue preference shares?
Preference shares are issued by the companies to raise their business capital. Preference shares are helpful to the issuing company as they raise their capital.
The preference shareholders also enjoy the rights like they get dividends paid to them before other shareholders. At the time of liquidation, preference shareholders can claim on the company’s assets as well.
In both, private placement and preferential allotment the shareholder have the right to renounce, accept or reject the offer letter. The companies do not make any advertisements to the public rather it is a private process. They both must have a prior special resolution is required in the company in order for them to go through.
Both private placement and preferential allotment are used in a case where the company doesn’t want to opt for an IPO mainly because the IPO’s are usually expensive.
Preferential allotment and private placement can be is however be missed used to in that share and company securities can be held by people and companies without paying the right fair price for them