Preferential Allotment of Shares in Listed Companies 2025

A Practical Guide for Business Owners & Investors: Preferential Allotment of Shares in Listed Companies 2025

Imagine you are the CEO of a fast-growing listed company, and you need funds to expand. The stock market looks volatile, and a public offering seems too complex. What if there was a simpler way to raise money without the hassle of a full-fledged public issue?

Enter Preferential Allotment—a method where your company issues shares directly to select investors, like big institutional players or strategic partners, without going through a public offering.

Sounds interesting, right? But before you start handing out shares, let’s break down how this works, what SEBI says about it, and the pre-conditions you must meet.

Step-by-Step Process for Preferential Allotment in a Listed Company

Step 1: Board Approval—The Green Light from the Top

Before doing anything, your company’s Board of Directors must approve the idea of preferential allotment.

🔹 Example: Suppose XYZ Ltd. wants to issue shares to a strategic investor, ABC Capital. First, XYZ’s board must pass a resolution approving the plan and setting the number of shares, price, and purpose.

Step 2: Valuation of Shares—No Favoritism Allowed

SEBI ensures that shares issued under preferential allotment are fairly priced. The price is determined based on:

✔️ The higher of:

Average weekly high and low price of the stock in the past 26 weeks OR
Average weekly high and low price of the stock in the past 2 weeks

🔹 Example: If XYZ Ltd.’s share price fluctuated between ₹90 and ₹110 in the last 26 weeks and between ₹95 and ₹105 in the last two weeks, the company must use the higher valuation to determine the issue price.

Step 3: Shareholder Approval—A Special Nod

You can’t just issue shares at will. SEBI mandates that a special resolution (at least 75% approval) in a general meeting must be passed by existing shareholders.

✔️ This ensures transparency and prevents misuse.

🔹 Example: If retail shareholders of XYZ Ltd. feel that issuing shares to ABC Capital is unfair or undervalued, they have the power to reject the proposal in the general meeting.

Step 4: SEBI’s Lock-in Period—No Quick Selling Allowed

To prevent unfair gains, SEBI has a lock-in period for shares issued through preferential allotment:

✔️ For promoters & promoter group: 18 months (if the company is not frequently traded)
✔️ For others: 6 months (from the date of allotment)

🔹 Example: If ABC Capital buys shares of XYZ Ltd. via preferential allotment, they cannot sell them immediately and must wait at least 6 months.

Step 5: Stock Exchange Approval & Filing with SEBI

Once shareholder approval is obtained, the company must:

✔️ Apply to the stock exchange (like NSE or BSE) for in-principle approval.
✔️ File necessary disclosures with SEBI, including details of investors, pricing methodology, and purpose.

Step 6: Allotment & Credit to Investors

Once SEBI gives the green light, the company issues shares and credits them to investors’ Demat accounts.

Pre-Conditions for Preferential Allotment (As per SEBI ICDR & LODR)

✅ Minimum Holding Period – Investors receiving preferential shares must hold them for a lock-in period as per SEBI guidelines.

✅ Pricing Formula – The pricing must follow the SEBI formula (average market price calculations).

✅ No Default in Past Loans – If the company has defaulted on bank loans or statutory dues, SEBI may reject the allotment.

✅ Disclosure & Transparency – The company must disclose all details of the allotment, including investor names, purpose, and valuation, in its stock exchange filings.

✅ Creditworthiness of Investors – If shares are issued to a strategic investor, SEBI may ask for proof of funds to ensure no illegal transactions.

Real-Life Example: Reliance Industries & Jio Platforms’ Preferential Allotment

During the pandemic, Reliance Industries needed funds for Jio Platforms. Instead of going for a public issue, they used preferential allotment and brought in marquee investors like Facebook and Silver Lake.

✔️ They followed SEBI’s rules, set the price as per regulations, and raised billions of dollars without a public offering!

Why Does This Matter to You?

If you are an investor, preferential allotment can be a golden ticket—you get shares at an early stage before the stock price skyrockets.

If you are a business owner, this is a powerful fundraising tool—you get funds quickly and efficiently while keeping control of your company.

🚀 Bottom Line: If done right, preferential allotment is a win-win for companies and investors. But knowing SEBI rules is the key to avoiding legal trouble.

The Complete Roadmap for Preferential Issue in a Listed Company

Imagine you are the CFO of a listed company, and you have a golden opportunity to bring in strategic investors through a preferential allotment. But here’s the challenge: SEBI has strict guidelines, and missing even a single step could land your company in regulatory trouble.

To ensure a smooth and compliant process, here’s a detailed breakdown of the preferential issue procedure—structured in a way that even a first-time company executive can follow.

📌 Phase 1: Pre-Approval & Compliance Setup (X-4 to X)

🔹 Step 1: Record Keeping in SDD Software (X-3)

Update the Structured Digital Database (SDD) with details of people involved in the preferential issue (e.g., Board Members, Consultants, Bankers).
Include Permanent Account Numbers (PAN) of those who have access to price-sensitive information.

🔹 Step 2: Board Meeting Preparation (X-4)

Send Agenda & Notice to Directors (Shorter Notice is allowed).
Intimate the Stock Exchange (SE) about the Board Meeting at least two working days before the meeting.

🔹 Step 3: Lock-In Pre-Preferential Holding (X-4)

Existing shareholders participating in the preferential issue must lock-in their pre-preferential holding for 90 trading days from the date of allotment/trading approval.

🔹 Step 4: Scrutinizer Consent for E-Voting & Postal Ballot (X-2)

Obtain consent from the scrutinizer who will oversee the e-voting process.

🔹 Step 5: Board Meeting (Key Resolutions) (X)

Approve the issue of warrants and equity shares on a preferential basis.
Approve EGM Notice & Explanatory Statement.
Appoint a Scrutinizer for e-voting.
Authorize the Company Secretary (CS) and Directors to handle the EGM process.
Appoint NSDL/CDSL for e-voting services.
Fix the cut-off date for determining members eligible to vote.
Optionally, form an allotment committee.

🔹 Step 6: Post-Board Meeting Compliance (X)

Disclose outcome of the Board Meeting (within 30 minutes per SEBI’s July 13, 2023 circular).
File Form MGT-14 for Board Resolutions (within 30 days).
Coordinate with RTA for uploading resolutions & e-voting details (X+2).

📌 Phase 2: Shareholder Approval & Regulatory Filings (X+6 to X+30)

🔹 Step 7: Prepare EGM Notice & Get In-Principle Approval (X+6 to X+7)

Finalize & Dispatch EGM Notice (X+7).
Submit In-Principle Approval application to the Stock Exchange (same day as notice dispatch).
Publish Newspaper Advertisement about the e-voting & submit it to SE.

🔹 Step 8: Open a Separate Bank Account for Investment Amount (X+9)

🔹 Step 9: Conduct EGM & E-Voting

E-Voting Period: Opens on X+27, closes on X+29.
EGM Date: X+30.
Disclose Voting Results & Scrutinizer Report within 2 working days (X+30).
Update Website & Depositories with results.

🔹 Step 10: File Special Resolution with ROC

MGT-14 Filing (X+60).

📌 Phase 3: Allotment & Listing Process (X+61 to X+125)

🔹 Step 11: Offer Letter & Investment Receipt (X+61 to X+74)

Issue Offer Letter (PAS-4) after filing MGT-14 & obtaining In-Principle Approval.
Receive 25% of the Warrant Subscription Money from allottees before allotment.

🔹 Step 12: Board Meeting for Allotment (X+74)

Conduct Board/Committee Meeting to allot Warrants & Shares.
File Form PAS-3 (within 15 days of allotment).
Apply for a separate ISIN (X+75).
Update Depositories & Create Lock-in Period (X+75).
Disclose under SEBI (PIT & SAST) Regulations, if applicable (X+77).

🔹 Step 13: Post-Allotment Regulatory Filings (X+84 to X+125)

File Shareholding Pattern if capital change exceeds 2% of paid-up capital (X+84).
Apply for Listing of Shares (within 20 days of allotment → X+93).
Receive Listing Approval (Tentatively X+114).
Apply for Trading Approval (within 7 working days of listing approval → X+121).
Receive Trading Approval (X+125).

🚀 Final Thoughts: Why This Process Matters?

⚡ For the Company: A fast, SEBI-compliant way to raise funds without a public issue.
⚡ For Investors: A chance to get shares at a preferential price before they hit the open market.
⚡ For SEBI: Ensures transparency, fairness, and prevents misuse of insider information.

📌 Miss any step? You risk regulatory action, investor disputes, or listing delays!

🚀 Need help drafting Board Resolutions or Compliance Filings? Let’s get it done right!

Internal Board Documents

A. Board Meeting & Internal Approvals

1️⃣ Internal Board Documents:

🔹 Draft Board Agenda – Outlines resolutions to be passed in the Board Meeting.
🔹 Board Notes & Justification – Explains the rationale for the preferential issue.
🔹 List of Allottees & Investor Details – Name, PAN, Address, Category (Promoter/Non-Promoter), number of shares, etc.
🔹 Shareholding Pattern (Pre & Post Issue) – Internal reference for impact assessment.
🔹 Board Meeting Attendance Register – Signatures of all directors attending the meeting.
🔹 Conflict of Interest Declaration by Directors – If any director is involved in the preferential allotment.
🔹 Resolution for Appointment of Scrutinizer – Internal approval before e-voting.
🔹 Authorization Letters for Company Secretary (CS) or Directors – Delegating responsibility to conduct the process.

📌 B. Preferential Issue Pricing & Compliance Reports

2️⃣ Preferential Issue Price Calculation & Compliance:

🔹 Certificate from a Practicing Company Secretary (PCS) – Certifying compliance with SEBI ICDR & LODR.
🔹 Certificate from a Chartered Accountant (CA) – Certifying the preferential issue pricing as per SEBI guidelines.
🔹 Valuation Report (if applicable) – If shares are issued at a price different from the market price, a valuation report is needed.
🔹 Pre-Issue & Post-Issue Shareholding Comparison – Helps management understand changes in control.
🔹 Lock-In Confirmation for Pre-Issue Holding – List of shareholders whose shares are locked in before allotment.

3️⃣ EGM & Shareholder Communication:

🔹 Draft EGM Notice & Explanatory Statement – Prepared before dispatch to shareholders.
🔹 Proof of Dispatch of EGM Notice – To shareholders via email/post.
🔹 EGM Attendance Register – Maintained internally.
🔹 EGM Minutes of Meeting (MoM) – Detailed record of the discussion & resolutions passed.
🔹 Scrutinizer’s Report (Detailed Copy) – Internal copy before submission to Stock Exchange.
🔹 Voting Summary Sheet (Before Final Submission) – Prepared for internal review before official submission.

📌 D. Investor & Legal Documentation

🔹 Subscription Agreement (if any) – If there is a negotiated agreement with investors.
🔹 Consent Letters from Investors – Their approval for participating in the issue.
🔹 Declaration by Allottees on No-Funding from the Company – Confirmation that funds used for subscription are not borrowed from the issuing company.
🔹 Undertaking from Allottees on Lock-In Period – Confirmation that they will abide by SEBI’s lock-in restrictions.
🔹 Bank Details for Fund Transfer – Internal document confirming funds received in the preferential allotment bank account.
🔹 Board Approval for Bank Account Opening – If a new bank account is opened for receiving funds.

📌 E. Post-Allotment Internal Documentation

🔹 Allotment Register (Internal Document) – Maintains details of allottees & number of shares allotted.
🔹 Corporate Action Request (CAR) with RTA – Before official submission.
🔹 Draft ISIN Application – Before filing with NSDL/CDSL.
🔹 Investor Communication on Allotment – Letters/emails sent to allottees confirming the allotment.
🔹 Record of Preferential Issue Lock-In Period (Internal List) – Helps track regulatory compliance.
🔹 Statement of Funds Utilization (Internal Report) – A report on how the company intends to use the funds.

💡 Why These Documents Matter?

🚀 Ensures Compliance – Many of these documents help demonstrate adherence to SEBI & MCA regulations in case of future scrutiny.
📌 Facilitates Smooth Execution – Having all internal records in place speeds up the approval process.
🔍 Risk Mitigation – Proper documentation prevents regulatory lapses, investor disputes, or compliance failures.

📝 Final Takeaway:

These internal documents act as a backbone of the preferential allotment process, ensuring that everything runs smoothly. Even though they are not filed anywhere, they play a crucial role in legal, financial, and investor relations.

📌 Tip: Always maintain a digital & physical copy of these records for at least 5 years for audit & compliance purposes.