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Presentation on
Preferential Allotment(71st SMTP September 16, 2006)
- By Mahavir Lunawat
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Outline
Introduction
Regulatory Framework in India
Time Frame Regulatory Framework in US
Specific Cases Preferential Allotment of Debt Securities
Preferential Allotment of Shares / Deb to NRIs/FIIs
QIP
Back Office Preparation
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Different Types of Issues
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What is Preferential Allotment
Issue of shares other than to the public at large or
existing shareholders proportionately is commonlyreferred to as preferential allotment.
As per DIP Guidelines, Preferential Allotment
means an issue of capital made by a body corporate inpursuance of a resolution passed under Sub -section
(1A) of Section 81 of the Companies Act, 1956.
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Preferential Allotment-Regulatory Framework Listing Agreement
SEBI (DIP) Guidelines, 2000 - Chapter XIII : Guidelines forPreferential Issues
SEBI Circular on private placement of debt securities by listedcompanies and clarification thereon
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
1997 SEBI (Prohibition of Insider Trading) Regulations, 1992 SEBI (Delisting of Securities) Guidelines, 2003 Depositories Act, 1996 Companies Act, 1956
Companies (Issue of Share Certificates) Rules, 1960 CARO and Rules under section 383A Unlisted Public Companies (Preferential Allotment) Rules, 2003 Stamp Act Guidelines issued by GOI/SEBI/RBI for preferential allotment if
made to Foreign Institutional Investors/ Overseas
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Preferential Allotment Listing Agreement
Clause 43: Quarterly statement (Contd.)
The statement shall be given for each of the years for whichprojections are provided in the explanatory statement & shallbe published in newspapers simultaneously with thequarterly financial results as required under clause 41.
If there are material variations between the projections and
the actual utilisation/ profitability, the company shall furnishan explanation therefor in the advertisement and shall also
provide the same in the Directors Report.
Clause 49
Quarterly disclosure of uses/application of funds raised by
Preferential Allotment Annual Statement of funds utilised for purposes other than
stated purposes certified by statutory auditors
to the Audit Committee till such time, money raised is fullyspent.
Other General Clauses like Clause 22, 31, 36 etc.
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Preferential Allotment DIP Guidelines
Provisions of Chapter XIII
Pricing
Currency of Shareholders Resolution
Lock-in Requirements
Situations where preferential allotment is prohibited
Other Requirements
Exemptions
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Pricing (13.1.1) Price not less than the higher of the following:
The average of the weekly high and low of the closing pricesof the related shares quoted on the stock exchange during thesix months preceding the relevant date; OR
The average of the weekly high and low of the closing pricesof the related shares quoted on a stock exchange during the twoweeks preceding the relevant date.
"relevant date" means the date thirty days prior to the date onwhich the meeting of general body of shareholders is convened
Stock Exchange means a stock exchange in which the highesttrading volume in respect of the shares of the company has beenrecorded during the preceding 6 months.
Preferential Allotment DIP Guidelines
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Pricing(Contd)
Pricing of Shares arising out of warrants (13.1.2) While pricing shall be calculated in the same manner, the relevant
date at the option of the issuer could be:
30th day prior to date of shareholder meeting
30th day prior to the date when the person becomes entitled toapply for the shares.
Pricing of shares on conversion of PCDs/FCDs (13.1.3) Pricing shall be calculated in same manner as determined for
allotment of shares in lieu of warrants
becomes entitled to apply for the shares Nath SeedsLtd. v. SEBI (2005) 59 SCL 363 (SAT-Mum)
Preferential Allotment DIP Guidelines
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Preferential Allotment DIP Guidelines
Currency of Shareholders Resolution (13.4)
Shareholders resolution for preferential issue of shares/
other instrument is to be implemented (by making
allotment and despatch of certificates) within 15 daysfrom the date of passing of the resolution (from the date of
regulatory or government approval, if required)
If allotment and despatch of certificates are not completed
within 15 days from the date of shareholders resolutionfresh consent will be necessary; consequently the relevant
date will also change.
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Preferential Allotment DIP GuidelinesLock-in Requirements (13.3)
Lock-in of 1 year from the date of allotment shall be applicable for allpreferential allotments made to all categories of allottees includingpromoters
Shares allotted on preferential basis to promoters/promoter groupshall be locked in for 3 years from the date of allotment
Overall lock-in of 3 years for promoter holding shall not exceed 20% ofthe post issue capital
Lock-in already complied shall be reduced while calculating lock-in onshares arising upon conversion, etc.
Pre-preferential allotment holding of the allottee shall also be kept under
lock-in from the relevant date up to 6 months from the date of makingpreferential allotment
Locked in securities can be transferred inter se amongst Promoters /Promoter Group or to a new promoter or person in control of theCompany subject to SAST and subject to continuation of lock-in the
hands of the transferees for the remaining period
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Preferential Allotment DIP Guidelines
Situations where Preferential Issue cant be made (13.3)
Conditions for continuous listing not complied with
Partly paid-up securities
Pre-allotment Shareholding of the allottee not in demat form
To those shareholders who have sold their shares during 6
months prior to the relevant date
When any public / rights issue is going on (8.7)
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Preferential Allotment DIP Guidelines
Other Provisions
Currency of instruments (Warrants/PCDs/FCDs/Others), with a
provision for the allotment of equity shares at a future date, shall
not exceed beyond 18 months from the date of issue of the
relevant instruments. (13.2)
If warrants are allotted, at least 10% of the price fixed shall bepayable on allotment of warrant/ PCD; such amount to be adjusted
on exercising option. In case option is not exercised, amount will
be forfeited. (13.1.2.3)
The statutory auditors of the Company shall certify that the issueis being made in accordance with these Guidelines; the Certificate
shall be laid before the general meeting convened to consider
preferential issue. (13.5)
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Preferential Allotment DIP Guidelines
Other Provisions (Contd)
In case preferential allotment is to promoters, their relatives,
associates/related entities for consideration other than cash,
valuation of assets shall be done by an independent qualified
valuer and the valuation report submitted to the exchanges on
which shares of the Issuer Company are listed. (13.5.1.c)
Details of money utilised / non-utilised out of the preferential
issue proceeds shall be disclosed under an appropriate headin the Balance Sheet of the Company. (13.5A)
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Preferential Allotment DIP Guidelines
Exemptions (13.7) -
Guidelines will not be applicable, where shares areissued :
In pursuance to the merger and amalgamationscheme approved by High Court
In accordance with the provisions of Rehabilitationpackage approved by BIFR
To All India Public Financial Institutions inaccordance with the provisions of LoanAgreements signed prior to 4th August, 1994.
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Preferential Allotment DIP Guidelines
Changes proposed by PMAC, SEBI (Dec04) Guidelines to be extended to issues made by non-company
issuers (eg. SBI), allotments under Section 81(3) etc.
Pricing :
Instead of the weekly high & low of the closing prices ofshares, the weighted average price of the shares based on alltransactions on the exchange to be reckoned.
The concept of 130 trading days and 10 trading days to beintroduced, in place of 6 months and 2 weeks,respectively.Valuation of infrequently traded shares to be done
as per the relevant provisions of SAST. No preferential issue at a price lower than face value except in
terms of the provisions of Section 79 of the Companies Act
IRR on preferential issue of convertibles not to exceed PLR ofSBI as on the relevant date.
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Preferential Allotment DIP Guidelines
Changes proposed (contd..) Choice of relevant dates for warrants to be done away with.
Time limit for completion of all formalities to be extended to
21 days from 15 days.
Lock-in :
Current reference to 20% lock-in to be removed; any
preferential issue to promoters, therefore, to be locked-in for 3
years.
The condition of pre-allotment lock-in of 6 months to be
extended to relatives of promoters (i.e., spouse, parents,
brother, sister or children) too.
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Preferential Allotment - SAST
Preferential Allotment was exempted from theTakeover Regulations
Justice Bhagwati Committee (May 02) recommendedto lift the exemption and accordingly on 9th Sep 02,such exemption was removed.
As per latest amendment effective 3rd Jan 05, noacquirer shall acquire shares, through market
purchases / preferential allotment, which entitle suchacquirer to exercise more than 55% of the post-allotment voting rights in the target company.
Other Provisions as to disclosures, public offer etc.
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Preferential Allotment As a method to
acquire Voting Rights
Preferential allotment route wasdominant method used to availexemptions till September 02.Thereafter, this route became a
less used one. (SEBI W.P. 10)
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Preferential Allotment Companies Act General provisions e.g. Sections 67, 81, 173 etc.
Return of allotment of Shares in Form 2 to be filedwith ROC
Issue of Certificate Rules
CARO & 383A Rules
Rules for unlisted companies Applicability : In respect of preferential issue of equity
shares, fully convertible debentures, partly convertibledebentures or any other convertible financial
instruments. Conditions
Authorisation in articles of the company.
A special resolution to be passed in a General Meetingempowering the BOD for such issue; the specialresolution to be acted upon within 12 months.
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Preferential Allotment Companies Act
Conditions (Contd.)
Explanatory statement to the notice will contain the
prescribed information like the price at which the
allotment is proposed, the relevant date on the basis ofwhich price has been arrived at, the object(s) of the issue
through preferential offer etc.
A Certificate from the statutory auditors / company
secretary in practice stating that the issue is being madein accordance with these Rules.
The Certificate will be laid before the meeting of the
shareholders convened to consider the proposed issue.
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Preferential Allotment Other
Regulatory ProvisionsPrevention of Insider Trading / Fraudulent & Unfair Trading in
Securities Generally.
Delisting Guidelines
If preferential allotment has the effect of reducing public shareholdingbelow the minimum level, the provisions of the delisting guidelines willbecome applicable.
Depositories Act, 1996
Person subscribing to securities offered by an issuer has an option toreceive the securities in physical or Demat Form
All securities held by a depository to be dematerialised and in fungibleform.
Stamp Act
Requisite stamp duty as per Central / relevant State Stamp Act should bepaid on the securities issued under preferential allotment. (Issue of share
certificates is a Central subject, while issue of debentures is a Statesubject)
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Preferential Allotment - Time Table
Relevant
Date
30 days
General Meeting
Offer Allotmentof Shares
Board
meeting
Despatch ofIndividual
Notices
Acceptance In-principleApproval
from Stock
Exchanges
Completion of
formalities
25 days
15 days
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Preferential Allotment Norms in US
Regulated by the Securities Exchange Commission(SEC).
Section 5 of Securities Act, 1933 No offer may bemade public unless a registration statement has been filedwith SEC or the offer is exempt.
Privately placed securities termed as restrictedsecurities and are subject to re-sale restrictions, unless
exempted. Private Placement Exemptions available
At first instance [Sec 4(2), Reg. D (Rules 504, 505, 506),Reg. S]
On re-sale [Sec 4(11/2), Rule 144, Rule 144A, Reg. S]
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Preferential Allotment Norms in US
Sec 3(b) read with Reg. D (Exempted Securities) Rule 504 & 505 : Exemption for small offerings limited to
$1 & $5 mn., respectively, during any 12-month period
Rule 506 : Unlimited amount of securities to an unlimitedno. of accredited investors and 35- non-accredited but
sophisticated investors. No general advertising or solicitation
Absence of re-distribution
Sec 4(2) : Private Placement Exemption (Transactions by
Issuer not involving any public offering) Reg. S : offshore distribution of securities of US &foreign issuers
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Preferential Allotment - Norms in US Resale of restricted securities - Rule 144 :
Securities are to be fully paid up.
Ordinary Brokerage Transactions : The sales must be handled in allrespects as routine trading transactions, and brokers may not receive morethan a normal commission. Neither the seller nor the broker can solicitorders to buy the securities.
Volume Restriction : The number of shares that may be sold (after theholding period) during any three-month period can't exceed the greater of
1% of the outstanding shares of the same class being sold, or the averagereported weekly trading volume during the four weeks preceding the filinga notice of the proposed sale in Form 144.
Holding (Lock-in) Period One Year. If the shares are held for 2 years,the above conditions are exempted.
Issuer must have complied with the periodic reporting requirements (e.g.
Form 8K Disclosure of material events including private placement;Form 10Q Quarterly financial Reports; Form 10K Annual Report)
Filing Notice With SEC : At the time of placing the order for saleinvolving more than 500 shares or the aggregate amount is greater than$10,000 in any 3-month period, a notice in Form 144 needs to be filed withSEC. The sale must take place within 3 months of filing the Form,
otherwise, a fresh Form needs to be filed.
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Preferential Allotment Norms in US
Rule 144A : permits financial institutions with morethan $100 mn. invested in securities to tradeunregistered privately placed securities among
themselves freely without re-sale conditions Sec 4(11/2)
Established by practice and confirmed by the regulator
Reliance on 4(1) based on the procedure applied under 4(2)
One private placement investor holding restricted securitiesprivately negotiates and sells to another, if the buyer agreesto hold them subject to the same restrictions as those that
bind the seller.
Reg. S : offshore re-sale of securities of US & foreign
issuers
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Preferential Allotment Specific CasesPreferential Allotment to NRIs / FIIs Issue of Shares / Convertibles / NCDs to NRIs / FIIs is regulated
under the the FEM (Borrowing and Lending in Rupees)Regulations and FEM (Transfer or Issue of Securities by aPerson Resident Outside India) Regulations. in terms of theseRegulations NCDs to NRIs is treated as borrowing and covered under the FEM
(Borrowing and Lending in Rupees) Regulations. These
Regulations permit automatic route on satisfaction of theconditions stipulated therein. One of the conditions is issue mustbe through public offer. Therefore, private placement of NCDs toNRIs would require RBI approval.
FEM (Transfer or Issue of Securities by a Person Resident OutsideIndia) Regulations
Purchase of Shares / Convertibles by FIIs : Subject to limits underSchedule 2 (PIS) Purchase of Shares / Convertibles by NRIs on non-repatriation basis -
No limit (Schedule 4). Therefore purchase on repatriation basis wouldrequire RBI approval.
Purchase of NCDs by FIIs on repatriation basis : Permitted underSchedule 5 on satisfaction of certain conditions like allocation of total
investment between equity and debt in the ratio of 70:30, etc.
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Preferential Allotment Specific Cases
Q I P
Eligible Issuer : A company listed on a stockexchange having nation wide trading terminals
and which is in compliance with the prescribedminimum public shareholding requirements.
Eligible Investor : QIBs other than any QIB whois a promoter or related to promoter(s) cannot
participate in QIP. Eligible Securities : equity shares
any securities other than warrants, which areconvertible into or exchangeable with equity shareswithin 5 years.
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Preferential Allotment Specific Cases
QIP Issue Structure Maximum Limit : 5 times the net worth of the issuer
in any year.
Minimum Placement to Mutual Funds : Minimum of
10% of securities issued pursuant to QIP will beallotted to mutual funds, if agreeable.
Minimum Number of Allottees : (a) 2, where the issue size is up to Rs.250 cr.;
(b) 5, where the issue size is more than Rs.250 cr. No single allottee can be allotted more than 50% ofthe issue size.
There will be a gap of at least 6 months between eachplacement in case of multiple placements pursuant to
the same resolution.
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Preferential Allotment Specific Cases
QIP Pricing and Lock-in Pricing : Minimum price to higher of the average
of the weekly high and low of the closing pricesquoted during 6 months or 2 weeks preceding therelevant date. Price to be subject to adjustment forcorporate actions such as stock splits, rights,bonus etc.
Lock-in of securities issued under QIP : No lock-in. Only, off-market transactions are prohibited fora period of 1 year from the date of allotment.
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Preferential Allotment Specific Cases
QIP - Other Requirements Merchant Banker Placement Document :
to contain information specified in Schedule XXIA. being a private document can be provided only to
select investors. to be placed on the website of the stock exchange(s)
and of the Issuer;
a copy to be filed with SEBI for record purpose within30 days of the allotment.
Securities to be fully paid-up at the time ofallotment.
The resolution approving QIP, passed underSection 81(1A) of the Companies Act, to remain
valid for 12 months from the date of passing.
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Preferential Allotment -
Back Office Preparation
Compilation of Share Prices and calculation of
appropriate price. Drafting of Shareholders Resolution containing
relevant details as specified
Calculation of Lock in Shares
Taking of Auditors Certificate
Disclosures in Balance Sheet / Directors Report
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Preferential Allotment -
Back Office Preparation Projection of funds to be raised, utilisation
of funds, variation if any, reasons formaterial variation etc.
Preparation of Quarterly / Annual Statement
Obtaining Audit Committees Views, if any Appointment of Valuer, if required
Allotment and Issue within time
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Preferential Allotment -
Back Office Preparation Internal and External Interactions
Shareholders
Stock Exchanges
Internal Accounts, Finance Department
Audit Committee
Statutory AuditorsValuer - Merchant Banker / CA
Press
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Disclosure Limits under SAST
Acquisition of 5% or 10% or 14% or 54% or 74% shares in the targetcompany and purchase or sale of shares aggregating 2% or more ifthe acquirer is holding more than 15% but less than 55% of shares inthe target company [Regulation 7]
Acquirer to disclose his aggregate shareholding to the targetcompany & the Stock Exchanges, within 2 days of receipt ofintimation of allotment of shares or acquisition of shares, as thecase may be.
Target company to disclose the aggregate number of shares heldby the acquirer to the Stock Exchanges, within 7 days of receipt of
information as above. Yearly Disclosures : The following persons to make yearly disclosures,
in respect of their holdings as on 31st March, to the target company :
every person holding more than 15% shares, within 21 days fromthe financial year ending 31st March. [Regulation 8(1)]
a promoter or every person having control over the company,
within 21 days from the financial year ending 31st March as wellas the record date of the company for the purpose of declarationof dividend. [Reg. 8(2)]
The target company to make disclosures, of the changes in holdings ofthe aforesaid persons, to the Stock Exchanges within 30 days from thefinancial year ending 31st March as well as the record date for the
purpose of declaration of dividend. [Regulation 8(3)]
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Triggers re. Public Announcement
On acquisition of 15% or more of the shares in thetarget company [Regulation 10]
On acquisition of additional shares entitling to exercisemore than 5% of the voting rights in any financial yearending on 31st March by an acquirer who has acquired
15% or more but less than 55% of the shares in thetarget company. [Regulation 11(1)]
On acquisition of additional shares by an acquirer whohas acquired more than 55% but less than 75% of theshares in the target company. [Regulation 11(2)]
On acquisition of control over the target company, inany manner, irrespective of whether or not there has
been any acquisition of shares. [Regulation 12]
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AND DONT FORGET,
ALL THIS HAS TO BE DONE
BY US
COMPANY SECRETARIES
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Thank You
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