This is a faster way for a company to raise equity capital. The shares which the investors receive on their investment is known as Preferential shares. Preferential allotment is an important tool for companies seeking targeted capital infusion. Companies choose preferential allotment to issue shares to a select group of investors such as venture capitalists and strategic partners.

The issuer company has to comply with the Companies Act and the requirements contained in Chapter pertaining to preferential allotment in SEBI guidelines.
 

Process of Preferential Allotment

1. Board Meeting: The company's board of directors convenes to discuss and propose the issuance of shares through preferential allotment.
2. Special Resolution: The proposal is then put to a shareholder vote, requiring approval through a special resolution in an Extraordinary General Meeting (EGM) or Annual General Meeting (AGM).
3. Pricing: The issue price is determined as per regulatory guidelines, often based on the average of high and low stock prices in the preceding weeks.
4. SEBI and Stock Exchange Compliance: Listed companies must comply with SEBI regulations and file necessary documents with the stock exchange.
5. Allotment: Once regulatory approvals are secured, shares are allotted to the identified investors.
6. Reporting: Post-allotment, the company must report the details to regulatory authorities and ensure compliance with any post-allotment regulatory requirements.

Advantages of Preferential Allotment

1. Rapid Fundraising : Preferential allotment enables companies to raise funds more quickly than public offerings. It bypasses the lengthy processes of IPOs, such as roadshows and regulatory compliances, allowing for quicker capital infusion to meet urgent financial needs or seize growth opportunities.
2. Cost-Effectiveness : This method is more cost-effective due to lower issuance costs. It avoids significant expenses associated with public offerings, like underwriting fees, extensive marketing campaigns, and various regulatory filing fees, thereby reducing the overall cost of capital.
3. Pricing Flexibility : Companies have a degree of flexibility in setting the issue price for shares, within the confines of regulatory guidelines. This can be particularly advantageous in volatile market conditions, allowing companies to price shares in a way that balances investor appeal with fundraising objectives.
4. Attracting Strategic Investors : Preferential allotment provides an opportunity to selectively bring in strategic investors, such as venture capitalists, who can offer not just capital but also valuable industry insights, management expertise, and business connections.
5. Debt Restructuring : It is an effective tool for companies aiming to convert debt into equity. This helps in restructuring the balance sheet, improving financial ratios like debt-to-equity, and potentially easing cash flow pressures.