31 MAY, 2011, 04.27AM IST,ET BUREAU

http://economictimes.indiatimes.com/markets/regulation/stringent-rules-for-preferential-allotment-of-shares-proposed/articleshow/8656749.cms

NEW DELHI: The government has proposed tighter rules for preferential allotment of shares and other financial instruments that can be converted into equity at a later date.

The new rules require the issuer to seek government permission if the cumulative value of the allotment is over 5 crore. The ministry of corporate affairs has put up its draft ' Unlisted Public Companies (Preferential Allotment) Rules, 2011' for comment on Monday.

Through these rules the government hopes to check flow of black money and money laundering. The new rules have proposed that the securities should be issued in Demat mode and imposed more disclosures on both the company and the buyer. The last date for submitting comments is June 20.

The new rules will replace the Unlisted Public Companies (Preferential Allotment) Rules, 2003. The guidelines will apply to preferential issue of equity shares, fully convertible debentures, partly convertible debentures, or any other financial instrument that can be converted into equity shares.

Tracking flow of transactions will become easier if securities are issued in a dematerialized form. There are about 40,000 active unlisted companies in the country.

A company will be allowed to issue securities on a preferential basis only if it allowed under Articles of Association and backed by a special resolution passed by the members in a general meeting.

In case of warrants the conversion price is to be fixed at the time of allotment. The issuer has to file a return of allotment with the registrar of companies within 30 days of allotment.

Apart from the routine information about the issue and its purpose, the issuer will have to disclose details of loss making group companies, outstanding loans and advances , unsercured debt investments or those carrying lower than market rate, negative cash flow (if any), and contested tax demand.