Definition
The allotment of shares or other securities by a listed company to a selected group of persons (not through a public offer) — at a price not lower than the SEBI-determined floor price — subject to shareholder approval by special resolution.
A preferential allotment under Section 62(1)(c) of the Companies Act, 2013 (and SEBI ICDR Regulations Chapter V for listed companies) is an issue of shares to specifically identified persons. The allottees may be promoters, strategic investors, institutional investors, or other specific parties. Key conditions for listed companies (SEBI ICDR): (a) special resolution approval; (b) allotment within 15 days of special resolution (60 days if SEBI approval needed); (c) issue price not less than SEBI-determined floor price (30-day or 26-week average VWAP, whichever is higher); (d) lock-in period: 18 months for promoters, 6 months for others. Preferential allotments are a common mechanism for corporate fundraising and strategic investments.
Statutory Definition
Section 62(1)(c), Companies Act, 2013: 'Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to persons, if it is authorised by a special resolution to persons other than those referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer.' Regulation 163, SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018: floor price calculation for preferential issues.
Etymology & Origin
From 'preferential' (giving preference, from Latin 'praeferre' — to carry before, to prefer) + 'allotment' (allocation of shares). A preferential allotment is one that 'prefers' (selects) specific persons for the share allocation, rather than the general public.
Full Legal Analysis
Preferential Allotment: Targeted Capital Raising
Preferential allotments allow companies to raise capital from specific investors quickly and efficiently, without the time and cost of a public issue. A strategic investor, a PE firm, or a promoter who wants to increase their stake — all can participate in a preferential allotment without the company going to the market. SEBI’s regulation ensures this targeted access doesn’t unfairly dilute existing shareholders.
Floor Price Calculation
The SEBI floor price for a preferential issue is the higher of: (a) average weekly VWAP of shares for the 26 weeks preceding the Relevant Date; (b) average weekly VWAP of shares for the 2 weeks preceding the Relevant Date. The 'Relevant Date' is 30 days before the shareholder meeting date. This formula prevents preferential issues at steep discounts that would unfairly benefit selected investors at the expense of existing shareholders. If the company is a newly listed entity (listed within 6 months), different rules apply.
Lock-In Period: Why It Matters
The lock-in period — 18 months for promoters, 6 months for non-promoters — prevents preferential allottees from immediately selling shares acquired at a discount. Without lock-ins, a preferential allottee could buy at a floor price (possibly below market) and immediately sell at market price, making an instant profit at existing shareholders’ expense. The lock-in ensures that preferential investors are making a genuine strategic investment, not an arbitrage trade.
“A preferential allotment is the company handpicking its investors. Unlike a public issue that goes to all comers, the company chooses who gets in. This choice power is why SEBI regulates it — to ensure the chosen investors pay a fair price and stay long enough to be genuine strategic partners.”
