Private Limited Company Share Allotment

As per the Companies Act, 2013, a private limited company can raise funds via shares in three ways. It can either use the private placement of shares, preferential issue of shares or the right issue of shares. There are many rules governing a private limited company share allotment. Today, we will take you through all these ways of raising funds via shares. We will also talk about the process of allotting equity shares of a private limited company.

Company Share Allotment – Private Placement

As the name suggests, a private placement of shares means selling securities to a limited group of investors for raising funds. A company must ensure that it cannot invite more than 50 persons at a time and more than 200 persons (aggregate) to subscribe to the securities in a financial year. However, the limit excludes Qualified Institution Buyers (QIBs) and employees offered securities under ESOP.

Company Share Allotment – Process for the issue of Equity Shares via Private Placement

Here is a step-by-step process for issue of equity share via private placement for a Pvt Ltd Company:

• Send a notice of the Board Meeting to all directors at addresses registered with the company.
• Pass a Board Resolution for issuing equity shares via private placement and approval of the draft offer letter. Also, fix the venue, date, and time of the general meeting.
• Send a notice of the General Meeting to all shareholders.
• Pass a special resolution in the meeting for the issuance of equity shares through private placement and approval of the draft offer letter. Also, create an approved list of people for the issuance of these shares.
• File Form MGT-14 with the Registrar of Companies for passing a Special Resolution.
• Dispatch the offer letter to the approved list of people via registered post, speed post, or electronically or in writing.
• Maintain a list of approved individuals in Form PAS-5.
• Open a separate bank account for the receipt of share application money and make sure the application money is received by Cheque, Demand Draft or other banking channels and not by cash.
• On receipt of the funds, send a notice of the Board Meeting to all directors at addresses registered with the company.
• Pass a Board Resolution for share allotment. This allotment of shares shall be made within 60 days of the receipt of share application money.
• File Form PAS-3 with the Registrar of Companies within 15 days from the date of allotment of shares.

Company Share Allotment – Preferential offer

When a company offers shares to a select group of persons whether or not the existing shareholders of the Company on a preferential basis for cash or for consideration other than cash, it is termed as an issue of shares on a preferential basis. The price at which shares are to be issued should be determined by the valuation report of a registered valuer.

Company Share Allotment – Process for the issue of Equity Shares on a preferential basis.

The stepwise process is specified below:

• Send a notice of the Board Meeting to all directors at addresses registered with the company.
• Create an approved list of people for the issuance of these shares and pass a Board Resolution for issuing equity shares on preferential basis and approval of the draft offer letter. Also, fix the venue, date, and time of the general meeting.
• Send a notice of the General Meeting to all shareholders.
• Pass a special resolution in the meeting for the issuance of equity shares on preferential basis and approval of the draft offer letter.
• File Form MGT-14 with the Registrar of Companies for passing a Special Resolution.
• Dispatch the offer letter to the approved list of people via registered post, speed post, or electronically or in writing.
• Open a separate bank account for the receipt of share application money.
• On receipt of the funds, send a notice of the Board Meeting to all directors at addresses registered with the company.
• Pass a Board Resolution for share allotment. This allotment of shares shall be made within 60 days of the receipt of share application money.
• File Form PAS-3 with the Registrar of Companies within 30 days from the date of allotment of shares.

Company Share Allotment – Right Issue

When a company opts for the right issue of shares, it simply issues rights to the company’s existing shareholders. These rights permit them to purchase additional shares from the company within a set period. Further, they can purchase these additional shares in proportion to their existing shareholdings.

A company can offer a Right Issue in two ways:

1. Preferential shares – that are preferred over equity shares for dividend payments. They have features of equity shares AND debentures.
2. Sweat shares – that a company issues to its employees or members at a discount or for a consideration other than cash.

The offer of shares made to the existing shareholders on Rights basis shall be deemed to include a right of renunciation of the offer in favor of any other person.

Company Share Allotment – Process for Right Issue of Equity Share

Here is a step-by-step process for the right issue of equity share for a Pvt Ltd Company:

• The company must send a notice of the Board Meeting to all directors at addresses registered with the company. The company must ensure that it delivers the notice via post, electronically, or hand-delivered.
• Pass a Board Resolution for the Rights Issue of equity shares.
• Prepare an Offer Letter. Further, send it to all existing shareholders via registered post, speed post, or electronically.
• The offer shall remain open for a period of not less than 15 days and not exceeding 30 days.
• On receipt of the funds, send a notice of the Board Meeting to all directors at addresses registered with the company.
• Pass a Board Resolution for share allotment.
• File Form PAS-3 with the Registrar of Companies within 30 days from the date of allotment.

Summing Up

The Companies act, 2013, governs the procedure for allotment of shares of a private limited company. We hope that this article gave you a clear overview of the company share allotment procedure. You can refer to sections 62 and 42 of the Companies Act, 2013 for further clarity.