What is meant by preferential allotment of shares and how it is different from private placement ?

Meaning of preferential allotment of shares

It is a process using which companies allots their shares to a group of people or interested companies on preferential basis. Bulk allotment of shares is done to individuals, venture capitalists or group of interested people. A company wants to raise funds to carry out different functional or operational activities. Also it may be looking for expansion or starting with new unit. Issuing securities to public at large scale is a tedious process and is time consuming as well. In order to save this time and raise funds in an efficient manner companies opt for preferential allotment of shares. To do so less paper work is required and thus companies can raise funds in less time. Both private and public companies can make such allotment but more rules and regulations are applicable to public companies.

Meaning of private placement

In common language we can say that private placement is a funding event in which securities are sold not through public offering but private offering to small number of selected investors. In two ways it can be done : equity private placement and debentures private placement. Investors who looks for private placement can be mutual funds and insurance companies, banks and pension funds. Less rules and regulations are to be followed here but it is mandatory to follow all stated rules by regulatory bodies. Private placement of shares facilitates issuer to raise funds quickly by avoiding the time consumed in registering with SEC(Security and Exchange Commission). Also process of underwriting the securities is fast here. Issuer can receive the benefits from the sale in very less time. In one financial year a company can make private placement to 50 investors maximum and not more than it.

Some key difference between the preferential allotment of shares and private placement are discussed below:

1) Preferential allotment of shares are done on preferential basis to any interested group of people or companies. Private placement is done to only selected group of investors.

2) Preferential allotment can be made within two months from the date of receipt of funds whereas private placement can be done within 12 months followed by passing of a special resolution.

3) Valuation report and authorization in article are not required with private placement . In case of preferential allotment they are compulsorily required.

4) With preferential allotment shares are issued for cash or some consideration which is equivalent to cash. In private placement one can make payment through demand draft, cheque but not by cash.

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