Preference Shares Allotment Rules & Procedure in Word

Sample Template Example of Preference Shares Allotment Rules & Procedure in Word in Word / Doc / Pdf Free Download





As per the existing provisions of the Takeover Code, an acquirer who holds between 15% and 55% of the shares of a listed company is allowed to acquire upto 5% stake in such company during a financial year ending 31st March.

The outer limit of 55% is proposed to be revised by SEBI to 75% vide Press Release No.239/2008 dated 27.10.08.

Acquisition beyond 5% can be made only after giving an open offer. Major steps to be taken by the acquirer are given hereunder: 

1.    Appointment of Merchant Banker

The acquirer shall have to appoint a Category I merchant banker who is not associate of or member group of the acquirer or the target company, before making public announcement.

2.    Minimum Public Offer

The public offer made by the acquirer to the shareholders of the target company shall be for a minimum of 20% of the voting capital of the company. An acquirer has to make an offer for a minimum of 20% of shares and he cannot make an open offer for less than 20% of shares.

3.    Public Announcement

It is an announcement made by the acquirer through a merchant banker disclosing his intention to acquire minimum of 20% shares/voting rights  of the target company from existing shareholders by means of an open offer.

Public announcement must be made in English and also in a vernacular language daily news paper circulating in the state where registered office of the target company is situated and the stock exchange where the shares are most frequently traded.

The public announcement must specify a date, which shall be the specified date for the purpose of determining the names of the shareholders to whom the letter of offer should be sent.

4.    Escrow Account
The acquirer must create an Escrow Account of 25% of the consideration for offer sizes less than Rs.100 Crores and 10% for the excess consideration above Rs.100 Crores. The escrow account shall consist of cash deposited with a scheduled commercial bank.

5.    Filing Letter of Offer with SEBI
A Letter of Offer (L.O.) must be filed with SEBI within 14 days from the date of public announcement. A hard and soft copy of the Public Announcement (P.A.) along with publication made in news papers and prescribed filing fee by way of Bankers’ Cheque or Demand Draft is to be remitted.

6.    Minimum Offer Price
L.O. must contain the minimum offer price. While determining minimum offer price, the acquirer in consultation with merchant bankers to take into consideration all parameters mentioned in the regulation.

7.    Minimum number of Shares to be acquired
The public offer shall be for a minimum of 20% of the voting capital.

8.    General obligations of the acquirer

i)                     The public announcement of offer to acquire the shares of target company shall be made only when the acquirer is able to implement the offer.

ii)                    Within 14 days of the public announcement of the offer, the acquirer shall send a copy of the draft letter of offer to the target company at its registered office address, for being placed before the board of directors and to all the stock exchanges where the shares of the company are listed.

iii)                   The acquirer shall ensure that the letter of offer is to be sent to all the shareholders (including non-resident Indians) of the target company, whose names appear on the register of members of the company as on the specified date mentioned in the public announcement:

Provided that where the public announcement is made pursuant to an agreement to acquire shares or control over the target company, the letter of offer shall be sent to shareholders other than the parties to the agreement.

9.    General obligation of the Board of

Directors of the target company

      The Board of Directors of the target company is also under obligation to abide by the requirement prescribed under the Regulation regarding disposal of assets, entering into material contract, appointment of Directors etc.

10. Penalty

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 lays down the obligation of acquirer, target company and merchant Bankers. Failure or non-compliance’s of provisions of the Regulations by them would entail penal consequences.



Promoters’ holding may be increased by issue of equity shares to them on  private placement basis. However limitation prescribed under the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997 will also be applicable here. A brief note an preferential issue of shares is given below:

1.            Alteration of Articles of Association of the company to enable it to raise fund by issuing equity shares by way of private placement should be made.
2.            Alteration of Capital clause of the Memorandum of Association, if needed, should be made.
3.            Prior permission of Banks & FIs’ for change in Capital structure as per their terms of sanction should be obtained.
4.            Determination of ‘Relevant date’ which means the date thirty days prior to the date of General Meeting convened to consider the proposal.
5.            Fixing the Price of the shares to be issued as per guidelines.
6.            Advance intimation to Stock Exchanges of the  Board Meeting to be held for approval of:
a)                    Preferential Issue
b)                    Increase of authorised capital
c)                    Approval of Notice to the shareholders for the Preferential Issue and related activities

7.            Information to Stock Exchanges of the decision to issue shares on private placement basis.
8.            Certificate from Statutory Auditors to be obtained confirming that the proposed allotment is in accordance with SEBI Guidelines on preferential allotment of shares.
9.            Notice of General Meeting to be sent shareholders.
10.         Three copies of the Notice of the General Meeting to be sent to Stock Exchanges.

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11.         In-principle approval for such issue to be obtained from Stock Exchanges.
12.         General Meeting to be held for approval of Preferential Issue by way of Special Resolution.
13.         Minutes of General Meeting to be sent Stock Exchanges.
14.         The requisite form to be filed with Registrar of Companies.
15.         A letter/placement document to be sent the proposed allottee (s) asking him for subscription.
16.         The proposed allottee(s) should be informed of the date of allotment along with the names, addresses of the Stock Exchanges on which the Company’s Shares are listed.
17.         The Stock Exchanges to be informed of the allotment of Shares with the details of allotment.
18.         Allottees account to be credited with the number of shares allotted.
19.         Application to be filed with the Stock Exchange for listing of the Shares.
20.         The acquirer has to disclose such acquisition under Insider Trading Regulations.
21.         The details of all monies (proceeds of preferential issue) utilised and unutilised should be disclosed in the Balance Sheet.
22.         Since Statutory Auditors has to give the certificate of compliance, the mater should be discussed with the auditors first.

Steps to be taken for Acquisition of more than 5%
shares by the Promoters Group in any Financial Year

1)    More than 5% Equity Shares can be acquired in any Financial year only after making a public announcement to acquire at least additional 20% shares of the target company from the shareholders through on open offer.
2)    For making some public announcement the promoter has to appoint a merchant banker registered with SEBI.
3)    A hard copy and soft copy of the PA are required to be filed with SEBI simultaneously with the publication of the same in the news paper.
4)     A draft letter of offer is required to be filed with SEBI within 14 days from the date of Public Announcement along with a filing fee of Rs.50,000/- per letter of offer (payable by Banker’s Cheque / Demand Draft) A due diligence certificate as well as registration details as per SEBI circular no. RMB (G-1) series dated June 26, 1997 are also required to be filed alongwith the draft letter of offer.
5)    The MB will incorporate in the letter of offer the comments made by SEBI and then send within 45 days from the date of PA the letter of offer along with the blank acceptance form , to all the shareholders whose names appear in the register of the company on the Specified Date. The offer remains open for 20 days. The shareholders are required to send their Share certificate(s) / related documents to registrar or Merchant banker as specified in PA and letter of offer. The acquirer is required to pay consideration to all those shareholders whose shares are accepted under the offer, within 15 days from the closure of offer.
6)    SEBI does not approve the offer price. The acquirer/ Merchant Banker is required to ensure that all the relevant parameters are taken in to consideration while determining the offer price and that justification for the same is disclosed in the letter of offer.
7)     Acquirers are required to complete the payment of consideration to shareholders who have accepted the offer within 15 days from the date of closure of the offer. In case the delay in payment is on account of non receipt of statutory approvals and if the same is not due to wilful default or neglect on part of the acquirer, the acquirers would be liable to pay interest to the shareholders for the delayed period in accordance with Regulations.
8)    No, if the shares received by the acquirer are more than the shares agreed to be acquired by him, the acceptance would be on proportionate basis.
9)    Before making the Public Announcement, the acquirer has to open an escrow account in the form of cash deposited with a scheduled commercial bank or bank guarantee in favour of the Merchant Banker or deposit of acceptable securities with appropriate margin with the Merchant Banker. The Merchant Banker is also required to confirm that firm financial arrangements are in place for fulfilling the offer obligations. In case, the acquirer fails to make the payment, MB has a right to forfeit the escrow account and distribute the proceeds in the following way.
10) Besides forfeiture of escrow account, SEBI can initiate separate action against the acquirer which may include prosecution / barring the acquirer from entering the capital market for a specified period etc.

Increase of Promoters holding by preferential issue of Shares

1)    Intimation to Stock Exchanges at least 7 days before the Board Meeting in which the board will consider the Preferential Issue of Shares.
2)    Preferential Issue of Shares to be approved by the Board of Directors.
3)    Notice convening a Shareholders Meeting and the Explanatory Statement to be approved by the Board.
4)    Board to consider whether increase of authorised capital and consequent amendment to Memorandum and Articles of Association is required.
5)    Amendment to Articles of Association to provide for making preferential allotment.
6)    Determination of share prices of the company as per SEBI guidelines for preferential issue and certificate from the Statutory Auditors for calculation of price.
7)    In principle approval from the Stock Exchanges to be taken.
8)    If by virtue of preferential allotment of shares the limit of 5% of the total equity base is exceeded the promoter has to give open offer as the SEBI Substantial Acquisition of Shares and Takeover Regulation.
9)    In the case of a listed company, three copies of the notice of the meeting shall be forwarded to each of the stock exchanges.
10)  To ensure that the proposed allottees hold Shares in dematerialized form only.
11)  To ensure that the proposed allottees have not sold the Shares of the company within a period of 6 months before the relevant date. If so, they shall not be eligible to be allotted Shares.
12)  To make an application to stock exchanges where the Shares of the company are listed for in-principle approval of the Shares that are to be issued on a preferential basis.
13)  In case of issue of Shares for consideration other than cash, get the assets that are proposed to be acquired valued by a Valuer, who shall be either a chartered accountant or merchant banker.
14)  To obtain a certificate from the statutory auditors that the proposed allotment is in accordance with the SEBI Guidelines on preferential Allotment.
15)  Hold general meeting. Place the Auditors’ Certificate before the members. Consent of shareholders by way of special resolution for preferential issue is require.
16)  File Form 23 with ROC within 30 days of passing of special resolution.
17)  If authorised share capital was increased, ensure to file form No.5 along with Form 23 with necessary fees within 30 days of the meeting. Form No.5 must bear adequate stamp duty.
18)  If consent of members is received by way of ordinary resolution only, instead of special resolution, the approval of the Central Government (Ministry of Corporate Affairs) is required.
19)  Receive application money along with application forms, duly filled in,
20)  To ensure that allotment is done within 15 days of the passing of the Special Resolution.
21)  Convene Board Meeting for considering allotment. Pass resolution for allotment.
22)  To intimate details of lock-in to both the depositories.
23)  To apply to the Stock Exchange for final listing.
24)  For allotment to NRIs, provisions of FEMA be kept in mind.
25)  In case of allotment of Shares to mutual funds, financial institutions the respective agreements shall be signed and executed.
26)  In the case of a listed company, send intimation to the stock exchanges regarding the allotment of Shares as approved by the Board.
27)  Ensure that the demat account of the allottees are within 15 days of the passing of the special resolution credited after paying the necessary stamp duty.
28)  To list the Shares of the company with the Stock Exchange.
29)  Within 30 days of allotment, file return of allotment with Registrar of Companies.
30)  Update member’s register and if so required, register of directors’ shareholding.
31)  If debentures were issued with an option to convert the whole or part into Shares, check the applicability of the Public Companies (Terms of Issue of debentures and Raising of Loans with Option to Convert such Debentures or Loans into Shares) Rules, 1977. Where the rules are not complied with, prior approval of the Central Government to be obtained.

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