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preferential shares issue

L Nageswara Rao (CHARTERED ACCOUNTANTS) (35 Points)

26 November 2010

My dear professional friends,

what is preferential allotment of shares? whether Preference and Equity shares can be issued under this category?Shares issued to whom can be described as preferential allotment.?What are the books prescribed u/s.301 of the companies Act.

2.Preference shares issued by a Private Limited company to it's promoter director can be treated as preferential allotment.

Please share your expert knowledge. Thanks.

CA.L Nageswara Rao

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3 Replies

Amisha (Asst. Company Secretary) (205 Points)
Replied 26 November 2010

Preference shares are a private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment. A listed company going for preferential allotment has to comply with the requirements contained in Chapter XIII of SEBI (DIP) Guidelines, in addition to the requirements specified in the Companies Act. In short, preferential issue means allotment of equity to some selected people by a company which has its share already listed.

The preferential issue of equity shares/ Fully Convertible Debentures (FCDs) / Partly Convertible Debentures (PCDs) or any other financial instruments which would be converted into or exchanged with equity shares at a later date, by listed companies whose equity share capital is listed on any stock exchange, to any select group of persons under section 81(1A) of the Companies Act 1956 on private placement basis shall be governed by these guidelines.

Section 301 reads as follows :

Register of contracts, companies and firms in which directors are interested

[(1) Every company shall keep one or more registers in which shall be entered separately particulars of all contracts or arrangements to which section 297 or section 299 applies, including the following particulars to the extent they are applicable in each case, namely.-

(a) the date of the contract or arrangement;

(b) the names of the parties thereto;

(c) the principal terms and conditions thereof,

(d) in the case of a contract to which section 297 applies or in the case of a contract or arrangement to which sub-section (2) of section 299 applies, the date on which it was placed before the Board;

(e) the names of the directors voting for and against the contract or arrangement and the names of those remaining neutral.

(2) Particulars of every such contract or arrangement to which section 297 or, as the case may be, sub-section (2) of section 299 applies, shall be entered in the relevant register aforesaid-

(a) in the case of a contract or arrangement requiring the Board's approval, within seven days (exclusive of public holidays) of the meeting of the Board at which the contract or arrangement is approved,

(b) in the case of any other contract or arrangement, within seven days of the receipt at the registered office of the company of the particulars of such other contract or arrangement or within thirty days of the date of such other contract or arrangement whichever is later,

and the register shall be placed before the next meeting of the Board and shall then be signed by all the directors present at the meeting.

(3) The register aforesaid shall also specify, in relation to each director of the company, the names of the firms and bodies corporate of which notice has been given by him under sub-section (3) of section 299.

(3A) Nothing in sub-sections (1), (2) and (3) shall apply-

(a) to any contract or arrangement for the sale, purchase or supply of any goods, materials or services if the value of such goods and materials or the cost of such services does not exceed one thousand rupees in the aggregate in any year; or

(b) to any contract or arrangement (to which section 297 or, as the case may be, section 299 applies) by a banking company for the collection of bills in the ordinary course of its business or to any transaction referred to in clause (c) or sub-section (2) of section 297.]

(4) If default is made in complying with the provisions of sub-section (1), (2) or (3), the company, and every officer of the company who is in default, shall, in respect of each default, be punishable with fine which may extend to [five thousand rupees].

(5) The register aforesaid shall be kept at the registered office of the company; and it shall be open to inspection at such office, and extracts may be taken therefrom and copies thereof may be required, by any member of the company to the same extent, in the same manner, and on payment of the same fee, as in the case of the register of members of the company; and the provisions of section 163 shall apply accordingly.

Preference Shares by pvt. co.

a private limited company can issue preference share, only if that preference share is a part of authorised Sahre Capital mentioned in Memorandum.

There are guidelines of SEBI for Listed Companies and for unlisted companies there are "Unlisted Public Companies (Preferential Allotment) Rules, 2003" .