Preferential allotment: how listed startups sell shares to set buyers

A preferential allotment is a private sale of new shares or convertible securities by a company to named buyers, such as a fund, a strategic partner or the promoters. The buyers are picked in advance, and the number of buyers is limited. It is different from a public issue, where anyone can apply, and from a rights issue, where every existing shareholder gets an offer.

The Companies Act 2013 allows it under section 62(1)(c), which needs a special resolution, and under the private placement rules of section 42. For listed companies, SEBI's ICDR Regulations 2018 add a full set of rules in Chapter V on pricing, timelines and lock-in.

The live case: Urban Company, a listed home services marketplace, said in October 2026 that its board cleared raising up to ₹2,500 crore through a QIP, a preferential allotment or a private placement, subject to shareholder approval.

The board proposes the issue and calls a general meeting or a postal ballot. The notice must give details of the buyers, the price and the purpose. Shareholders approve with a special resolution, which needs at least three votes in favour for every vote against. The exchanges then give in-principle approval, and the company allots the shares.

Timing is strict. The board has to allot within 15 days of the shareholder approval, or of the last regulatory approval if one is needed. If it misses the window, the company needs a fresh approval and the price is calculated again from a new date.

• Board approves the issue, the buyers and the proposed price.
• Shareholders pass a special resolution.
• Stock exchanges give in-principle approval.
• Buyers pay and the board allots the shares.
• Trading approval follows, and the lock-in starts.

For a frequently traded company, SEBI sets a floor price equal to the higher of two volume-weighted average prices (VWAP): the average over the 90 trading days before the relevant date, and the average over the last 10 trading days. The relevant date is normally 30 days before the shareholders' meeting. Using the higher of the two blocks a company from selling cheaply to a friendly buyer.

Articles of association can set a stricter price. Rules for a company listed for less than 90 trading days use other benchmarks. An issuer cannot sell below the floor but may sell above it. A company with a falling share price therefore prices off the older, higher average, and sometimes the placement fails because investors will not pay it.

Lock-in means the buyer cannot sell for a set period. As of November 2026, shares allotted to promoters are locked in for 18 months from trading approval, and shares allotted to other investors for 6 months. Convertible securities carry their own one-year lock-in, and the shares that result from conversion follow the equity rule.

Many issues are made in warrants, which are the right to buy shares later. A warrant must convert within 18 months of allotment, and the buyer pays at least 25% of the price up front, with the rest due at conversion. Warrants let a buyer commit now and pay over time, but if the buyer does not pay the balance, the company can keep the upfront amount.

A proposed buyer is not eligible if it sold any shares of the company in the 90 trading days before the relevant date. This prevents an investor from selling into the market and buying back cheaply in the placement.

A QIP, or qualified institutional placement, sells shares only to qualified institutional buyers such as mutual funds, insurers and banks, under Chapter VI of the ICDR rules. The buyers are not pre-named in the shareholder notice, the floor price is based on a two-week average with a discount of up to 5% allowed, and there is no lock-in on allottees. It is fast and suits a company seeking money from many institutions at once.

A preferential allotment names its buyers, can include promoters and non-institutions, uses the 90 and 10 day pricing, and carries a lock-in. It suits a negotiated deal with one or a few investors, or a promoter increasing a stake. A QIP is also faster in some cases, because a preferential issue needs a shareholder meeting first.

A rights issue differs again: it is offered to existing holders in proportion to their stake, so nobody is diluted if they take up their share.

• Preferential: named buyers, special resolution, floor price from 90 and 10 day VWAP, lock-in.
• QIP: institutional buyers only, floor price from a two-week average, up to 5% discount, no lock-in.
• Rights issue: every existing holder, in proportion, usually at a discount.
• Private placement, section 42: offers to a limited set of people, mostly used by unlisted companies.

Newly listed startups often burn cash and need capital after the IPO. A preferential allotment lets them bring in a strategic investor, a fund that wants a large block, or the founders, who may put in money to show faith. The negotiated deal can be quicker than a rights issue.

The cost is dilution. Every new share lowers the percentage held by existing shareholders, and the price can be lower than the market price of the day it is announced, because the floor is an average. Minority holders therefore read the notice for the price, the buyer and the use of funds.

A preferential issue can also be used to settle a purchase. Shares may be issued to the sellers of a business instead of cash, which is called a swap, and the pricing rules still apply.

A board approval is only the first step, and a story saying a company can raise up to a figure describes a ceiling and not a deal. The raise needs shareholder approval, and the final price and buyers may differ. Look for words such as warrants, which mean only part of the money arrives now, and for the buyer's identity, which shows whether the deal is a signal of confidence or a bailout.

Rules change, so check the latest ICDR text. This guide explains the idea and is not legal or investment advice. Check with a company secretary or lawyer before relying on any figure.