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Hybrid and convertible instruments now covered under preferential allotment

22nd December, 2011
The Unlisted Public Companies (Preferential Allotment) Rules, 2003 have been amended by the Ministry of Corporate Affairs by a notification dated 14th December, 2011. As per the notification, the definition of preferential allotment has been amended to cover any other instrument convertible into shares on preferential basis. It will also cover hybrid instruments as per the amended Rule 3(1) and such allotment shall not be made to more than 49 persons as per Section 67(3) of Companies Act, 1956.

Preferential allotment requires to be authorized by articles of association of the company and approved by its shareholders through a special resolution passed in a general meeting held for authorizing the Board of Directors to carry on the process of allotment within 60 (Sixty) days of receipt of the share application money. Once the special resolution is passed, it should be acted upon within twelve months of the date of passing such special resolution.

A new Rule 8 has been inserted providing for several conditions which will govern such preferential allotment. Fresh offer cannot be made unless allotment relating to earlier offer has been completed. Offer not in line with relevant provisions will be treated as public offer in which case Securities Contracts (Regulation) Act, 1956 and SEBI Act, 1992 will apply. A complete ban has been placed on any kind of marketing to inform the public about such an offer. The amendments are seen as consequential to recent developments in Sahara case.
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