Definition

A method of raising capital by issuing securities to a select group of persons (not exceeding 200 in a financial year).

A type of private placement where securities (shares or convertible instruments) are allotted to a specific group, usually promoters, strategic investors, etc.

Governing Provision

Section 42 of the Companies Act, 2013

Section 62(1)(c) of the Companies Act, 2013 + Section 42 for procedural aspects. Also, SEBI (ICDR) Regulations for listed companies.

Applicability

Applies to both listed and unlisted companies.

Applies to both listed and unlisted companies, but listed companies must additionally comply with SEBI ICDR Regulations.

Nature of Issue

Involves issuance of securities (equity shares, preference shares, debentures, etc.) to a selected group of persons.

A sub-category of private placement, generally used for issuing shares or convertible instruments to strategic investors or promoters.

Maximum Number of Allottees

Not more than 200 persons in aggregate in a financial year, excluding Qualified Institutional Buyers (QIBs) and ESOPs. (Section 42(2))

Same limit applies under Section 42 for the private placement route used for preferential allotment.

Board and Shareholder Approval

Requires Board approval and a Special Resolution from shareholders. (Section 42(3))

Requires Special Resolution under Section 62(1)(c). The explanatory statement must contain detailed disclosures.

Offer Letter

Offer is made through Form PAS-4 (Private Placement Offer Letter). (Section 42(3) & Rule 14(3) of Companies (PAS) Rules)

Same offer letter format (PAS-4) is used.

Filing with ROC

Filing of Form MGT-14 (for SR), PAS-4, and PAS-3 (return of allotment) is mandatory. (Section 42(9))

Same compliance as private placement route, as Section 42 applies simultaneously.

Pricing Guidelines

No specific pricing norms under Companies Act. Pricing is generally based on valuation report (especially for unlisted cos).

For listed companies, pricing must comply with Regulation 164 & 165 of SEBI (ICDR) Regulations. For unlisted cos, valuation report by registered valuer is mandatory. (Rule 13(2)(g) of Companies (Share Capital and Debentures) Rules, 2014)

Valuation Requirement

Required in practice to justify price, especially for unlisted companies.

Mandatory for unlisted companies (Rule 13(2)(g)); pricing formula mandatory for listed companies under SEBI ICDR.

Use of Application Money

Money received must be kept in a separate bank account until allotment. (Section 42(6))

Same requirement as under Section 42.

Time Limit for Allotment

Allotment must be completed within 60 days of receipt of application money. (Section 42(6))

Same time limit under Section 42 applies.

Penalty for Non-Compliance

Heavy penalties under Section 42(10) – amount raised shall be refunded + penalty up to amount involved or ₹2 crore, whichever is lower.

Same penalty provisions of Section 42 apply if procedure is not followed.

Disclosure in Explanatory Statement

Must disclose details of the offer including name, amount, purpose, valuation, etc. (Rule 14(1) of PAS Rules)

In addition to Rule 14(1), preferential allotment must comply with Rule 13(2)(d) of Share Capital Rules (source of funds, identity of allottee, change in control, etc.).

Trading Lock-in (for listed companies)

Not applicable unless SEBI Regulations apply.

Lock-in applies under SEBI ICDR Regulations – generally 1 year for non-promoters and 3 years for promoter contribution.

Conversion Option (if convertible instruments issued)

Allowed. Terms must be specified at the time of issue. (Rule 14(2)(b) of PAS Rules)

Allowed. More frequently used in preferential allotments involving CCDs or warrants. SEBI norms apply if listed.