April 04, 2002
‘7’
MISUSE OF PREFERENTIAL ALLOTMENT OF SHARES
There are no restrictions on sale of shares by the preferential allottees in the open market other than lock-in requirements. Companies can make preferential allotment by passing a special resolution of shareholders under Section 81 (1A) of the Companies Act, 1956 and in compliance with conditions imposed by Securities and Exchange Board of India (SEBI), such as, minimum pricing, disclosure to shareholders and lock-in of shares allotted on preferential basis, if they desire to seek listing of Stock Exchanges. Companies have been making such preferential issue to persons including overseas entities.
SEBI and Department of Company Affairs (DCA) have been receiving queries and suggestions from various quarters regarding abuse and misuse of preferential allotment and how to prevent them. In this connection, SEBI has already strengthened the guidelines for preferential issues in August, 2000 stipulating that preferential shares are eligible for listing only if disclosures specified in the guidelines are made, the shares are locked in and the consideration fully paid on allotment.