{"id":493,"date":"2019-04-15T12:19:28","date_gmt":"2019-04-15T12:19:28","guid":{"rendered":"https:\/\/rta.saginfotech.com\/blog\/?p=493"},"modified":"2019-12-11T10:29:36","modified_gmt":"2019-12-11T10:29:36","slug":"preferential-allotment-of-shares-process-benefits","status":"publish","type":"post","link":"https:\/\/rta.saginfotech.com\/blog\/preferential-allotment-of-shares-process-benefits\/","title":{"rendered":"What is the Need, Process, and Benefits of Preferential Allotment of Shares?"},"content":{"rendered":"\n

As per the Company Act 2013, the companies in India can raise funds via different methods, which include preferential allotment, right issue, IPOs, employee stock option plan (ESOP)<\/a><\/strong>, and sweat equity shares. Among all the prescribed methods, the preferential allotment is considered to be the best fundraising option for unlisted companies.<\/p>\n\n\n\n

The\nprocedure and provisions of preferential allotment of shares are\nmentioned under Section 62 (focuses on allotment of shares) and\nSecond 42 (focuses on allotment of securities) of the Companies Act\n2013.<\/p>\n\n\n\n

Let’s Try to Understand What Exactly is Preferential Allotment of Shares, Its Benefits, and Why It is Done:<\/strong><\/h4>\n\n\n\n

What\nis Preferential Allotment of Shares?<\/strong><\/h2>\n\n\n\n

Preferential\nallotment of shares refers to the procedure of bulk allotment of\nfresh shares to a specific group of individuals, venture capitalists,\ncompanies, or any other person by any particular company. This\nprocess is termed as the preferential allotment of shares.<\/p>\n\n\n\n

This\nmethod is certainly unique from other fundraising methods as the\nentire allotment is made to a pre-identified people, who may or may\nnot be the existing shareholders of a firm. These are generally the\nindividuals, who are interested in getting a stake in the company.<\/p>\n\n\n\n

Why Companies Exercise this Option?<\/strong><\/h2>\n\n\n\n

Preferential\nallotment of shares option is mainly used by the companies to provide\na route to those shareholders, who are unable to buy a large chunk of\ncompany shares at affordable prices during IPOs. However, such\nshareholders do no get any voting position in the company and are\npaid only when the company made profits.<\/p>\n\n\n\n

Apart\nfrom this, the venture capitalists, financial institutions, and\nexisting shareholders or company promoters are also given an option\nto increase their stakes in the company by the firm owners through\nexercising the preferential share allotment option. The companies\nalso use this option to secure the equity participation of those\nshareholders, whom they believe can be of value as shareholders.<\/p>\n\n\n\n

Lastly, there is a high possibility that companies performance will improve after exercising preferential share allotment option if funds were raised in an efficient manner as well as veteran investors have invested in them. The veteran investors trust in any company during the preferential share allotment can drive the growth of its business in the near future.<\/p>\n\n\n\n

Read More: <\/em><\/strong>Complete Procedure For Right Issue of Shares Under Companies Act: 2013<\/em><\/strong><\/a><\/p><\/blockquote>\n\n\n\n

What are the Benefits for Preference Shareholders?<\/strong><\/h2>\n\n\n\n