Pref Allot (Updated)

8/14/2019 Pref Allot (Updated)

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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.



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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)



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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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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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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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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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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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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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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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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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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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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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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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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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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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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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