Difference Between Private Placement and Preferential Allotment

Private placement and preferential allotment are two of the most juxtaposed terms. These two usually happen when the company seeks to raise funds without making it a public issue through Initial Public Offering IPO.

Private placement has two types qualified institutional placement and preferential allotment; Preferential allotment happens when a person receives securities from a person based on the company preferences. Qualified institutional placement is a way to raise capital without submitting any legal paperwork to market regulators.

Preferential allotment offers company securities based on preference to a select group of investors through a fresh issue of shares.

Key Takeaways

1. Private placement is the sale of securities to a select group of investors without a public offering.
2. Preferential allotment is the allotment of shares to a select group of investors at a price lower than the current market price.
3. Private placement is used to raise capital from a small group of investors. In contrast, preferential allotment is used to raise capital from a select group of investors at a discounted price.

Private Placement vs Preferential Allotment

Private placement is the process by which a company issues securities to a select group of investors, rather than making them available to the general public. Preferential allotment is a method of issuing shares to a select group of investors at a price that is lower than the market price. The investors can be individuals, institutions, or promoters of the company.

Both help the company to avoid going the IPO route to raise money.

Comparison Table

Parameter of Comparison	Private Placement	Preferential Allotment
Meaning	The offering of securities by a company to a given group of specific investors	Issuing shares and other company securities to a person is mainly based on a preferential basis.
Minimum Subscription Fee	It has a minimum subscription fee	It has no minimum subscription fee
Article Authorization	No authorization in AOA-Article of Authorization	Requires Authorization in AOA
Bank Account Required	Maintaining a separate bank account for the keeping of the application money	Has no requirement to maintain a different bank account
Valuation Report Required	It needs a valuation report	No valuation report is required
Allotment Period	It has an allotment period of 60 days from the payment period of the application money date.	Has 12 months from the date of passing of the special resolution. Listed companies have 15 days from the passing of a special resolution.
Offer Letter	A private Placement offer letter should be available	Has no such Documentation
Governing Acts	Governed by section 42 of the Companies Act,2013	This is governed by the company act 2013, section 62(1)c
Documents Involved	Documents shall be in the form of a PAS 4	Has NO requirements for such
Documents Required	Requires a PAS 3, PAS 4 and a PAS 5	It only requires a PAS 3
Payment of Consideration	Payment is by Cheque, demand draft of other approved banking channels.	Cash payment can be issued or other consideration other than cash.

What is a Private Placement?

This is the offering of securities by a company to a given group of investors to raise finances. It is mainly used to avoid IPO processes, which are time-consuming and costly.

This allows for the selling of securities privately. In a financial year, the private placement can be made up of up to 200 persons or less without the inclusion of qualified Institution players or security offered to company employees by way of ESOP.

If issuing the private placement shares is more than the predetermined number of 200 individuals, then it becomes a public issue making the company become regulated accordingly. Allotment of securities is to be made to the investors within 60 days from the date of receipt issue, or else a refund of 15 days must be made to the investors.

A defaulting company returning the investor money within 15 days is liable to pay back the entire sum with the interest of 12% from the 60th day. There are two types of private placements: qualified institutional placement and preferential allotment.

What is Preferential Allotment?

This is the giving out of shares or issuing out of shares or company securities to a selected person based on a preferential basis. For a preferential allotment to happen, regulations must be complied with.

1. Company articles of association must be authorized.
2. A special resolution is to be approved by the central government for it to occur.
3. Full payment should be given when issuing the securities.

This helps save costs involved in the public issue of the securities. It is also a faster way for a company to raise capital by issuing shares in bulk.

It may be used as a way of helping out a company that is troubled through some injection of capital to move the company out of a bad situation.

Main Differences Between Private Placement and Preferential Allotment

1. The private placement is the invitation to offer securities to specific investors by issuing securities to raise funds. At the same time, preferential allotment is the issuing of shares to groups of people from a listed company to raise cash.
2. Application money can be received through checks, drafts and any other banking form but NOT CASH, while in the preferential allotment, money can be received in cash or kind.
3. The private placement must be authorized by an authorisation article in the company, while in the preferential allotment, no such authorization is needed.
4. A private placement is governed by section 42 of the companies act,2013, while preferential allotment is governed by section 62(1) of the Companies Act,2013
5. The documents required in private placement include the PAS 3-return of allotment securities form, PAS 4-The private placement offer letter, and PAS 5-A complete record of the private placement to be maintained by the company. In contrast, the company shall only sign the PAS 3-return of allotment forms for preferential allotment.
6. Preferential allotment requires a valuation report, while no valuation report is needed in a private placement.
7. The allotment shall be made within 60 days of the receipt of application money, while in the preferential allotment, allotment shall be made within 12 months from the date of passing of the special resolution. Still, in a case of a listed company, allotment shall be made within 15 days of passing the special resolution.

References

1. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2795658
2. https://journals.sagepub.com/doi/abs/10.1177/0256090915590332
3. https://rbidocs.rbi.org.in/rdocs/content/pdfs/194NT070618_A2.pdf