Preferential Allotment of Shares in India: Cash Consideration & Valuation Report Explained

Introduction: Preferential Allotment of Shares in India

A popular misconception exists that preferential allotment of shares in India only happens when there’s non-cash consideration. But this is far from the truth.

Fact: Preferential allotment is completely allowed for cash—and is widely used for raising capital from promoters, private equity investors, or strategic partners.

This blog will bust the myth and explain why a valuation report is mandatory, whether the consideration is cash or non-cash.

Under the Companies Act, 2013, and in line with SEBI guidelines (for listed companies), preferential allotment is fully permitted for both cash and non-cash consideration.

In fact, many companies—especially startups and SMEs—routinely issue shares to promoters, strategic investors, or private equity firms in exchange for cash. This method allows for quicker capital infusion without going through the lengthy processes of public offerings or rights issues.

💰 Preferential Allotment Can Be for Cash

Under the Companies Act, 2013 and SEBI ICDR Regulations, preferential allotment can be issued against cash. In fact, most unlisted and listed companies prefer this route for raising quick capital without approaching the public.

✅ Legal Provisions Supporting Cash Consideration:

• Section 62(1)(c) and Section 42, Companies Act, 2013
• Rule 13 & 14 of Companies (Share Capital and Debentures) & (Prospectus and Allotment of Securities) Rules, 2014
• SEBI ICDR Regulations for listed companies

❌ Why This Misconception Exists

Most of the compliance-heavy discussions happen around non-cash consideration—like converting loans, issuing shares for assets, or sweat equity. These involve complex disclosures and valuation, so people assume cash-based preferential issues aren’t allowed.

But reality? Preferential allotment for cash is common, quick, and legally supported.

📈 Why Valuation Report Is Mandatory in Preferential Allotment

Regardless of whether the shares are issued for cash or for assets, a valuation report is compulsory. Here’s why:

🔎 1. To Determine Fair Market Value (FMV)

• Prevents shares from being undervalued or overvalued.
• Ensures equitable treatment for existing shareholders.

🔎 2. Regulatory Compliance

• For unlisted companies: Report by a Registered Valuer.
• For listed companies: Valuation certified by a SEBI-registered merchant banker.

🔎 3. For Non-Cash Consideration

When shares are issued in exchange for tangible or intangible assets, the valuation ensures the consideration is equivalent and justified.

🔎 4. Transparency & Investor Confidence

It enhances governance and builds credibility for both internal and external stakeholders.

📊 Quick Comparison: Cash vs Non-Cash Preferential Allotment

📌 Key Takeaways

• 💡 Preferential allotment can be made for cash – it’s a myth that it’s only for non-cash consideration.
• 📑 Valuation report is compulsory in both cases—cash and non-cash—to ensure fairness and regulatory compliance.
• ⚖️ Legal provisions under the Companies Act, 2013 and SEBI regulations mandate fair pricing and valuation processes.

Detailed Guide for Share Swap Arrangement under Preferential Allotment in India

📌 What is Share Swap under Preferential Allotment?

A share swap under preferential allotment refers to a non-cash transaction, where a company issues shares to another entity or person in exchange for shares held in another company (usually for acquisition, consolidation, or strategic investment purposes). No cash changes hands—only equity securities are exchanged.

This type of transaction is governed by:

• Section 62(1)(c) & Section 42 of the Companies Act, 2013
• Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014
• SEBI (ICDR) Regulations, 2018 (for listed companies)

✅ When is Share Swap Used?

• 🏢 Acquisition of another company or its stake
• 🤝 Strategic investment between promoter groups
• 🔁 Corporate restructuring or group consolidation
• 📉 Avoiding cash outflow while gaining control

📝 Mandatory Requirements in Share Swap under Preferential Allotment

1. ✅ Valuation Report
   • Mandatory to establish equivalency of the swapped shares.
   • Must be obtained from:
     • Registered Valuer (for unlisted companies)
     • Merchant Banker (for listed companies)
2. ✅ Board Approval
   • Pass a resolution approving the swap arrangement.
   • Approve the draft of offer letter (PAS-4).
3. ✅ Shareholder Approval
   • Special resolution under Section 62(1)(c) in a general meeting.
4. ✅ Filing with ROC
   • Form MGT-14 for special resolution
   • Form PAS-3 for return of allotment
5. ✅ Offer Letter (PAS-4) & Record of Private Placement (PAS-5)
   • Even in non-cash cases, private placement formalities apply.

🔄 Step-by-Step Process for Share Swap via Preferential Allotment

📍 Step 1: Proposal & Drafting

• Identify parties and the companies involved.
• Draft the terms of the share swap agreement.

📍 Step 2: Valuation

• Two valuations are done:
  • Valuation of shares of the issuing company (Company A)
  • Valuation of shares being received in return (Company B)
• This ensures a fair share exchange ratio.

📍 Step 3: Board Meeting

• Approve:
  • Share swap proposal
  • Valuation report
  • Calling of Extra-Ordinary General Meeting (EGM)

📍 Step 4: Shareholder Approval

• Pass a special resolution via EGM.
• Minimum 3/4th consent (75%) of shareholders present and voting.

📍 Step 5: File ROC Forms

• File Form MGT-14 within 30 days.
• Issue PAS-4 to the other party.
• Maintain PAS-5 record.

📍 Step 6: Execute the Swap

• Shares are issued in accordance with the valuation ratio.
• No cash flows take place.
• Issue share certificates or credit to demat.

📍 Step 7: File Return of Allotment (PAS-3)

• Within 15 days of allotment, file Form PAS-3.

🛑 Compliance Checklist

⚖️ Legal Provisions Referenced

• Section 62(1)(c) – Preferential Allotment
• Section 42 – Private Placement
• Rule 13 of Share Capital Rules
• Rule 14 of PAS Rules
• SEBI ICDR Regulations – Chapter V (Preferential Issue)

📊 Example of Share Swap

Scenario:
Company A acquires 30% stake in Company B.
Instead of paying ₹50 crores in cash, Company A issues equity shares worth ₹50 crores to the shareholders of Company B.

Compliance Steps:

• Valuation of Company A’s and B’s shares
• Determine exchange ratio (say, 1:5)
• Approvals + ROC Filings + Allotment

🎯 Key Takeaways

• Share swap under preferential allotment is a legally valid non-cash route to issue shares.
• Valuation report is compulsory to determine a fair swap ratio.
• Requires board resolution, shareholder approval, and ROC compliance.
• For listed companies, SEBI’s pricing and disclosure norms are stricter.

🧾 Conclusion

Preferential allotment is a powerful and flexible tool for companies in India to raise capital. Don’t fall for the myth that it’s only for non-cash deals. Even cash-based preferential issues are valid, legal, and widely practiced.
Just remember: Valuation is key, no matter the form of consideration.