Difference between private placement and preferential issue

Introduction

Various modes of raising finance for a company exists in the industry. Chart hereunder depicts the common instruments used by companies to fulfill their funding requirements:

For issuing any of the above instruments, companies mostly opt for private placement or preferential issue to raise funds. These terms are often used interchangeably. But the concern here is that what is the difference between the two? The author in this write-up will explain all the crucial differences in both the concepts.

Difference between private placement and preferential issue

The first and foremost difference is the types of instruments which are allowed to be issued under Private Placement and Preferential Issue. The list of instruments is given below:

The other important differences between private placement and preferential issue are given in the below table:

Basis	Private Placement	Preferential Issue
Meaning	Private placement is an invitation or offer to a select group of persons (identified persons) to subscribe the securities of a company. [Section 42]	Preferential Offer means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis. [Section 62(1)(c)]
Applicable Provisions	(i) Section 42: Private Placement (ii) Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (iii) Section 55: Private Placement of Preference Shares (iv) Section 71: Private placement of debentures (v) Section 180(1)(c): Maximum Limit for raising NCDs	(i) Section 62(1)(c): Preferential Allotment (ii) Section 42 of the Companies Act, 2013; (iii) Rule 13 of the Companies (Share Capital and Debentures) Rule, 2014; (iv) Rule 14 of the Companies (Prospectus and Allotment of Securities) Rule, 2014.
Payment options	Cheque or demand draft or any other banking channel but not in cash [Section 14(4)]	Cash or for consideration other than cash [Section 62(1)(c)]
Time limit for allotment	Within 60 days of receipt of subscription money [Section42(6)]	Within 12 months from the date of passing Special Resolution [Rule 13(2)(e)]
Approvals	Special Resolution (Except for Non Convertible Debentures, if limit u/s 180(1)(c) does not exceed) [Second Proviso to Rule 14(1)]	Special Resolution [Section 62(1)(c)]
Explanatory Statement	As per rule 14(1) of PAS Rules	As per rule 13(2)(d) of Share Capital Rules read with rule 14(1) of PAS Rules
Similarities due to compliance of Section 42
Maximum Allottees	Offer may be made to maximum 200 persons (excluding QIBs and employees under employees stock option) in a financial year [Section 42(2)]	Offer may be made to maximum 200 persons (excluding QIBs and employees under employees stock option) in a financial year [Rule 13(1) and Section 42(2)]
Deemed Public Offer	Breach of limit of 200 persons will result in deemed public offer [Explanation III of Section 42]	Breach of limit of 200 persons will result in deemed public offer [Rule 13(1) and Explanation III of Section 42]
Offer Letter	Private Placement Offer-cum-Application Letter (PPOAL) i.e. Form PAS – 4 [Rule 14(3)]	Private Placement Offer-cum-Application Letter (PPOAL) i.e. Form PAS – 4 [Rule 13(1) and Rule 14(3)]
Form filing	MGT-14 (within 30 days passing of special resoution) before issue of Letter of Offer [Private Companies shall also file MGT-14 for approval obtained u/s 179(3)(c)] [Rule 14(8)] PAS-3 (within 15 days of allotment of shares) [Section 42(8)]
Use of funds	Only after filing of PAS-3 [Section 42(4)]
Valuation Report	Mandatory (not for listed companies) [Rule 14(1) of PAS Rules and Rule 13(1) of Share Capital Rules]
Renounce the offer	Not allowed [Section 42(3)]

Conclusion

On the basis of the above mentioned differences, it is amply clear that the provisions of Private placement i.e. Section 42 of the Act read with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 are required to be compiled in case of Preferential Allotment but provisions of Preferential Allotment [Section 62(1)(c)] are not required to be complied in case of Private Placement. Further, Private Placement covers all kinds of securities, however, Preferential Allotment covers only equity shares and convertible securities. Therefore, it can be concluded that every Preferential Issue is a Private Placement but vice versa is not true.