All about preferential issue of shares!

What is a preference share? 

A preference share is a type of share, in which, shareholders are owners of the company but do not enjoy voting rights. There are four types of preference shares namely, cumulative preferred stock, non-cumulative preferred stock, participating preferred stock, and convertible preferred stock. When it comes to distributing dividends or paying the shareholders after a company becomes insolvent, preference shareholders are paid before ordinary shareholders. 

What is a preferential issue of share? 

Preferential issue of shares refers to the allotment of shares to a select group of investors. This is different from public issues and rights issues such as employee stock ownership plan (ESOP) and employee stock purchase scheme (ESPS).  

This is a preferred way of raising capital in a short span of time and involves less paperwork. A preferential issue is less complicated than a public issue as the shares are allotted to a select few investors. 

Process 

A board meeting has to be called and held at least seven days prior to making a decision about the preferential issue. In this meeting, details such as valuation report, number of allottees, a draft of the offer letter, and notice of extraordinary general meeting (EGM) are discussed and finalised. In EGM, an offer letter in PAS-4 form is presented to the members of the company. Post this meeting, the approved letter of offer is circulated and form MGT-14 is filed with the Registrar of Companies (RoC). After this, the company needs to open a separate bank account for receiving money upon allotment. The select investors, who receive the offer letter then, subscribe for shares. The money received towards the subscription is deposited in the bank account opened for this purpose. After this, the company has to file a PAS-3 form within fifteen days of allotment of shares. After all the above procedures are completed, the share certificates are issued to the preferential shareholders.