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Every firm needs capital for investment. They need capital to meet expenditure like expansion, diversification, modernization, M&A, etc., from time to time.

When a listed company doesn't want to go for further public issue and the objective is to
raise huge capital by issuing bulk of shares to selected group of people, preferential allotment is a good option.

A private placement is an issue of shares or of convertible securities by a company to a select group of persons under Section 81 of the Companies Act, 1956, which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital.

A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment. A listed company going for preferential allotment has to comply with the requirements contained in Chapter XIII of SEBI (DIP) Guidelines, in addition to the requirements specified in the Companies Act. In short, preferential issue means allotment of equity to some selected people by a company which has its share already listed.

Example

On April 20 this year, ACC has entered into a Share Subscription Agreement with Shiva Cement Limited (SCL), Rourkela, Orissa, by which ACC would be inducted as a shareholder of this company.

According to this Agreement, ACC will subscribe Preferential Allotment of 1,45,00,000 Equity Shares of Shiva Cement Limited with a face value of Rs. 2/- and a premium of Rs. 9/- per Equity Share in all, aggregating to Rs. 15.95 crore and further Subscribing to Preferential Allotment of 2,27,00,000 warrants of Shiva Cement Limited, which has an option to convert into corresponding number of Equity Shares at a face value of Rs. 2/- and a premium of Rs. 9/- per Equity Share within 18 months from the date of allotment.

This is a strategic move by ACC as they have supply agreement with SCL which operates a mini cement plant with a clinkering capacity. It has the scope of being expanded further. ACC is hopeful that after this they can increase their production capacity in Orissa.

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* Contributed by: -
Saurabh Raja, Naval K. Pratihasth & Renu Agarwal,
ICFAI Business School, Hyderabad.