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Preferential issue of shares by unlisted public companies

Prior to the introduction of SEBI guidelines dated 4th August 1994 listed and unlisted companies were passing special resolutions under section 81(1A)  of the companies act 1956 and allotting shares, at any price, to any persons whether they are existing shareholders or not. It was possible to allot the shares at any price, as the board of directors may deem fit. However, with the introduction of SEBI’s Guidelines dated 4th August 1994, regarding preferential allotments, certain restrictions were placed on the listed companies issuing shares to selected group of persons including the promoters of the company.

Company Registration in Bangalore

Unlisted Companies

The matters relating to Employees Stock Option Scheme, issue of sweat equity shares and preferential issue of shares by unlisted companies were examined by a committee appointed by the central government.


Unlisted public companies better allocations rules 2003 is  assigned for all unlisted public companies. The private limited companies are not covered by these rules.

Meaning of Preferential allotment

  • private locations
  • Preferential allotment includes issue of shares
  • on preferential basis and/or

Preferential allotment under SEBI guidelines

It may be noted that the term “Preferential Allotment” in respect of a listed company means an issue of capital made by a body corporate to select group of persons.

Meaning of “Promoter” under SEBI (Disclosure and Investor Protection) Guidelines, 2000

The term “promoter” has been defined in SEBI (disclosure and Investor Protection) Guidelines, 2000 as follows :

Who are eligible for preferential allotment

There is no specific mention about the class of persons eligible for an issue on preferential basis other than the promoters and their relatives. However going by the definition of the term “promoter” in rule 3(2) and the working in rule 6(e) in the rules, it may be inferred that the following persons may also be considered to be covered by these rules. The company registration is also plays an role in preferential allotments.

  • promoters – who hold themselves as promoters
  • persons who are in control of the company
  • promoting companies
  • a class or classes of persons
  • directors
  • key management persons

Provision in the articles- a precondition

Issue of shares on preferential issue can be made by a company only if it is authorized by its articles of association. The members in a general meeting authorizing the board of directors to issue the same.

Board will recommend the price for approval of shareholders

The board of directors, after ensuring that there is an authorization in the articles of association may consider to convene a general meeting of the members of the company to get the consent of the members.

Filing with the registrar of companies

Certified copy of the special resolution along with the explanatory statement will be filed with the ROC within 30 days of passing. The return of allotment under section 75 will be filed with the Registrar within 30 days of allotment.

Certificate of auditors or practising company secretary

In every preferential issue of :

  • Warrants
  • Shares
  • Partly Convertible Debentures
  • Fully Convertible Debentures

FIMA Provisions

Hence allotment of shares to a Non-resident as a preferential allotment by an unlisted public company shall be as per the formula to be worked out as per earlier CCI Guidelines. It is therefore prudent for an unlisted public company to comply with the regulations under FEMA in regard to allotment of shares to resident outside India.

When to be fully paid up ?

Unlike in the case of listed companies (clause 13.4.2) of SEBI Guidelines, 2000, there is no requirement to get the shares fully paid up with in a particular time frame. Further there is no stipulation regarding the minimum amount payable as up-front payment. The board of directors has been given freedom to decide the above matters in the best interest of the company.

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