What is Private Placement?
Companies go for private placement to raise funds. A private placement is an invitation or offers to a select group of persons to subscribe to the shares and securities of a company.
As per Section 42(2), the offer can be sent to a maximum of 200 persons (excluding QIBs and employees under employees stock option) in one financial year. Any breach of this limit can result in a deemed public offer.
A Company can not utilize the funds unless the return of allotment has been filed with the Registrar of Companies. It is also mandatory to get approval from shareholders by way of a Special Resolution.
What is Preferential Allotment?
A preferential Offer is a way by which a company raises funds for its expenses. A preferential offer is defined as an issue of shares or other securities, by a company to a selected person or group of persons on a preferential basis.
Shares also include equity shares, partly convertible debentures, fully convertible debentures, or any other securities, which could be convertible into or exchanged with equity shares at a later date.
A Private Placement Offer-cum-Application Letter (PPOAL) is mandatory to send offers to the selected person or entity.
Difference Between Private Placement and Preferential Allotment
Private placement of securities is the allotment of any kind of security on a private basis according to provisions of Section 42. A preferential allotment is the allotment of equity shares or securities convertible into equity shares according to both Section 42 and 62(1)(c).
Private placement offers a wide range of securities that can be issued. On the other hand, preferential allotment only allows a narrow range of securities.
In private placement, the accepted payment method is a cheque or a demand draft, or any other banking channel. Cash is not acceptable. In preferential allotment, cash or for consideration other than cash is accepted
In private placement, approval is granted by special resolution under section 42. In preferential allotment, approval is granted by special resolution under section 62.
As per Section 42 (6), the time limit for allotment in a private placement is within 12 months from the date of passing the Special Resolution. As per Rule 13(2)(e), the time limit for allotment in a preferential allotment is within 12 months from the date of passing the Special Resolution.
The explanatory statements are given as per rule 14(1) of PAS rules for private placement. For preferential allotment, the explanatory statements are given as per rule 13(2)(d) of Share Capital Rules read with rule 14(1).
Comparison Between private placement and preferential allotment
| Parameters of Comparison | Private Placement | Preferential Allotment |
| Definition | Private placement of securities is the allotment of any kind of security on a private basis according to provisions of Section 42. | A preferential allotment is the allotment of equity shares or securities convertible into equity shares according to both Section 42 and 62(1)(c). |
| Range of securities offered | Wide range | Narrow range |
| Payment options | A cheque or a demand draft or any other banking channel. Cash is not acceptable. | Cash or for consideration other than cash is accepted. |
| Approval | A special resolution under section 42. | A special resolution under section 62. |
| The time limit for allotment | Within 60 days of receipt of subscription money | Within 12 months from the date of passing the Special Resolution |
| Explanatory statements | As per rule 14(1) of PAS rules. | As per rule 13(2)(d) of Share, Capital Rules read with rule 14(1). |