Previous

Page - 2

Advantages

One advantage of raising money via a preferential issue is that it helps save costs and time involved in a public issue. More important, if the concerned company is not doing too well at that point in time but requires capital, then retail investors may not want
to participate in an issue.

At the same time, there could be some institutions which view the company's troubles as being temporary and feel that some injection of capital could help it out of the trough.

In fact, promoters need such investors in times when the market sentiment is weak and a public issue could fail. Moreover, if promoter is being allotted preferential issue and they acquire more shares in the company, it is a good sign because it shows that the corporate ship is not sinking and they have abiding interest in the company.

There is no requirement of filing any offer document / notice to SEBI in case of the preferential allotment and even no eligibility norm for the company for the preferential allotment.

Apart from this, in the preferential allotment, the shares are issued in bulk and, hence, when huge fund requirement is there without incurring much cost and without investing much time.

In current scenario, where there is lots of takeover in preferential issues, the shares are issued to friendly investors like promoters to ward-off the risk of take over. If shares are issued to public, there is a chance that later they can sell it to a firm which has an intension of take over.

Pitfalls

The preferential allotment is often misused by the promoters as they could secure it because of majority holding by them and they consolidate their hold on the company without paying a fair price for it. As per Section 81 (1A) of the Companies Act, it is merely a formality though special resolution need to be passed but only members present in person and through proxy are counted.

Next

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