Preferential allotment and private placement are two key methods of issuing securities that can be practised by both private and public companies. The key difference between preferential allotment and private placement is the group of investors they are been offered to. Any investor can subscribe to shares offered through a preferential allotment since shares are allocated based on a preferential basis whereas only selected shareholders are entitled to the opportunity to buy securities in private placement.
CONTENTS
- Overview and Key Difference
- What is Preferential Allotment
- What is Private Placement
- Side by Side Comparision – Preferential Allotment vs Private Placement
What is Preferential Allotment?
This is the issue of shares or other securities by a company to any selected person or group of persons on a preferential basis. This is similar to an investor purchasing securities of a company of his or her choice from the stock exchange.
Preferential allotments do not include the shares and securities issued through the following share issues since the parties involved in them are often decided based on the type of issue.
Initial Public Offering (IPO)
IPO is when a company offers its shares to the public investors for the first time by listing the company on a stock exchange. The company can gain access to wider opportunities to raise increased amounts of finance in this manner.
Rights Issue
When the company issues shares to the existing shareholders instead of new investors, it is referred to as rights issue. Shares are allocated based on the existing shareholding and shares are often offered at a discounted price to the market price in order to provide an incentive for the shareholders to subscribe for the issue.
Employee Share Option Scheme (ESOP)
This provides the existing employees with the opportunity to purchase a certain number of shares at a fixed price, sometime in the future. The objective of EPOS is to achieve goal congruence by aligning the objectives of employees with that of the company.
Employee Share Purchase Scheme (ESPP)
ESPP offers the option to purchase shares of the company at a specified price, normally referred to as the offer price, over a specified period of time. ESPP is designed to serve a similar purpose as ESOP.
Bonus Shares
A bonus issue (also called a scrip issue) refers to the issue of additional shares to the existing shareholders. This is done in proportion to the current shareholding. The liquidity of shares improves due to the reduced share price.
Issue of Sweat Equity Shares
These are shares issued for employees and directors in recognition for their positive contributions to the company. The issue of sweat equity shares is done by passing a special resolution. Following the issue of shares, they will be non-transferrable for a time of 3 year period.
Preferential Allotment by Public Companies
While preferential allotments can be made by both private and public companies, higher rules and regulations are applicable to public companies. These guidelines are introduced and regulated by the Securities and Exchange Board. Special attention is given to the following in case of preferential allotments in public companies.
- Pricing of the issue
- Pricing of shares arising out of warrants
- Pricing of shares on conversion
What is Private Placement?
Private placement refers to the offer of securities by the company to a selected group of investors. Raising finance through an IPO can be very costly and time-consuming; this can be avoided through a private placement, thus, this strategy is preferred by many small scale businesses. This strategy allows a company to sell securities to a selected group of investors privately. Further, types of documentation and the legal implications are less complicated and can be done cost effectively.
A company can make a private placement offer for a maximum of 50 investors within a financial year. Investors typically involved in private placement issues are either institutional investors (large scale investors) such as banks and other financial institutions or high-net-worth individuals. For an individual investor to participate in a private placement offering, he must be an accredited investor as defined under regulations of the Securities and Exchange Commission (SEC).
There are two basic types of private placement offerings,
- Equity Private Placement (common stock is offered as securities)
- Debt Private Placement (debentures are offered as securities)
What is the difference between Preferential Allotment and Private Placement?
Preferential Allotment vs Private Placement |
|
| Preferential allotment is the issue of shares or other securities by a company to any selected person or group of persons on a preferential basis. | Private placement refers to the offer of securities by the company to a selected group of investors. |
| Security | |
| Securities are offered to any investor who wishes to obtain a stake in the company. | Securities are issued to a group of investors selected by the discretion of the company. |
| Governance | |
| Preferential Allotment is governed by the provisions of Section 62(1) (c) of Companies Act, 2013 | Private Placement is governed by the provisions of Section 42 of Companies Act, 2013. |
| Authorization through the Articles of Association (AOA) | |
| Authorization through AOA is required | No authorization through the Articles of Association is required |
| Time Period | |
| Shares should be allocated within a time frame of 2 months from the date of receipt of funds. | Allocation should be done within 12 months followed by passing of a special resolution. However, for listed companies, the specific time period is very less. (15 days) |
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