In recent years, in the sequel of regulatory ease, preferential allotment of shares and warrants has become a common practice. The preferential allotment is a tool to infuse fresh equity in the corporate unit. It is by way of issuing shares or warrants at a given price to promoter or promoter group or a person acting in concert or institutional players. This is done when the unit needs additional funds to grab any lucrative investment opportunity. If the investment makes a good return, it is natural that the share prices will soar up for the benefit of the company. During the first half of 1990s, the regulations were rigid on this count. After the preferential allotment, the allottee had to go through a mandatory open offer to the public which the allottee did not take in good spirit. It was only after the Bhagwati Committee recommendations that the rules were made liberal since 1997. It is found that the promoters, especially of foreign companies allot equity shares to themselves at comparatively lower prices than those prevailing in the market and then selling those shares in the market at market rates, ultimately reaping huge profits. However, the SEBI has issued guidelines to curb such profiteering. The price at which the preferential allotment is made must conform to an average of weekly high and low of the closing prices of the related shares during past fortnight. The company has to let the SEBI know about the details of the number of shares and about the allottee. The preferential allotment, apart from helping in funds-raising, transfuses confidence in the general investors. The issue price functions as a benchmark for them. It is true that such issues lead to lowering of earning per share and of return on the net worth and thus impair the share prices. But, on the other hand, it has experience of better performance and rising profits among a number of companies. There is, of course, some difference between shares and warrants. Warrants take time for their conversion into shares and so there is a time lag for better results. However, to shorten the time lag related to fund-raising, SEBI guidelines make it mandatory for the allottee to make an upfront payment of at least 10 per cent of the total amount. Let us see now the performance of the following five companies going for preferential allotment.
It is obvious that all the five companies listed in the table showed upward jump in sales volume and operating profit. The share price in the market too soared up except in one case.
1. What is preferential allotment?
2. What are the broad rules in this context?
3. Do you agree that such allotments have yielded good performance results?