Preferential Allotment v/s. Private Placement

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udit sharma (Querist)
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15 December 2010 Can somebody please explain me the difference between preferntial allotment and private placement of shares....?????

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Udit Sharma

CA Sanat Pyne

CA Sanat Pyne (Expert)
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15 December 2010 private placement route is what an unlisted public company chooses to avail, if it does not want to go with public issue and formalities related thereto and is confident of getting willing contributors by its individual approach. Normally, this is what such a company does, for raising funds after its incorporation. Preferential issue comes into picture when the existing shareholders of such a company can not or do not want to contribute to the further funding requirements in full and, therefore, are willing to let in new set of shareholders and approve further equity shares under Section 81(1A). This can be also by private placement, if the company can get hold of such willing contributors, without going to public.
I hope you now understand the difference.

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Ankur Garg

Ankur Garg (Expert)
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15 December 2010 Hi,

Preferential allotment in simple term is allotment to a person who is not an existing shareholder of the company against section 81. In other words preference given to a person other than existing shareholder in case of allotment is called preferential allotment. According to Preferential allotment is always a kind of private placement of shares.

On the other hand if there are 5 shareholders in a company and you are allotting further shares to those 5 existing shareholders again the same is not preferential allotment but we can call it private placement of shares. Bcoz we are not to public at large for this second issue.

Hope I’m able to bring some clarity.

Regards

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Jayashree S Iyer

Jayashree S Iyer (Expert)
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16 December 2010 Preferential issue means allotment of equity to some select people by a company which has its share already listed. A private placement of shares by a listed company is generally known by name of preferential allotment.

Private placement in case of unlisted companies refers to allotment of equity to third party financial investors in the form of equity capital. This way of funding is resorted to by a private company or a closely held unlisted company who has no means of reaching the public.

The difference is that for preferential allotment the company has both the options either to approach the public or to approach to a select group.
In case of private placement the company has no choice of public equity. The options are either promotors equity or private placement.

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