Procedure for Issue of Shares on Preferential Basis Under Companies Act

Soumya Bajpai

13 Sep, 2022

According to the Companies Amendment Act 2017, a Company can raise funds or Capital mainly in three ways: (1) Private Placement/ Preferential Allotment (2) Right Issue (3) Bonus Issue. According to the provision of Section-62 subsection (1) clause (a) at any time, a company having a share capital proposes can increase its subscribed capital by issue of shares. Such shares are offered to people who, at the time of the offering, are the holders of the equity shares of the company in any proportion. The preferential allotment of paid-up share capital is issued by sending the letter of offer for those shares before its issuance.  

Applicability of Provisions

• Preferential Basis Allotment means an issue of shares by any company under Section 62 (1) (c) of (Share Capital and Debenture) of the Companies Amendment Act, 2017.
• SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009

Conditions while Issuing Shares by a Company     

• Approval shall be taken from shareholders though AGM or EGM or Postal Ballot
• Ensure Issue of shares has to be authorized by AOA (Article of Association)
• A list of persons is prepared not exceeding 200 to whom the offer has to be made and obtain the consent letter from the proposed allottees prior to the board meeting to consider the Preferential issue.
• Separate Bank is opened through which subscribers can subscribe to its share and receive money for the allotment or return.
• The company cannot issue shares to any person who has sold any equity shares during the six months preceding the relevant date
• The value of an offer or an invitation must not be less than Rs. 20,000 of the face value of the Security.
• For the Listed company, existing proposed allottees shall have shares in dematerialised form.
• The fully paid up securities have to be issued.
• The preferential issue shall not be done unless it is in compliance with the conditions of continuous listing and also all the proposed allottees must have a PAN

Ineligible person for preferential issue of shares

• The Person who belongs to a promoter or group who has sold his equity shares during six months preceding the relevant date
• The Person who belongs to the promoter or group has earlier applied for a warrant but failed to exercise it.

Procedure for Right Issue of Shares Under Section 62 by a Company

The proposed issue of shares is made by the company when the total authorized share capital of a company gets decreased. Therefore steps must be taken to increase the authorized share capital of the company. The below procedure is required to be followed:

• Under Section- 173(3), the notice is issued not less than 7days to conduct a Board meeting. In the case of urgent business, the director of the company in writing can call a Board meeting to consider the proposal for the rights issue of shares and approving the same issue price of shares.
• The meeting held by the Board of directors can decide the following agendas:
• The Board Resolution can pass the necessary number of shares to be offered on issue rice, right basis, and the list of equity shareholders to whom the issue of shares is to be offered.
• Approval of draft letter of offer
• Approval on share application form and renunciation letter
• The director signs and file the form with ROC (Registrar of Company) and perform all such deeds and acts which is decided in the Board meeting
• The letter of offer is sent to the members by the officer as appointed on the Board meeting, and it shall specify the following:
• Number of shares that are offered
• Offer period of right issue of shares ( i.e., within 15 to 30 days the offer letter is dispatched and must reach to members at least 3 days before the opening of the issue) Section-62 (1)(a)
• The letter of offer is dispatched to all existing equity shareholders accompanied by the draft of the renunciation letter and application form.
• If the offer is not accepted with the offer period as mentioned above, then it shall be deemed to be rejected or declined.
• Subject to condition mention in AOA, the members to whom shares are offered may renounce the shares offered to him in favor of any other person.
• The preparation of the circular draft minutes within 15 days from the date of the conclusion of the Board meeting and send to all Directors. The Board Minutes is for the comments received from the directors.

In the case of the public company

• The certified copy of Board resolution filed with Registrar for the issue of shares on right basis in E-Form No. MGT. 14 as per the provisions of Section- 179(3) along with the fees as mentioned under Companies (Registration Offices and Fees) Rules 2014, within 30 days of passing of the Board meeting resolution.
• After the expiry of specified time or by earlier intimation by a person if he declines the offer of issuance of shares, then the Board of Directors may dispose of the offer in a manner which is not disadvantageous to shareholders of a company as per Section-62(1)(a)(iii).
• On acceptance of the offer by the person, a notice is issued not less than 7days after the expiry of the offer period in writing to every director to conduct a Board meeting for the consideration of a proposal for allotment of shares as per Section- 173(3).
• The Board of Directors hold a meeting to pass the necessary Board resolution for approving the allotment of shares.
• The directors then file the relevant form with ROC and perform all such deed and acts as decided in the Board meeting
• The Board meeting also consider the manner of disposal of unsubscribed shares, if any
•  The preparation of the circular draft minutes within 15 days from the date of the conclusion of the Board meeting and send to all Directors. The Board Minutes is for the comments received from the directors.
• The filing of the return of allotment is made in E-Form No. PAS-3 with the Registrar along with the fees as mentioned under Companies (Registration Offices and Fees) Rules 2014 within 30 days of allotment of shares
• The following attachment is required:
• List of allottees with their name, address, occupation, and a number of securities. This list is certified by the signatory of the Form PAS-3 as being correct and complete as per the records of the company
• Copy of approving the allotment of shares by the Board Resolution
• Any other attachment if required

Other key considerations

• In case the shares are held in the Demat form, the company shall intimate the allotment shares details to the depository immediately on allotment of such securities as per Proviso Section 56(4).
• In case the shares held in physical form, the issue of share certificates in Form No. SH-1 and deliver the share certificates within the duration of two months from the date of allotment as per Section- 56(4) (b).
• Share certificate that is issued must have the seal of the company, which is signed by two directors and by a secretary who is duly authorized by the Board of directors or committee of Board
• The other formalities, such as refund of excess application money, have to be completed.
• In the case of One Person Company, the share certificate is issued under the seal of the company and signed by one director or a person who is authorized by the Board as per Rule-5 (3) of Companies (Share Capital and Debenture) Rules 2014.
• Payment of the requisite stamp duty on the share certificates in accordance with the provisions of the Indian Stamp Act
• The necessary entries made in Register of Directors and the Register of Members and on key managerial personnel as per Rule-5 (4) of Companies (Share Capital and Debenture) Rules 2014.

Conclusions

According to Section- 62 (1) (a), the issue of shares is proposed, to the equity shareholders, of the company in proportion to their paid-up share capital. These shares are offered on right basis by sending a letter of offer fulfilling the prescribed conditions. The AOA provides guidance regarding the offer of rights issue of shares and the person concerned who wants to renounce his shares or offer it to any other person. The Board Resolution for considering the issue of shares on right basis cannot be passed by circulation as per Section- 179(3) (c). The meeting is conducted to draw the final conclusion.