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SHORT SUMMARY In the modern era of corporate finance, especially for closely held and unlisted companies, raising capital without going public involves key decisions. Among the most used methods are Private Placement and Preferential Allotment. On the surface, these terms may seem interchangeable.
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Private placement, governed by Section 42 of the Companies Act, 2013, is an offer of securities to a select group (max 200) not via public offer. Preferential allotment, under Section 62(1)(c), is the allotment of shares or convertible securities on a preferential basis, requiring shareholder approval by special resolution and valuation norms.
In practice, for unlisted companies, the distinction is largely academic. A preferential allotment must comply with the private placement framework, meaning the company executes a preferential allotment via private placement.
Both require board approval, shareholder approval by special resolution, an offer letter (PAS-4), filing with the ROC (MGT-14, PAS-3), a valuation report by a registered valuer, allotment within 60 days of application money, funds through banking channels, and a cap on allottees (max 200 per financial year, excluding QIBs & ESOPs).
Private placement can include equity, preference shares, and debentures, often used for debt instruments. Preferential allotment primarily involves equity or convertibles, commonly for equity funding by promoters or investors. For listed companies, preferential allotment has additional SEBI (ICDR) regulations regarding pricing and lock-in periods.
Failure to comply can lead to a refund of the subscription amount with interest, significant penalties for the company and officers, and classification of funds as deposits, attracting further scrutiny.
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