Statement in-lieu of prospectus is not required.
If preferential allotment is to be made, provisions of section 81 in respect of Rights Issue must be complied with e.g. special resolution in general meeting.
In case of listed company, the pricing of preferential issue should be made as per SEBI guidelines. In case of unlisted company, pricing of preferential issue can be made as may be decided by Board of Directors. Other provisions and procedures are similar to issue by private placement.
Provisions are made in Unlisted Public Companies (Preferential Allotment) Rules, 2003.
Applicability of rules - The rules apply to all unlisted public companies in respect of preferential issue of equity shares, fully convertible debentures, partly convertible debentures or any other financial instrument which will be convertible into or exchanged with equity shares at a later date. These include shares issued through private placement by company and issue of shares to promoters and their relatives either in public issue or otherwise. [In case of unlisted company, how can there be ‘public issue’ ?]
‘Promoter’ means persons who are in overall control of the company or those who hold themselves as promoters.
The intention of rules is to control preferential allotment to promoters. However, the wording of rules is such that the rules apply to all preferential issues of public unlisted companies covered under section 8(1A).
Special resolution and explanatory statement - - Issue of preferential shares will be by special resolution in general meeting. Such issue should be authorised under Articles [Otherwise, Articles will have to be amended before passing the resolution. Model Articles in Table A do not have such specific provision. Really when Statute itself authorizes preferential issue, providing for the same in Articles seems meaningless]. Explanatory statement to notice of meeting shall indicate particulars about pricing and relevant date of pricing, object of preferential offer, class or classes of persons to whom preferential issue is proposed, intention of promoters/directors/key management persons to subscribe, shareholding pattern of promoters and other classes before and after the offer, proposed time within which allotment will be completed and whether a change in control is intended or expected.
Validity period of special resolution - Special resolution should be acted within 12 months. Thus, if issue is not made within 12 months, fresh special resolution will be required.
Certificate from auditor/PCS - Statutory auditors / practicing company shall certify that the issue of the instrument is being made in accordance with rules. The certificate shall be placed before the general meeting.
Preferential allotment in case of private companies – The rules are not applicable to private company. In fact section 81 itself does not apply to a private company.