Preferential allotment under SEBI ICDR: Balancing fundraising agility with shareholder protection

In the fast-moving world of capital markets, companies often find themselves needing to raise funds at the drop of a hat. Preferential allotment has become the go-to tool for this purpose. It allows companies to issue shares or convertible instruments to select investors without wading through the red tape of public issues.

Yet, this route walks a tightrope. On one hand, it offers much-needed fundraising agility. On the other hand, it risks sidelining existing shareholders if left unchecked. SEBI’s challenge, therefore, is to strike the right chord, ensuring flexibility for issuers while keeping the playing field level for all shareholders.

Under Regulation 164 of the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018 (ICDR Regulations), pricing must be pegged to the higher of the 90 trading-day or 10 trading-day volume-weighted average price before the relevant date, a rule designed to avoid sweetheart deals or short-term manipulation. Further, the allotment must wrap up within 15 days from the date of shareholder approval, keeping companies on their toes.

The lock-in provisions under Regulation 167 of the ICDR Regulations prevent fly-by-night investors from cashing out prematurely, thereby aligning long-term interests between the company and investors.

1. Companies Act, 2013 – Section 62(1)(c) read with Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 and Section 42 read with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014

2. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 – Chapter V: Regulations 164 – 170 read with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Preferential allotments have their finger on the pulse of modern finance; they allow speed and discretion - both valuable commodities in a volatile market. However, unchecked discretion can be a slippery slope.

Over the years, SEBI has tightened the screws to prevent misuse. The watchdog’s approach combines carrot and stick, offering procedural flexibility but imposing strict compliance thresholds. For instance:

- Lock-in periods ensure investors have skin in their game.

- Comprehensive disclosures in the explanatory statement shed light on investor identity, rationale, and impact on shareholding.

- Market-linked pricing prevents arbitrary valuations or preferential treatment.

- Disqualification filters, screening out wilful defaulters or entities under regulatory censure.

This calibrated framework proves that SEBI aims not to clip corporate wings but to prevent them from flying too close to the sun.

To better understand where preferential allotment fits, it helps to compare it with other modes of equity raising:

If the rights issue is a democratic exercise, the preferential allotment is a targeted strike — expedient, decisive, and often strategic. Bonus issues, on the other hand, serve more as a goodwill gesture, reinforcing investor confidence. Each has its own place, and ultimately, the choice depends on whether the company values speed over inclusivity or strategic control over proportionate participation.

Companies often use preferential allotment when time is money—during mergers, acquisitions, or when onboarding a strategic investor. However, this fast lane demands caution.

• Decisions must align with long-term corporate strategy, not short-term promoter gain.

• Companies are expected to go the extra mile in explaining the deal rationale, valuation, and investor credentials.

• Exchanges and SEBI keep a hawk’s eye on repeated use of this route, ensuring that no company cuts corners under the guise of urgency.

• Courts have time and again held that preferential allotments should not become a backdoor entry for circumventing public issue norms (as emphasised in Sahara India and Shriram Transport Finance).

Advantages:

• Quick as lightning, funds can be raised within weeks.

• Allows companies to bring in strategic partners or investors with deep pockets.

• Flexibility in structuring instruments (shares, warrants, convertibles).

• Can boost market confidence when backed by credible investors.

Disadvantages:

• Dilution is an unavoidable bitter pill for existing shareholders.

• Valuation fights may crop up despite the pricing formula.

• Perception risk, too many preferential issues may raise eyebrows about governance intent.

• Lock-in curbs liquidity for new investors, which can be a dealbreaker.

Over time, SEBI has shown it has its ear to the ground. The amendments adjusting pricing lookback periods were a nod to market volatility, enabling flexibility while maintaining fairness. In an era of fluctuating valuations, this fine-tuning helps issuers act quickly without throwing caution to the wind.

Investors, too, have become more demanding. Institutional shareholders increasingly seek detailed justifications and independent fairness opinions, proof that good governance sells as much as capital itself. Companies that approach preferential allotments with transparency and prudence find themselves in investors’ good books.

Preferential allotment is not the villain it was once suspected to be, nor is it a silver bullet for raising capital. It is a useful lever that, when pulled with care, can keep a company financially nimble while protecting shareholder trust.

The ICDR Regulations ensure that this route does not become a game of favourites. It gives companies room to manoeuvre but reminds them not to throw caution to the wind. At day’s end, investor confidence hinges less on how many rules exist and more on whether boards play by the spirit of those rules.

Preferential allotment, in that sense, is a litmus test for corporate integrity; it rewards those who understand that balancing speed and fairness is not just good compliance, but smart business.

About the authors: Abhishekh Kanoi is the Group Legal Head & Company Secretary at PDS Limited.

Haripriya N Nair is a recent graduate of Dr. DY Patil College of Law. Her academic focus centered on Corporate Law, Banking & Finance Law, and Securities Law.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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