Preferential Allotment of Shares: Pricing Rules, Lock-in and Dilution Explained

Every few weeks a listed company tells the exchanges it plans to issue fresh shares to a handful of named investors, and the stock moves on it. Sometimes up, because a big name is putting money in. Sometimes down, because existing shareholders work out how much of the pie they just gave away. That transaction is a preferential allotment of shares, and once you know the rules behind it, those announcements get a lot easier to read.

We’ll cover who can do it, how SEBI fixes the minimum price, how long the new shares stay locked in, and then run the dilution maths on a made-up company so you can see what actually happens to your holding.

What a preferential allotment of shares actually is

In plain terms, it’s a listed company selling new shares (or convertible securities like warrants) to a select group of people instead of the public at large. The buyer could be a promoter topping up their stake, a private equity fund, a strategic partner, or a lender converting part of its exposure. No IPO-style book building, no retail application window. The board proposes it, shareholders vote on it, the exchanges give in-principle approval, and the shares are allotted.

Two sets of rules apply. Under company law, it’s governed by section 62(1)(c) of the Companies Act, 2013, read with the share capital and private placement rules, as the Vinod Kothari Consultants FAQ on preferential issues sets out. For listed companies, Chapter V of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 sits on top and does most of the heavy lifting on price, eligibility and lock-in.

It’s a close cousin of a QIP. If you’ve read our piece on the qualified institutional placement, the difference is mostly about who gets to buy and how the price is set. In a preferential issue, the allottees are named up front and shareholders approve that specific deal.

Why companies choose this route

Speed and certainty, mostly. A company that already has a willing investor doesn’t need to market an offering to hundreds of funds. Common reasons we see in exchange filings:

• A promoter wants to increase their stake and bring in cash at the same time.
• A strategic investor is buying in as part of a business partnership.
• A stressed company needs capital quickly and has one or two backers lined up.
• Warrants are issued to promoters so they can pay in instalments and convert later. Our explainer on share warrants covers that version in detail.

The flip side is that the deal is negotiated privately. That’s exactly why SEBI puts a hard floor under the price.

The pricing rule: the 90/10 VWAP floor

For shares that are frequently traded, the minimum price is the higher of two numbers: the volume weighted average price (VWAP) over the 90 trading days before the “relevant date”, or the VWAP over the 10 trading days before it. If the company’s articles of association prescribe a stricter valuation method, that higher price applies. This is how both the Quillon Partners briefing on the 2022 ICDR amendment and Business Standard’s report on SEBI’s board decision describe it.

This wasn’t always the formula. Before the change, the floor was based on the 26-week and 2-week averages, whichever was higher. SEBI’s board approved the switch on 28 December 2021 and the amended regulations were notified on 14 January 2022, according to Quillon’s note, which also links the rethink to the controversy over PNB Housing Finance’s proposed preferential issue in 2021.

VWAP itself is simple. Add up the traded value over the window and divide by the shares traded. So a 10-day VWAP is total turnover on those 10 days divided by total volume on those 10 days, not an average of daily closing prices.

What counts as “frequently traded”

A share is frequently traded if the number of shares traded on any recognised exchange over the 240 trading days before the relevant date is at least 10% of that class of shares, per the Vinod Kothari FAQ. A company with 10 crore shares where 3.4 crore changed hands over those 240 days has a traded turnover of 34%, comfortably above the line. Thinly traded stocks don’t get the VWAP formula at all; they need a valuation report from an independent registered valuer.

The relevant date

Everything hangs off this date. For an equity issue, it’s 30 days before the shareholder meeting (AGM, EGM or postal ballot) that votes on the proposal. If the meeting is on 30 November, the relevant date is 31 October, and the 90-day and 10-day windows are counted backwards from there.

The floor is a minimum, not a fair value. A company can issue above it, but it can’t go below it, and the gap between the two tells you how badly someone wanted in.

When a valuation report is also needed

The 90/10 VWAP isn’t the end of it for bigger deals. If the allotment is more than 5% of the post-issue fully diluted share capital to one allottee or to people acting in concert, or if it could lead to a change in control, the company also needs a valuation report from an independent registered valuer, and that report is considered while fixing the floor. Where control changes hands, Quillon notes the valuation has to work out a control premium on top, and a committee of independent directors has to give a reasoned recommendation, with its voting pattern disclosed.

Who can’t take part

The rules keep a few people out. Anyone who sold or transferred shares of the company in the 90 trading days before the relevant date is ineligible. That’s meant to stop someone selling high in the market and buying back cheaper through an allotment. Quillon’s note also says qualified institutional buyers that are promoters, or that hold special rights like a veto or a director nomination right, can’t participate.

Lock-in: how long the new shares can’t be sold

This is the part retail investors often skip, and it matters. Locked-in shares can’t hit the market, so a large allotment to a promoter isn’t an immediate supply overhang. After the 2022 changes, per Business Standard and Quillon:

• Promoters and promoter group, allotment up to 20% of post-issue capital: 18 months (earlier 3 years).
• Promoters, the portion above 20%: 6 months (earlier 1 year).
• Non-promoters: 6 months (earlier 1 year).
• The allottee’s existing, pre-preferential shareholding: locked from the relevant date until 90 trading days from trading approval (earlier 6 months).

The Vinod Kothari FAQ notes the lock-in on newly allotted shares runs from the date of trading approval, not the allotment date. Promoters are also allowed to pledge their locked-in shares, but only to a financial institution as a condition of a loan to the company or its subsidiary that funds the objects of the issue.

Timelines from board meeting to allotment

Roughly, the sequence runs like this: board approval, notice to shareholders, in-principle approval from the exchanges, the shareholder vote by special resolution, and then allotment. The board has to allot within 15 days of the special resolution, or of the last regulatory approval if any is pending, according to the Vinod Kothari FAQ. Miss that window and the company needs a fresh special resolution, which also resets the relevant date and so the price.

For warrants, the FAQ notes the tenure can’t exceed 18 months from allotment. That’s why you’ll often see promoter warrant conversions spread across a year or more in filings.

A worked example: what dilution really looks like

Let’s take a hypothetical company, call it Sahyadri Components. Every number below is invented for illustration.

• Shares outstanding before the issue: 10 crore
• 90-day VWAP before the relevant date: ₹480
• 10-day VWAP before the relevant date: ₹520
• Proposed allotment: 1 crore shares to a private equity fund (a non-promoter)
• Annual net profit: ₹550 crore; net worth before the issue: ₹2,000 crore

Step 1, the floor price. The higher of ₹480 and ₹520 is ₹520. Assume the articles don’t prescribe anything stricter, so the issue can’t be priced below ₹520.

Step 2, the valuation report test. After the issue there are 11 crore shares. The fund gets 1 crore of them, which is 1 ÷ 11 = about 9.09% of post-issue capital. That’s above 5%, so a registered valuer’s report is also needed. If the valuer came in at ₹540, the floor would rise to ₹540. We’ll keep ₹520 for the rest of the maths.

Step 3, money raised. 1 crore shares × ₹520 = ₹520 crore.

Step 4, your stake. Say you own 10 lakh shares. Before the issue that’s 10 lakh ÷ 10 crore = 1.00% of the company. After, it’s 10 lakh ÷ 11 crore = about 0.91%. You haven’t sold anything; your slice just got thinner.

Step 5, per-share numbers. Earnings per share falls from ₹550 crore ÷ 10 crore = ₹55 to ₹550 crore ÷ 11 crore = ₹50, before counting anything the new money earns. Book value per share moves the other way: ₹2,000 crore ÷ 10 crore = ₹200 before, and (₹2,000 crore + ₹520 crore) ÷ 11 crore = about ₹229 after, because fresh capital came in well above book.

Step 6, the lock-in. The fund is a non-promoter, so its new shares are locked for 6 months from trading approval. If the same 1 crore shares had gone to a promoter instead, 9.09% is under the 20% line, so the lock-in would be 18 months.

Dilution isn’t automatically bad. If ₹520 crore of fresh money earns more than the ₹5 of EPS it costs on day one, existing shareholders come out ahead. The question is always what the cash is for.

How we’d read a preferential issue announcement

When one lands in your feed, a few questions do most of the work:

• Who’s buying? A promoter adding money at a premium signals confidence. A string of small allotments to little-known entities deserves a closer look at who they are.
• What’s the price against the market? Compare the issue price with the current price and with the 90/10 floor. An issue at a big premium to the floor is a different story from one priced right at it.
• How much dilution? Work out new shares ÷ post-issue shares, the same way we did above.
• What’s the money for? Debt repayment, capex and acquisitions read very differently. The stated objects are in the notice to shareholders.
• Is control changing? If yes, look for the independent directors’ recommendation and the valuation report, and check whether takeover rules come into play.
• When does the lock-in end? Six months for non-promoters is not long. Mark the date if the allottee is a financial investor.

Most of this sits in the shareholder notice and the exchange filings on NSE and BSE. Our guide to IPO investing in India covers how primary market issues more broadly are disclosed, and the habits carry over.

Preferential allotment of shares versus a rights issue and a QIP

A rights issue offers new shares to every existing shareholder in proportion to what they hold, so you can protect your stake if you pay up. A preferential allotment goes only to named allottees, so you can’t. A QIP is placed only with qualified institutional buyers under a separate set of SEBI rules, so retail holders can’t take part there either. If avoiding dilution matters to you, a rights issue is the only one of the three that lets you do it directly.

The short version

A preferential allotment of shares lets a listed company sell new shares to chosen investors after a shareholder vote. For frequently traded shares the floor price is the higher of the 90-day and 10-day VWAP before the relevant date, with a valuer’s report added for allotments above 5% or a change in control. Promoter shares up to 20% of post-issue capital are locked for 18 months, and most others for 6 months. Run the dilution maths yourself, check who’s buying and why, and the announcement tells you a lot more than the headline does.

Disclaimer: This article is for educational purposes only and is not investment advice. The company, prices and figures in the worked example are hypothetical. Regulations change, so check the current SEBI ICDR Regulations and the company’s own filings before relying on any rule. Please do your own research or consult a SEBI-registered adviser before making any investment decision.