Q.Explain private placement and preferential allotment as methods of issuing shares.

Both private placement and preferential allotment let a company raise capital from a narrow, identified group rather than the public at large, but they serve subtly different purposes.

Private placement, governed by Section 42 of the Companies Act, 2013, is a method of issuing securities to a select, identified group of persons rather than to the public at large. The company issues a private placement offer letter to the identified offerees, and the offer cannot be made to more than two hundred persons in aggregate in a financial year — a cap that excludes qualified institutional buyers and employees offered shares under an employee stock option scheme, so those categories do not eat into the 200-person limit. The company cannot use any form of public advertisement or media, in any manner, to publicise the offer, since doing so would turn it into a public offer in substance and defeat the whole point of the private route. Application money must be paid only through the applicant's own bank account, by cheque, demand draft, or other recognised banking channel, and never in cash, and the company must complete allotment within sixty days of receiving the application money, failing which it must refund the money, with interest, within a further prescribed period. …

Students frequently conflate the two, since both avoid the public at large; the distinguishing test is that private placement is capped by a headcount (200 persons) and governed by Section 42 generally, while preferential allotment is specifically about issuing to named, identified pe …