Private Placement, Preferential Allotment, ESOS and Sweat Equity

Not every issue of shares is made to the public at large or to existing shareholders. Four further methods let a company raise capital from, or reward, a narrower, pre-identified group of people.

Under private placement, governed by Section 42 of the Companies Act, 2013, a company offers or invites subscription of securities to a select group of identified persons — other than by way of a public offer — through a private placement offer letter. The offer cannot be made to more than two hundred persons in aggregate in a financial year (a limit that excludes qualified institutional buyers and employees offered securities under an employee stock option scheme), the company cannot use any public advertisement or media to publicise the offer, and application money must be received only through the applicant's bank account, by cheque, demand draft or other banking channel — never in cash. Allotment must be completed within sixty days of receiving the application money, failing which the money must be refunded, with interest, within a further stipulated period.

Preferential allotment, governed by Section 62(1)(c) read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, is the issue of shares or other convertible securities to specifically identified persons — often promoters or a strategic investor — otherwise than through a rights issue or a public issue. It requires a special resolution of the shareholders, a price determined in the manner prescribed (ordinarily by a registered valuer), and the resulting shares are subject to a statutory lock-in period before they can be transferred.

An Employee Stock Option Scheme (ESOS), permitted under Section 62(1)(b), lets a company grant its employees and directors an option — never an obligation — to apply for and be allotted the company's shares at a predetermined price, at a future date, after a minimum vesting period of at least one year from the date of grant. It requires shareholder approval by special resolution and is designed to align an employee's own financial interest with the company's long-term performance. …