New Guidelines for preferential allotment by unlisted public companies

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On 14 December 2011 the Ministry of Corporate Affairs (MCA) has issued Unlisted Public Companies (Preferential Allotment) Amendment Rules, 2011 (Amendment Rules) which is effective from the date of publication in Official Gazette. The Amendment Rules provide for amendment of Unlisted Public Companies (Preferential Allotment) Rules, 2003 (2003 Rules). The Amendment Rules does not replace the 2003 Rules but makes few significant additions.

Key Highlights of Preferential Allotment Amendment Rules 2011:

• Definition of ‘Preferential Allotment’: It is amended to specifically include allotment of convertible instrument including hybrid instruments convertible into shares.2003 Rules definition included issue of shares to promoter and relatives in public issue, which will not be included post amendment.
• Special Resolution: Requirement of special resolution is made specifically applicable to issue of convertible instrument including hybrid instruments convertible into shares.Under 2003 Rules such requirement was applicable only to issue of shares.
• The offer for preferential allotment cannot be made to more than 49 persons.
• Any offer or invitation not in compliance with provisions of Section 81 (1A) read with section 67(3) of the Companies Act, 1956 (the Act) would be treated as public offer and provisions of the SCRA, 1956 and SEBI Act, 1992 will need to be complied with.
• The money payable on subscription should be paid only by way of cheque or DD or other banking channels but not by cash.
• Allotment of securities should be completed within 60 days from the receipt of application money. If not so allotted, the company should repay application money within 15 days thereafter, failing which it should be repaid along with an interest @ 12percent p.a.
• The application money should be kept in a separate bank account and should not be utilized prior to allotment.
• Company offering securities can not release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about the offer.
• Details of proposed allottees should be included in the Special Resolution.• Allotment of securities should be completed within 60 days from the receipt of application money. If not so allotted, the company should repay application money within 15 days thereafter, failing which it should be repaid along with an interest @ 12percent p.a.
• The application money should be kept in a separate bank account and should not be utilized prior to allotment.
• Company offering securities can not release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about the offer.
• Details of proposed allottees should be included in the Special Resolution.