Difference Between Private placement and preferntial allotme

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Querist : Anonymous

Querist : Anonymous (Querist)

12 January 2011 Can any one tell me difference between Private placement and preferntial allotment??????????????

CA Sanat Pyne

CA Sanat Pyne (Expert)
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12 January 2011 VISIT THIS LINK

https://www.caclubindia.com/experts/preferential-allotment-v-s-private-placement-541415.asp

Jayashree S Iyer

Jayashree S Iyer (Expert)
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12 January 2011 I have come accross lot of queries on Preferential allotments / private placements. As far as I know both can be considered as one. In both the cases instead of approaching the public, funds are raised through a small group / FI / VC. While an unlisted company has no option of approaching public for money, even the public companies may have lot of restrictions (like start up companies not fulfilling the minimum requirements or non-profit making companies, etc.) and for them the option is only preferential allotment.

For better understanding of the subject I give below the various forms in which Funds can be raised by a Company-

1) Promotors' Equity
2) Public Issue(Equity/Preference); or
3) Private or preferential allotments;or
4) Debentures, etc.

Let's analyse the pros and cons of each way of fund raising.

1) Promotors' Equity is the Share Capital brought in by the promotors of the company.

2) Public Issue - Probably the cheapest source of funding as there is no fixed commitment for repayment. The company pays dividend only when it earns profit. No interest payment is involved.

However there are aspects of equity dilution, profit sharing, etc. and the managment with conservative look may not find this option interesting.

Only the listed companies have this option. Listing again is subject to various SEBI regulations viz., three years profitability, minimum networth, post issue market cap, etc. The company has to comply with several formalities. To add to this, the response for the public issue is always subject to capital market conditions.

3) Private Placement / Preferential allotment - When promotors cannot pump in more money and also public issue is not possible, this sort of funding can be used. You have to find an investor who is willing to invest in the company. This is probably the simplest form of funding without undergoing the vigorous compliances. However this is an expensive source as the investors expect a high return. This can be used to meet temporary needs of the Company.

Here you have the option of either issuing equity or preference shares. If you don't want dilution in your equity shareholding, issue preference shares. However preference shares may carry a fixed outgo for the company.

3) Debentures - This form of funding can be used when the company doesn't want any change in its capital structure. However it is a debt carrying fixed interest and is subject to repayment.

Other experts please come out with your valuable opinion on any other sources of funds available to the company.

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