MODES OF ALLOTMENT OF SHARES OTHER THAN PUBLIC OFFERS

Modes of Allotment of Shares other than Public Offers

• Private Placement of Shares: A company may decide to make an offer to a selected group of investors, who may be better informed, and therefore not requiring elaborate protection mechanisms. This is called a private placement of shares.
• Key Features:
  • A private placement of shares can be done by a company irrespective of whether it has made a public offer of shares or not.
  • A private placement of shares made by a listed company is called a preferential allotment of shares.
  • The company is required to meet the regulations of SEBI and the Companies Act.
  • The regulations aim at ensuring that promoters and large investor groups do not take any action that may be detrimental to the interests of the public investors.
  • If the shares are allotted to promoter or promoter group, the said shares shall be locked-in for a period of 18 months from the date of trading approval.
  • The shares that are allotted to other than promoter or promoter group, will be locked-in for a period of 6 months from the date of trading approval.

Private Placement of Shares

• Definition: Under section 42 of the Companies Act, 2013, a company may make allotment of shares through private placement subject to certain conditions.
• Details:
  • A company shall make private placement to select group of persons as identified by the company (“Identified Persons”).
  • The number of allottees shall not exceed 50 or such higher number as may be prescribed, (excluding Qualified Institutional Buyers, and employees of the company) in a financial year.
  • Shares allotted to the qualified institutional buyers and employees of the company being offered securities under a scheme of employees’ stock option shall not be considered in the aforementioned number.
  • The company shall issue private placement offer and application in prescribed manner to identified persons.
  • The company is required to record name and addresses of such identified persons.

Qualified Institutions Placement (QIP)

• Definition: A qualified institutions placement (QIP) is a private placement of eligible securities made by a listed company to certain identified categories of investors known as Qualified Institutional Buyers (QIBs).
• Details:
  • To be eligible to make such a placement, the shares of the company should have been listed on the stock exchange for a period of at least one year before the notice of such issue is given.
  • A QIP will be made at a price not less than the average of the weekly high and low of the closing prices for the two weeks preceding the relevant date.
  • The issuer may offer a discount of not more than 5 percent on the price so calculated for the QIP, subject to approval of shareholders.
  • QIBs include financial institutions, mutual funds, alternative investment funds, venture capital funds, scheduled commercial banks, foreign portfolio investors (other than individuals, corporate bodies and family offices) and the like.

Rights Issue

• Definition: A rights issue is an issue of fresh capital made to the existing investors of a company.
• Details:
  • In a rights issue, the company has to decide on the proportion of fresh shares to be issued to the investors.
  • The investor’s percentage holding in the company remains the same after the rights issue unless the shares are foregone by the investor.
  • If specified in the letter of offer, promoters may subscribe to the unsubscribed portion of the rights issue over and above their entitlement.
  • The rights issue by a listed issuer is subject to the Companies Act as well as the SEBI (ICDR) Regulations.

Employee Stock Options (ESOPs)

• Definition: ESOP is a scheme or plan or programme set up by a company for its employees.
• Details:
  • Employee Stock Options are options under which a company gives the right to its employees to purchase its shares at a discounted price.
  • ESOP is a type of retirement and employee benefit plan which offers its employees, ownership interest in the shares of the company on fulfilment of certain conditions.
  • Stock options: These are not shares, but the right to own shares at a future date by paying the price.
  • Vesting period: This is the period only after which the employees are allowed to exercise the options and convert them to shares.
  • Exercise period: This is the period during which the employees can exercise their right to convert stock options to shares.
  • Exercise price/ Grant price/ Strike price: This is the price at which the employees are given shares of the company.
  • Expiration date: ESOP is valid only for a limited period, i.e., during the exercise period.

Conversion of Convertible Debentures/Bonds into shares

• Definition: Convertible debentures or bonds are long-term debt instruments issued by a company that can be converted into equity shares of the company on a future date.
• Details:
  • They can be fully, partially or optionally convertible.
  • They pay a lower coupon rate (interest) than pure debt instruments.
  • A debenture holder is a creditor or lender of the company.
  • Investors benefit from interest payment and have the option to convert the loan into equity to participate in the growth of the company.