There are many ways under the companies act to issue shares / securities. We have already discussed the Rights Issue and Private Placement method in different posts. Here we bring to your attention the preferential allotment method.

As per this method a company can increase its subscribed capital by the issue of further shares to any persons (existing shareholders or others), if it is authorised by a special resolution, either for cash or for a consideration other than cash, at the price as determined by the valuation report of a registered valuer.

It has to be borne in mind that only equity shares, fully convertible debentures into equity, partly convertible debentures into equity, or any other securities, which would be convertible into equity shares at a later date can be allotted using this method. Other instruments (eg. Non convertible debentures) cannot be offered under preferential allotment.

The company shall make the various disclosures in the explanatory statement to the EGM like the object of the issue, the total number of shares being issued, the price band, basis on which the price has been arrived, registered valuer report, the intention of the promoters / key managerial personnel to use the money, justification for the allotment being done, the change in control that may happen post the allotment etc.

The allotment of securities on a preferential basis made pursuant to the special resolution shall be completed within a period of twelve months from the date of passing of the special resolution.

Interesting provision related to convertible instruments:

The conversion formula for a convertible instrument shall be determined either at the time of issue of the convertible instrument itself or at the time of conversion using the valuation report issued by a registered valuer which is not older than 60 days before the date of conversion.