In the ever-evolving corporate landscape, companies often seek capital infusion to fund expansion plans, meet working capital requirements, or bring in strategic investors. One of the most efficient ways to achieve this is through a preferential issue of shares, a commonly used method that allows businesses to raise funds by allotting shares to a specific group of investors at a pre-determined price.
What is a Preferential Issue of Shares?
A preferential issue is a method by which a company issues equity shares, fully or partly convertible debentures, or any other financial instruments to select individuals or entities, including promoters, institutional investors, private equity firms, and strategic partners. Unlike an initial public offering (IPO) or rights issue, which are open to the general public or existing shareholders, a preferential issue is a targeted offering to chosen investors.
Under the Companies Act, 2013 and SEBI (Issue of Capital and Disclosure Requirements) Regulations, companies must comply with various conditions while executing a preferential issue. These include shareholder approval through a special resolution, adherence to minimum pricing guidelines, and a lock-in period for allotted shares.
Why Companies Opt for Preferential Issue?
A preferential issue is considered a strategic tool for businesses due to the following reasons:
1. Quick Capital Infusion – Unlike an IPO, which involves extensive regulatory scrutiny and investor outreach, a preferential issue is a relatively quicker way to raise funds.
2. Bringing in Strategic Investors – Companies can use this route to onboard long-term investors who bring industry expertise and capital.
3. Strengthening Promoter Holding – Many firms opt for a preferential issue to increase the promoters’ stake and prevent dilution of control.
4. Debt Reduction & Expansion Plans – The funds raised can be utilized to reduce debt, fund acquisitions, or accelerate business growth initiatives.
Regulatory Framework & Key Considerations
A preferential issue must adhere to strict regulatory guidelines. Some of the key requirements include:
• Pricing Guidelines – SEBI mandates that the issue price should be the higher of either the average of weekly high and low prices over the last six months or the last two weeks’ average stock price on the recognized stock exchange.
• Lock-in Period – Shares allotted under a preferential issue have a mandatory lock-in period (minimum one year for non-promoters and three years for promoters).
• Shareholder Approval – Companies must obtain a special resolution (requiring at least 75% shareholder approval) before proceeding with the issue.
Recent Examples of Preferential Issues in India
Several prominent companies have recently used preferential issues to raise capital. For instance, in 2023, Zomato allotted shares via a preferential issue to raise capital for its expansion, while Adani Enterprises used this method to bring in marquee global investors.
