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.

📌 C. Shareholder Approval & EGM-Related Documents

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

4️⃣ Internal Agreements & Investment-Related Documents:

🔹 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

5️⃣ Share Certificate & Allotment Compliance:

🔹 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.