Guide · Corporate actions · Updated 2026-09-23

The floor on a preferential allotment is an average of prices from before the vote, so it bounds the formula and not the dilution

The reassurance usually offered about a preferential allotment is that SEBI sets a minimum price, so holders who are not invited cannot be diluted much. The minimum is real. What it is a minimum of is the problem: an average of prices that ends 30 days before the vote, applied to shares issued up to 15 days after it.

Every figure below is computed, from stated inputs or from the exchange's records of every issue it approved since 2023, and the method is at the end so the work can be redone.

A private sale of new shares, approved by the holders it dilutes

The power sits in section 62(1)(c) of the Companies Act, 2013: a company may issue further shares to any persons if a special resolution authorises it. Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 sends a listed company's offer to SEBI's regulations and spares it the registered valuer's report on price that an unlisted company needs. The SEBI ICDR Regulations, 2018 define it in Regulation 2(1)(nn) as an issue of specified securities to any select person or group of persons on a private placement basis, and govern it in Chapter V.

Almost anyone can be an allottee, and the bars are few and pointed. Anyone who sold shares of the company in the 90 trading days before the relevant date is ineligible, and a sale by any member of the promoter group disqualifies the whole group, with exceptions for transfers within it and for pledges invoked by lenders (Regulation 159(1)); mutual funds, insurers, banks and public financial institutions are exempt (158(5)). Promoters who let earlier warrants lapse wait a year (159(2)), and the company itself is barred while a promoter or director is a fugitive economic offender or while it owes SEBI, an exchange or a depository (159(3) and (4)).

The approvals run in a fixed order, and the order opens the gap this page is about.

The vote is thinner protection than it looks. A preferential issue that complies with the ICDR Regulations is expressly not a related party transaction under the listing regulations (LODR Regulation 2(1)(zc)), so the rule that stops related parties voting on those transactions does not reach it. The only route in Chapter V that counts public votes separately is the stressed-company route, where public votes in favour must exceed those against, with the proposed allottees left out of the public count (Regulation 164A(4)).

The floor is the higher of two averages, and both stop at the relevant date

For a share listed for 90 trading days or more on the relevant date, Regulation 164(1) sets the price at not less than the higher of its volume weighted average price over the 90 trading days before the relevant date and the same over the 10 trading days before it. Each is total value traded over total quantity traded, on the exchange where the share traded most in the 90 days (the explanation to Regulation 164(5)). Articles of association that prescribe a higher figure prevail.

The relevant date is 30 days before the meeting that votes on the issue (Regulation 161(a)), or the day before it if that is a weekend or holiday. The company sets it by setting the meeting date. In 88 per cent of the 138 equity issues measured below, the relevant date fell on or before the day the board resolved to make the issue, a median 3 days earlier, so the board could see every price in the floor before it fixed the terms.

The formula is younger than most descriptions of it. Until 14 January 2022 the floor was the higher of averages of weekly highs and lows of the volume weighted price over 26 weeks and over 2 weeks. The SEBI (ICDR) (Amendment) Regulations, 2022, approved by SEBI's board on 28 December 2021, replaced them with the 90 and 10 trading day averages; the staff memorandum of 16 December 2021 placed before that meeting had proposed 60 trading days, and the notified text says 90. The same amendment cut the lock-ins and added the valuation rule for large allotments.

The two averages are the general case. Six situations replace or raise them, and the notice has to say which applies.

The floor, computed from a stated price history

Take a share that trades at 200.00 for 60 sessions on 1,00,000 shares a session, then rises 2.00 a session for 30 sessions, from 201.00 to 259.00, on 2,00,000 shares a session, each session at a single price. The relevant date follows the 90th session.

The 90 trading day VWAP is the value traded, 60 × 200.00 × 1,00,000 plus 2,00,000 × the sum of the 30 rising prices, 2,58,00,00,000 in all, over the 1,20,00,000 shares traded: 215.00. The 10 trading day VWAP covers 241.00 to 259.00 on equal volume, so it is their mean, 250.00. The floor is the higher, 250.00. After the relevant date the share keeps rising, 1.00 a session, to 280.00 at the vote, and is still there on allotment.

The mirror image, a share that holds at 300.00 and then falls 2.00 a session to 241.00, swaps the legs: a 90-day VWAP of 285.00, a 10-day of 250.00, and a floor of 285.00 from the stale leg. If the share keeps falling to 220.00 by the vote, the floor sits 29.5 per cent above the market.

The higher-of rule is asymmetric by design. In a rally the 10-day leg pulls the floor up; the 90-day leg alone would have allowed 215.00, 23.2 per cent below the price on allotment. In a fall the 90-day leg holds the floor above a market no investor will pay, which is why a company in trouble cannot raise money this way and why the regulations keep 10-day routes for up to five institutions and for stressed companies. Neither leg sees anything after the relevant date. The 30 days to the vote and up to 15 more to allotment are unpriced, and in a rising market that is where the discount comes from.

Dilution is a transfer between two groups of holders, and it has a break-even

Dilution means two things, and only one depends on the price. Ownership dilution is arithmetic on share counts: 10,000 shares of a company with 10 crore shares are 0.0100 per cent of it, and after 1 crore new shares go to others they are 0.0091 per cent, one eleventh less at any price. Value dilution is a transfer between the holders who are not invited and those who are, and it has a price at which it is zero.

Take the rising history's company on allotment: 10 crore shares at 280.00, and 1 crore new shares sold to four unrelated investors, each well under the 5 per cent line of Regulation 166A. Afterwards the company holds its old value plus the cash, so a share is worth (10 crore × 280.00 + 1 crore × issue price) / 11 crore, and each existing share loses (280.00 less the issue price) / 11. As a share of a holding, the loss is the new shares' share of the enlarged capital times the discount to the market.

At the floor each existing share gives up 2.73, and the holders who were not invited give up 27.27 crore between them, 0.97 per cent of their value. The four allottees gain exactly that: they pay 250 crore for shares worth 277.27 crore the moment they are issued. The break-even is 280.00, the market price on the day of allotment, not the floor.

A discount can still leave existing holders whole if the money is put to work worth more than it cost. With value X created beyond the cash, the break-even price becomes 280.00 less X divided by the number of new shares. For 250.00 to break even here, the 250 crore raised must become 280 crore of value, exactly what the new shares would have fetched at the market. That is the claim the objects of the issue make. The arithmetic forecasts nothing; the price on allotment already reflects what the market made of the notice.

What the exchange's own records show

The exchange publishes every preferential issue it approves: at the in-principle stage, with an Issue Summary Document the company files in XBRL under SEBI's ICDR master circular, and again at listing. From January 2023 to September 2026 that is 805 in-principle approvals and 1,719 listings. Of the approvals, 87 per cent were for cash and 19 per cent went to promoters alone; of the 799 whose documents could be read, 59 per cent included warrants. Each document gives the relevant date and the minimum issue price, which makes the formula testable.

The test comes first. For the 143 issues of equity shares for cash by main board companies whose windows fall inside the exchange's daily files, the floor recomputed from those files, on this exchange's volume alone, reproduces the filed minimum within half a per cent in 78 per cent of cases and within 2 per cent in 87 per cent. The remaining 13 per cent divide into 8 per cent with a filed minimum more than 2 per cent above the formula, as a valuation report or the articles can require, and 5 per cent more than 2 per cent below it, which the other exchange's volume, the unaffected price or an error can explain. The five whose filed figure was under half the formula are set aside as filing errors.

Then the question the formula does not ask. On the day before the relevant date the filed minimum sat at the market: the median issue's floor was 0.1 per cent below the close. By the day of the vote, 30 days later, the floor was below the share's close in 58 per cent of issues, the median issue's floor was 3.6 per cent below the close, and 38 per cent of floors were at least 10 per cent below it. On the last day for allotment the median was 5.6 per cent below.

That is not what the formula does on an ordinary day. Applied to the same 113 companies on every other session the files allow, 1,02,916 company-days, it put the floor below the close 30 days later only 35 per cent of the time, and the median floor was 5.5 per cent above that close. The difference is timing. The median issuer's share had risen 12 per cent over the 90 sessions that set its floor, against 2 per cent for the same companies on an ordinary day: companies issue when the look-back has fallen behind the market, and the 10-day leg, which set the floor in 64 per cent of these issues, catches only part of the run.

The listing records close the loop for 118 of these issues, and 83 per cent of them were allotted within half a per cent of the filed minimum: in practice the floor is the price, not a floor under it. Of the same allotments, 60 per cent were below the close on the day of allotment, and the median was 4.1 per cent below it. For the 94 whose size the exchange's share counts give, the median issue was 5.3 per cent of the enlarged capital. The value moved from the holders left out ran from a gain of 1.4 per cent of their holding at the tenth percentile to a loss of 2.6 per cent at the ninetieth, with the largest loss 7.8 per cent. They gained in 43 per cent of issues, where the market had fallen through the floor, and lost more than 1 per cent in 23 per cent. Most allotments move little; the slack sits in a tail.

By allottee, the pattern runs against the cynical reading. Equity issues to promoters alone were the least often below the market at the vote, 31 per cent of them, with the median floor 7.3 per cent above the close; issues to outside investors alone were below it in 64 per cent, and mixed issues in 70 per cent. Warrant issues sat below the market at the vote in 61 per cent, before counting the option each warrant carries. The samples are small and the categories are the company's own: a reason to read each notice, not a rule.

Since May 2024, the floor can be computed on prices that never traded

The change most explanations of the formula miss is two sentences long. Regulation 166(2), inserted by the SEBI (ICDR) (Amendment) Regulations, 2024 with effect from 18 May 2024, allows the effect on the share price of a material price movement, and of the company's confirmation of the reported event, to be excluded when the floor is computed, under the framework in Regulation 30(11) of the listing regulations. Regulation 176(5) does the same for a qualified institutions placement.

Regulation 30(11) requires the top 100 listed companies, and then the top 250, to confirm, deny or clarify a specific event reported in the mainstream media within 24 hours of a material price movement, as the exchanges define one; when the company confirms within that window an event priced under Chapter V or VI of the ICDR Regulations, or under the takeover or buyback regulations, the price effect may be excluded. SEBI's circular SEBI/HO/CFD/CFD-PoD-2/P/CIR/2024/51 of 21 May 2024 applies it to the top 100 from 1 June 2024 and the next 150 from 1 December 2024. The move from the day of the price movement to the day after confirmation is attributed to the rumour: the adjusted price holds the pre-movement level through that span, every later day is cut by the same amount, and the floor is computed on the adjusted series. The industry standards the circulars adopt keep the unaffected price available for 60 days from confirmation, or 180 where there is a competitive bid.

SEBI's own example gives the size. On the ten sessions it prints, the floor on prices that traded is 1,175.78 and on adjusted prices 1,069.80, 9.0 per cent lower; recomputing both from the circular's table matches its printed averages to the paisa. Against the relevant date's weighted price of 1,208.33, an issue at the ordinary floor would be 2.7 per cent below the market and one at the unaffected floor 11.5 per cent below it.

The logic is defensible: an investor whose deal leaked should not pay for the leak. The consequence for a holder who is not invited is as plain: when the price moved because the market expects the deal to create value, the allottee buys that value at the old price. The exchange's records do not show which issues used the rule, so the measurements above could not separate them.

The lock-in stops the flip, not the transfer

Regulation 167 locks the new shares from trading approval, the last of the approvals from every exchange where the company is listed: for 18 months for promoters and the promoter group, up to 20 per cent of the total capital, and six months beyond it; for six months for everyone else. Unlisted warrants and convertibles are locked for a year from allotment, an allottee who becomes a promoter through a change in control is locked as one (167(7)), and the stressed-company route locks for three years (164A(7)).

The rule that does more work covers the shares the allottee already owned. Regulation 167(6) locks the entire pre-preferential holding from the relevant date until 90 trading days after trading approval. With the seller test in Regulation 159, it closes the obvious trade from both ends: no selling existing shares at the market while buying new ones at a floor struck from the past.

SEBI's reason is on the record: its December 2021 board memorandum calls the lock-in essential so that allottees "do not offload the shares immediately after receiving the same" and take the benefit of price arbitrage. In the rising history the arbitrage is 30.00 a share. Without a lock-in it is riskless once the shares are credited; with one it is a six or 18 month holding exposed to the price. Of the 87 measured allotments whose sixth month after trading approval falls inside the files, the share closed below the issue price at that point in 57 per cent, and the median close was 6.5 per cent below it.

What the lock-in does not do is reverse anything. The value moved on allotment; the lock-in only decides when the allottee can take it out, and at what risk.

A warrant at the floor hands over more than a share at the floor

Warrants, which appear in 59 per cent of the approvals measured above, are where the floor matters least. Regulation 169(2) takes at least 25 per cent of the price on allotment and the rest on exercise, Regulation 162(1) caps the tenure at 18 months, and Regulation 169(3) forfeits what was paid if the warrant is never exercised.

That is a call option. At the rising history's floor of 250.00 the allottee pays 62.50 now for the right to pay 187.50 for a share at any time in 18 months, and walks away having lost 62.50 if the share falls below 187.50. The floor fixes the strike; it says nothing about what the right is worth.

At 45 per cent volatility, close to the median of 46 per cent measured on the issuers above over the windows that set their floors, the right is worth 109.71 once exercise dilution is counted, so each warrant hands over 47.21 beyond what was paid, against 27.27 for a share sold outright at the same floor. Issued with the share at the floor itself, a share hands over nothing and a warrant still hands over 23.86: the value of paying three quarters later and of being able to walk away.

Three routes to new capital, and three different protections

A preferential allotment is one of three ways a listed company sells new shares for cash without a public offer. A rights issue gives every holder the discount; the other two give it to someone else, under different price rules and on different clocks.

How a rights entitlement is priced, and what letting it lapse costs, is worked in the rights entitlement guide and the rights issue explainer. The placement floor reads closing prices over two weeks and allows 5 per cent off; the preferential floor reads volume weighted prices and allows nothing off, but its reference date sits a month further from the allotment.

What the notice tells a holder before the vote

Regulation 163 puts most inputs of the arithmetic into the explanatory statement: the objects, the maximum number of securities, whether promoters, directors or senior management intend to subscribe, the holdings before and after, the natural persons who ultimately own or control each allottee, each allottee's share of the enlarged capital, any change in control, and each allottee's status as promoter or not. The relevant date and the minimum price are in the Issue Summary Document the company files with the exchange, and the company secretary's certificate and any valuation report must be on the company's website.

The allottee's identity is the most informative line. An allotment to a promoter at the floor after a rally moves value from the holders left out to the ones who run the company, when a rights issue would have offered everyone the same price; an allotment to an unconnected investor at the market moves nothing. A change in control brings an open offer, announced on the day the board authorises the issue (Regulation 13(2)(g) of the takeover regulations) and priced under the rules in the open offer guide. The objects decide whether a discount can be earned back. At least 53 per cent of the 798 approvals measured above list general corporate purposes among them, which commits to nothing that can be checked; a named acquisition or loan can be followed through the monitoring agency's quarterly reports on issues above ₹100 crore and through the annual report, which must show how preferential money was used until it is spent (LODR Regulation 32(7A)).

What the floor is for

The floor is an anti-abuse rule about the look-back: it stops a company pricing an issue below where its shares recently traded. It was never built to make an issue neutral for the holders who are not invited. That happens only at the market price on the day of allotment, or when the money creates the difference, and the formula can see neither.

What such a holder has instead is the paperwork and the vote, and the vote decides only where the promoters do not. The notice and the exchange filing carry every input: the allottees, the number of shares, the relevant date, the minimum price, the objects. Working the transfer from them before the meeting takes ten minutes, and it is the habit taught here as method: the formula first, then the calendar, then the price on the day against both.