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Strategic Management and Corporate Finance · Raising of Funds - Private Funding

Preferential Allotment and Qualified Institutions Placement

Updated 11 October 2026 · Fact-checked

Preferential allotment is an issue of shares or other securities to a select group of identified persons, made by private placement under section 42 of the Companies Act, 2013. A QIP is an issue by a listed company only to qualified institutional buyers. Solve by checking who is offered, the number cap, approvals, pricing and filings.

Understand Preferential Allotment and Qualified Institutions Placement

Companies need funds without going to the public at large. One route is to offer securities to a chosen few. The Companies Act, 2013 calls this private placement. Section 42 defines it as an offer or invitation to subscribe, or an issue of securities, to a select group of persons, other than by way of public offer, through a private placement offer-cum-application.

A preferential allotment is a private placement where the Board picks the allottees. Unlisted and listed companies both use it. A listed company must also follow the SEBI rules on preferential issue, which add pricing norms, lock-in and shareholder approval. The Companies Act side covers the identified persons, the offer letter, the payment mode and the return of allotment.

A Qualified Institutions Placement (QIP) is a route only for listed companies. They raise equity or securities convertible into equity from qualified institutional buyers (QIBs) such as mutual funds and insurers. It is faster than a public issue because no full prospectus is filed. A placement document is used instead. Section 42 itself treats QIBs as outside the count of persons.

The key difference: preferential allotment goes to any identified person or group (promoters, investors, strategic partners), while a QIP goes only to QIBs. Both are private placement in nature. Neither can be advertised to the public.

If the section 42 conditions are breached, the consequences are serious. An issue to more than the prescribed number of persons is deemed a public offer. Then the public-issue provisions, the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992 apply.

Key rules to remember

Number of identified persons (s.42(2))
Identified persons ≤ 50, or such higher number as prescribed, in a financial year
QIBs and employees under an ESOP scheme (s.62(1)(b)) are excluded from the count. Check the prescribed higher limit in the rules for your answer.
Mode of payment (s.42(4))
Subscription money by cheque, demand draft or other banking channel; not by cash
Applies to every identified person.
Time to allot (s.42(6))
Allot within 60 days of receipt of application money
If not allotted, repay within 15 days after the 60 days expire.
Interest on delay in repayment (s.42(6))
12% per annum from the expiry of the 60th day
Payable if repayment is not made within the 15 days.
Return of allotment (s.42(8))
File with the Registrar within 15 days of allotment
Include a complete list of allottees with names, addresses and number of securities. Money cannot be used until allotment is made and the return is filed.
Penalty for late return (s.42(9))
₹1,000 per day of default, maximum ₹25,00,000
Company, promoters and directors are liable.
Penalty for contravention (s.42(10))
Lower of amount raised or ₹2,00,00,000
Company must also refund money with interest within 30 days of the penalty order.

How to solve Preferential Allotment and Qualified Institutions Placement questions

Use this order for any case question on preferential allotment or QIP. Link each fact to a rule, then conclude.

  1. 1Identify the company type: private, unlisted public or listed. A QIP is open only to a listed company.
  2. 2Identify the allottees. Are they identified by the Board? Are they QIBs? Count the persons, leaving out QIBs and ESOP employees.
  3. 3Check the number limit for the financial year under section 42(2). Remember that a breach makes the issue a public offer.
  4. 4Check approvals: Board resolution, and shareholder approval (special resolution) with the explanatory statement where the case requires it. Apply the SEBI pricing and lock-in norms for listed companies.
  5. 5Check the process: offer-cum-application to named persons, no right of renunciation, payment by banking channel, separate bank account, no public advertisement.
  6. 6Check the timeline: allot within 60 days, refund within 15 days after that, return of allotment within 15 days of allotment.
  7. 7Apply the consequence for any default: penalty, interest at 12% or deemed public offer.
  8. 8Write a clear conclusion in one line that answers the question asked.

Quickest way: Five-point compliance check

When to use it: Use it when a short case asks whether a private placement is valid or what the company must do next.

  1. Who: identified persons or QIBs only?
  2. How many: within the 50 or prescribed limit, excluding QIBs and ESOP employees?
  3. How paid: banking channel, separate account, no cash?
  4. How long: 60 days to allot, 15 days to refund, 15 days to file the return?
  5. What if wrong: penalty, 12% interest, or deemed public offer.

Common mistakes in Preferential Allotment and Qualified Institutions Placement

  • Saying a QIP can be made by any company.

    Students treat QIP as just another private placement.

    Fix: State that QIP is only for listed companies and only to QIBs.

  • Counting QIBs and ESOP employees in the limit of 50.

    The exclusion in section 42(2) is read too fast.

    Fix: Count only the other identified persons. Write the exclusion explicitly in your answer.

  • Using the money raised before filing the return of allotment.

    Students focus on allotment and forget the proviso to section 42(4).

    Fix: Say the money cannot be used until allotment is made and the return is filed with the Registrar.

  • Mixing up the 60-day and 15-day periods.

    Both periods sit in the same sub-section.

    Fix: Remember: 60 days to allot, then 15 days to refund. Interest at 12% runs from the 60th day if refund is late.

  • Treating a breach of the person limit as only a penalty.

    Students stop at sub-sections (9) and (10).

    Fix: Under section 42(11), non-compliance with sub-section (2) makes the issue a deemed public offer.

  • Allowing renunciation or advertising the offer.

    Students confuse private placement with a rights issue or public offer.

    Fix: The offer carries no right of renunciation, and section 42(7) bars public advertisements or marketing channels.

Worked examples

Example 1

Sunrise Textiles Ltd, an unlisted public company, made a private placement offer to 60 identified persons in a financial year. Of these, 12 are QIBs and 3 are employees under an ESOP scheme under section 62(1)(b). Assume the applicable limit is 50. Is the issue within the limit?

Show the solution
  1. Total persons offered: 60.
  2. Exclude QIBs: 60 − 12 = 48.
  3. Exclude ESOP employees: 48 − 3 = 45.
  4. Counted persons: 45, which is not more than 50.
  5. Under section 42(2), QIBs and ESOP employees are excluded from the count.

Answer: Yes. The counted persons are 45, within the limit of 50, so the issue stays a private placement. The other conditions of section 42 must still be met.

Example 2

Kaveri Pharma Ltd received application money from allottees on 1 March. It allotted the securities on 20 April. How must it proceed on filing, and what if it had failed to allot?

Show the solution
  1. Days from 1 March to 20 April: 30 days (rest of March) + 20 days = 50 days.
  2. 50 days is within the 60 days allowed by section 42(6), so allotment is valid on timing.
  3. Return of allotment is due within 15 days of 20 April, that is by 5 May.
  4. The company may use the money only after allotment and filing of the return (s.42(4) proviso).
  5. If it had failed to allot within 60 days, it must repay within 15 days after the 60 days expire.
  6. If repayment is also late, it owes interest at 12% per annum from the expiry of the 60th day.

Answer: The allotment on day 50 is in time. Kaveri Pharma must file the return of allotment with the Registrar by 5 May and may use the funds only after that. Had it failed to allot in 60 days, repayment within the next 15 days would be needed, failing which 12% p.a. interest runs from day 60.

Exam tips

  • Write the section number 42 with each sub-section limit. Examiners reward a clear provision, facts, conclusion structure.
  • In differences between QIP and preferential allotment, use points: who can issue, who can subscribe, disclosure document and approvals.
  • Do the date arithmetic in the answer. Show the 60-day and 15-day counts.
  • State the consequence of breach in every compliance question: penalty, refund with interest, or deemed public offer.
  • For listed companies, mention that SEBI regulations add pricing and lock-in conditions beyond the Companies Act.

Practice questions from Raising of Funds - Private Funding

Preferential Allotment and Qualified Institutions Placement: frequently asked questions

What is the difference between QIP and preferential allotment?

A preferential allotment is made to identified persons chosen by the Board, by a listed or unlisted company. A QIP is made only by a listed company and only to qualified institutional buyers. Both are private in nature and cannot be advertised to the public.

How many persons can be offered shares in a private placement?

Section 42(2) says the number shall not exceed fifty, or such higher number as is prescribed, in a financial year. QIBs and employees under an ESOP scheme are excluded from the count.

What happens if a private placement breaks the person limit?

Under section 42(11), an issue not made in compliance with sub-section (2) is deemed a public offer. The Companies Act, the Securities Contracts (Regulation) Act, 1956 and the SEBI Act, 1992 then apply.

Can a company use private placement money immediately?

No. It must keep the money in a separate account in a scheduled bank. It can use it only after allotment is made and the return of allotment is filed with the Registrar.