Define Preferential Issues

Preferential issue means issue of shares/convertible debenture/ any other financial instrument to any select group of persons on a private placement basis.

Preferential issues are governed by the guidelines given below:

Compliance with Conditions for Continuous Listing

A listed company can make preferential issues only subject to compliance with the conditions for continuous listing.

Pricing of the Preferential Issues

Shares

The issue can be made at a price not less than the higher of the following:

Average of weakly high and low of the closing prices of the related shares quoted on the stock exchange during the 6 months preceding the relevant date.

Average of weakly high and low of the closing prices of the related shares quoted on the stock exchange during the 2 weeks preceding the relevant date.

The relevant date means 30 days prior to the date on which the meeting of the general body of shareholders is held to consider the proposed issue.

Pricing of the Shares Arising out of Warrants

In cases of issue of warrants on a preferential basis with an option to apply for shares, the price of the resultant share is determined in accordance with the provisions mentioned above (A). Here the relevant date is either the one referred to in (A) or a date 30 days prior to the date on which the holder of the warrant become entitled to apply for the said shares. It is at the option of the issuer company.

Pricing of Shares on Conversion

Where convertible instruments are issued on a preferential basis with a provision to allot share at a future rate, the issuer should determine the price of the shares to be allotted in the same manner as specified for pricing of shares in lieu of warrants.

Currency of Financial Instruments The currency of the instruments with a provision for the allotment at a future date cannot exceed beyond 18 months from the date of issue of the relevant instruments.

Non-transferability of Financial Instruments

The instruments allotted on a preferential basis and shares allotted are subject to a lock in period as detailed below:

Lock in shares/instruments can be transferred to, and among promoter group or to a new promoter or person in control of the company subject to continuation of the lock-in in the hands of the transferee for the remaining period.

Currency of Shareholders Resolution

The resolution passed at a meeting of shareholders of a company granting consent for preferential issues of any financial instrument is valid for a period of 15 days from the date of passing of the resolution/within 15 days from the date of approval of any Regulatory Authority/Government/ within the time specified by SEBI in relaxation order.

Other Requirements

The statutory auditors of the issue company should certify that the issue of the said instrument is being made in accordance with the requirements contained in these guidelines and Copies of the auditors’ certificate should be laid before the meeting of the shareholders convened to consider the proposed issue.

An independent qualified evaluator should value the assets in consideration for which shares are proposed to be issued in the following case:-

Preferential  allotment  of  shares  to  promoters/relatives/ associates and related entities for consideration other than cash

The valuation report should be submitted to the stock exchange on which they are listed.

The following disclosures are to be made

Details of all money utilized out of the preferential issue proceeds (to be disclosed in the balance sheet) along with purpose for which it has been used.

Details of unutilized money and the form in which it is invested should also be disclosed.

Applicability to FIIs

The guidelines issued by Govt. of India/SEBI/RBI are applicable in the case of preferential allotment if any to be made to FIIs.

The guidelines are not applicable in the following cases

Where further shares are allotted in pursuance to the merger and amalgamation scheme approved by a High court.

Allotment made to persons in accordance with the provisions of the rehabilitation packages approved by the BIFR. If such persons are promoters/promoters group, the lock in provisions would apply unless otherwise stated in the BIFR order.

Where further shares are allotted to All India Public financial institutions in accordance with the provisions of the loan agreements signed prior to August 4, 1994.