Preferential Allotment of Shares Under Section 62(1)(c): The Unlisted Company Playbook That Keeps Your Funding Round Clean (2026)
On 5 March 2026, the Registrar of Companies, Chennai signed an adjudication order against a company that had done everything in its funding round right, except one filing. It allotted 681 preference shares on 13 September 2024 and filed the return of allotment forty-six days late. Under Section 42(9), the penalty runs at Rs 1,000 a day on the company, its promoters and each director personally. A single missed date on a routine preferential allotment of shares turned a clean raise into a named order on the public record. For an unlisted company heading towards diligence or an eventual listing, that order is exactly the kind of finding a buyer or a merchant banker circles in red.
TL;DR — Preferential allotment for unlisted companies
Governing law: Section 62(1)(c) of the Companies Act 2013, Rule 13 of the Companies (Share Capital and Debentures) Rules 2014, read with the private placement rules of Section 42.
Who must comply: Every unlisted company issuing shares to a selected investor, whether a seed round, a growth round or a pre-IPO placement.
Hard deadlines: MGT-14 within 30 days of the special resolution. Allotment within 60 days of receiving money. PAS-3 within 15 days of allotment.
Penalty: Up to the amount raised or Rs 2 crore (whichever is lower) for a Section 42 breach; Rs 1,000 per day up to Rs 25 lakh for a late PAS-3.
Act now: Line up your registered valuer report before you draft the board notice, and diary the three filing dates the moment the special resolution is passed.
Why preferential allotment trips up good companies
Preferential allotment is the standard route for bringing a new investor onto the cap table of an unlisted company. It is fast, it is targeted, and it does not require the company to offer shares to every existing shareholder. That convenience hides a problem: a preferential allotment is treated as a private placement under company law, so it carries two separate rulebooks at once. Section 62(1)(c) and Rule 13 govern the preferential mechanics. Section 42 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules govern the private placement mechanics. Miss either set and the allotment is exposed.
The people who pay for the mistake are the promoters and directors. Adjudication penalties under Sections 42 and 117 fall on named officers, not just the company. The ROC Delhi has penalised companies for circulating a private placement offer before the special resolution was in place, and the ROC Chennai order above shows how a short filing delay becomes a monetary penalty. None of these companies set out to break the law. They treated the round as a commercial event and forgot that the paperwork has its own clock.
The ten-step preferential allotment process
Here is the sequence for an unlisted company, in the order the law expects it to happen. Skipping a step or reordering it is what creates the gaps a diligence team later finds.
The valuation report is still mandatory, even after angel tax went
Many founders assume that once the angel tax under Section 56(2)(viib) was abolished from assessment year 2025-26, the registered valuer report became optional. That reading is wrong. The Finance (No. 2) Act 2024 made the income tax charge on excess share premium inapplicable for all classes of investors from 1 April 2025. It did nothing to Rule 13 of the Companies (Share Capital and Debentures) Rules.
Rule 13(2) still requires the price of a preferentially allotted share to be at least the value determined by an IBBI-registered valuer. So the tax reason for a valuation is gone, but the company law reason remains, and a fresh reason has grown in importance: diligence. When a company raises a priced round today, the valuation report is the document that proves the pricing was defensible. A round priced without one is a governance gap that a secretarial auditor under Section 204, or a merchant banker preparing an offer document, will flag. If a non-resident investor is coming in, FEMA independently requires the price to be at or above fair value certified by a merchant banker or chartered accountant, and Form FC-GPR follows within 30 days of allotment. The valuation is now a diligence asset, not a tax defence.
The penalties that make this worth doing right
The reason a preferential allotment deserves a clean file is the size and personal reach of the penalties. A Section 42 contravention is not a fixed fine; it scales with the money you raised.
| Default | Provision | Penalty |
|---|---|---|
| Contravention of the private placement rules (using money before PAS-3, accepting cash, offering to more than 200 persons) | Section 42(10) | Company, promoters and directors: up to the amount raised or Rs 2 crore, whichever is lower; plus refund of all money with interest within 30 days |
| Failure to file the return of allotment PAS-3 | Section 42(9) | Rs 1,000 per day of default, capped at Rs 25 lakh, on the company, promoters and directors |
| Failure to file the special resolution in MGT-14 | Section 117(2) | Company: Rs 10,000 + Rs 100 per day, up to Rs 2 lakh. Every officer in default: Rs 10,000 + Rs 100 per day, up to Rs 50,000 |
| Any other breach of Section 62 with no specific penalty | Section 450 | Rs 10,000, plus Rs 1,000 per day of continuing default, up to Rs 2 lakh (company) / Rs 50,000 (officer) |
| Where the defaulter is a startup, small company or OPC | Section 446B | Half of the above, subject to a maximum of Rs 2 lakh (company) / Rs 1 lakh (officer) |
Penalty figures are drawn from the Companies Act 2013 as in force in 2026. Startups recognised by DPIIT and small companies get the Section 446B concession, but the concession is a discount, not an exemption.
What you must do now
If a round is coming, treat the compliance file as part of the deal, not an afterthought once the money lands. Work through these actions in order.
1. Read your Articles before you promise anything. An Article that does not permit a preferential issue means you need an extra special resolution and an extra MGT-14 before the round can even start. Discover this early, not on the day of the board meeting.
2. Appoint the registered valuer first. Engage an IBBI-registered valuer under Section 247 and let the report land before you fix the price in any term sheet. Pricing below the valuation is the fastest way to invalidate the allotment under Rule 13.
3. Draft the explanatory statement in full. Rule 13(2)(d) lists the disclosures the special resolution notice must carry, including the basis of the price and the names and post-issue holding of the proposed allottees. A thin explanatory statement is a defect even if the resolution passes.
4. Open the separate bank account before money moves. Section 42 requires a dedicated scheduled-bank account for the subscription money. Investors should wire into that account, never into the operating account, and never in cash.
5. Diary three dates the moment the resolution passes. MGT-14 at day 30, allotment by day 60 from receipt of money, PAS-3 at day 15 from allotment. Put them in the compliance calendar with a reminder a week ahead of each.
6. Do not spend the money until PAS-3 is filed. The subscription money is locked until the return of allotment is on record. This is the single rule that catches the most companies, because founders naturally want to deploy the capital they just raised.
7. Close the file with certificates and registers. Issue SH-1 certificates within two months, pay stamp duty at 0.005%, update the Register of Members, and where a non-resident has invested, file FC-GPR within 30 days.
The deeper implication for growth and pre-IPO companies
According to CS Sapna Malpani, the preferential allotment file is one of the first documents a serious buyer or a merchant banker asks for, and it reveals more about a company than the pitch deck does. A round with a dated valuation report, a complete explanatory statement and MGT-14 and PAS-3 filed on time signals a board that runs disciplined process. A round with a missing MGT-14 or share application money spent before PAS-3 signals the opposite, and it forces the acquirer to price in a compliance clean-up.
The forward view for 2026 and 2027 is straightforward. ROC adjudication on private placement has been rising, and the orders are increasingly naming directors personally for filing delays that used to be treated as clerical. As more unlisted companies move towards listing, the secretarial audit under Section 204 will examine every prior preferential allotment, and defects that sat quietly for years will surface at the worst possible moment. Companies that build a clean allotment file with each round will not have to reconstruct history under deal pressure later.
Preferential allotment versus the routes founders confuse it with
Founders often use “rights issue”, “private placement” and “preferential allotment” as if they mean the same thing. They do not, and picking the wrong route creates its own compliance problem.
| Feature | Rights issue Sec 62(1)(a) |
Preferential allotment Sec 62(1)(c) |
Private placement Sec 42 |
|---|---|---|---|
| Who receives the offer | All existing shareholders, pro rata | Selected identified persons | Selected identified persons |
| Special resolution | Not required | Required | Required |
| Registered valuer report | Not required | Required | Required |
| PAS-4 offer letter | No | Yes | Yes |
| PAS-3 timeline | 30 days | 15 days | 15 days |
The key insight: a preferential allotment is a private placement carried out under Section 62(1)(c), so it must satisfy both provisions at once. A rights issue is the simpler cousin, with no valuation and no special resolution, but it only works when you are offering to existing shareholders. Our full comparison of rights issue, private placement and preferential allotment walks through when each route fits.
Key takeaways
- Preferential allotment under Section 62(1)(c) is also a private placement, so Section 42 and Rule 14 apply in full.
- The issue price cannot be below the value fixed by an IBBI-registered valuer, even though angel tax under Section 56(2)(viib) ended from assessment year 2025-26.
- Three dates decide the outcome: MGT-14 at 30 days, allotment at 60 days, PAS-3 at 15 days.
- A Section 42 breach can cost the amount raised or Rs 2 crore, whichever is lower, with a refund plus interest on top.
- Subscription money must sit in a separate scheduled-bank account and stay untouched until PAS-3 is filed.
- The 200-allottee cap per financial year excludes QIBs and ESOP holders; crossing it creates a deemed public offer.
- Penalties fall on promoters and directors personally, not only on the company.
- A clean allotment file is a diligence asset for any company heading towards a sale or a listing.
Sources and references
- Companies Act 2013, Section 62 and Section 42 — India Code (Gold)
- Companies (Share Capital and Debentures) Rules 2014, Rule 13 — MCA (Gold)
- Companies (Prospectus and Allotment of Securities) Rules 2014, Rule 14 — MCA (Gold)
- ROC Chennai adjudication order dated 5 March 2026 (Section 42(8) / 42(9), 46-day PAS-3 delay) — reported by Taxguru (context)
- Finance (No. 2) Act 2024, abolition of Section 56(2)(viib) from AY 2025-26 — India Briefing (context)
- ROC enforcement trend on private placement, FY 2024-25 — MMJC (Silver)
Planning a priced round?
Get the preferential allotment done once and done clean. CS Sapna Malpani helps unlisted and pre-IPO companies in Bangalore run the full process, from the registered valuer report to PAS-3 and FC-GPR.
→ Estimate your exposure with the MCA penalty handling guide
→ See the fundraising compliance advisory for founders
→ Heading towards listing? Review the IPO compliance and readiness service
→ Non-resident investor coming in? Check the FEMA compliance calculator
→ Talk it through on WhatsApp: +91 96208 03375
Frequently asked questions
What is preferential allotment of shares under Section 62(1)(c)?
Preferential allotment is the issue of shares by a company to a select group of identified persons on a preferential basis, rather than to all existing shareholders or to the public. For unlisted companies it is governed by Section 62(1)(c) of the Companies Act 2013 and Rule 13 of the Companies (Share Capital and Debentures) Rules 2014. Because the offer goes to a chosen group, it is also a private placement and must satisfy Section 42. The price is fixed by an IBBI-registered valuer, a special resolution is required, and the company must file MGT-14 within 30 days and PAS-3 within 15 days of allotment.
Is a registered valuer report mandatory now that angel tax is abolished?
Yes. The abolition of angel tax under Section 56(2)(viib) from assessment year 2025-26 removed an income tax charge on excess share premium, but it left company law untouched. Rule 13(2) still says the price of a preferentially allotted share cannot be lower than the value determined by an IBBI-registered valuer under Section 247. Skipping the valuation is a Rule 13 breach and a diligence red flag, whatever the tax position. If a non-resident invests, FEMA also requires a fair value certificate, so the valuation is doing more work than ever.
How many people can I allot shares to in a preferential allotment?
A private placement, including a preferential allotment, can be made to a maximum of 200 persons in a financial year for each kind of security. Qualified Institutional Buyers and employees holding shares under an ESOP are excluded from that count. Crossing 200 persons converts the offer into a deemed public offer, which drags in the full prospectus regime and exposes the company and its officers to penalties under Section 42. Track the running count across every offer you make in the year, not just the current one.
What is the penalty for late PAS-3 filing after a preferential allotment?
For a private placement, Section 42(9) imposes a penalty of Rs 1,000 for each day the default continues, subject to a maximum of Rs 25 lakh, on the company, its promoters and its directors. The penalty is not discretionary. In an adjudication order dated 5 March 2026, the Registrar of Companies, Chennai penalised a company for filing PAS-3 forty-six days late after allotting 681 preference shares. Startups and small companies get the Section 446B concession of half the penalty, but the clock still runs from the date of allotment.
What is the difference between preferential allotment and a rights issue?
A rights issue under Section 62(1)(a) offers shares to all existing shareholders in proportion to their current holdings, and it needs neither a valuation report nor a special resolution. A preferential allotment under Section 62(1)(c) offers shares to selected persons, and it requires a special resolution, a registered valuer report and compliance with the private placement rules of Section 42. Founders raising from a new investor almost always use the preferential route, because a rights issue cannot bring in someone who is not already a shareholder.
Can I use the subscription money before filing PAS-3?
No. Section 42 requires the subscription money to sit in a separate bank account with a scheduled bank, and it prohibits any use of that money until the return of allotment in PAS-3 is filed with the Registrar. Using the money early is one of the most common triggers for an adjudication penalty, which can extend to the amount raised or Rs 2 crore, whichever is lower, together with a direction to refund the money with interest. Wait for the PAS-3 acknowledgement before you deploy a single rupee.
What extra steps apply if a non-resident investor participates?
The company law process stays the same, but FEMA adds a pricing floor and a reporting filing. Under the Non-Debt Instruments Rules, the price for shares issued to a person resident outside India cannot be lower than the fair value worked out by a merchant banker or a chartered accountant using an internationally accepted methodology. The company must then file Form FC-GPR on the RBI FIRMS portal within 30 days of allotment. Our guide to the FEMA share pricing and valuation certificate covers this in detail.
This article is general information on the law as it stands in 2026 and is not a substitute for advice on your specific facts. For a preferential allotment tailored to your company, speak to a practising company secretary.