Allotment of Share - Share Capital, Company Law B Com Notes | EduRev

Company Law

B Com : Allotment of Share - Share Capital, Company Law B Com Notes | EduRev

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Allotment of Shares

When a company wishes to raise capital, it may do so by bringing a fresh issue of shares in the market. The people who wish to purchase the shares of the company may apply for the number of shares desired by them in an application form accompanied by some money called ‘application money’. After a specified time, the company issuing shares, scrutinizes all the applications and ‘allots’ the shares to the eligible applicants.

Allotment of Share - Share Capital, Company Law B Com Notes | EduRev

Figure:  Allotment of shares

What is Allotment? 

The Companies Act, 1956 does not define the term "allotment". The meaning of “allotment” can be understood from some of the cases decided in India and England. One such case in the Indian context is given below.

Case Law 3

Sri Gopal Jalan and Co. vs Calcutta Stock Exchange Association Ltd.

In this case, it was held that allotment is the ‘appropriation of shares’ to a particular person by the company. While application for shares is an offer, allotment constitutes acceptance leading to a binding contract between the company and the shareholder.

Allotment is governed by a number of general and special provisions. These are discussed below.

(A) General Provisions: As mentioned above, allotment leads to a contract between the company and shareholder. Thus, some general provisions of the Indian Contract Act, 1872 apply to allotment of shares. These are:

Allotment of Share - Share Capital, Company Law B Com Notes | EduRev

Figure:  Allotment of Shares

 

  • proper authority- The allotment must be done by i.e. the Board of directors or as mentioned by the articles.
  • reasonable time-  The allotment must be done within a or else the applicant may refuse to accept the offer.
  • communicated-  The allotment must be A mere resolution is not enough, the decision to allot shares must be communicated to the shareholder.
  • absolute and unconditional-  The allotment must be If the shareholder had mentioned any conditions in the application, the allotment is valid only if the conditions are met and not otherwise.
  • If the above provisions are not met, the allotment is null and void.

(B) Special Provisions: As per the Companies Act, 1956 there are certain conditions that must be satisfied for allotment of shares by a public company 11 . These provisions differ depending on whether the issue is made to the public or not and also whether the company is allotting the shares for the first time. These are discussed from the following page:

(C) Special Provisions: As per the Companies Act, 1956 there are certain conditions that must be satisfied for allotment of shares by a public company 11 . These provisions differ depending on whether the issue is made to the public or not and also whether the company is allotting the shares for the first time. These are discussed from the following page:

A company may decide to raise capital through private placement of shares, i.e. the company may engage intermediaries like brokers to find investors. According to Section 70 of the Companies Act, 1956, a company which does not offer shares to the public for subscription can allot shares or debentures only if it submits a duly signed statement in lieu of a prospectus to the Registrar at least three days before the first allotment of securities. This statement should contain the particulars mentioned in Schedule III. If a company does not comply with these provisions then the company and every director in default can be fined upto Rs 10,000.

Illustration :
Ajanta Ltd. wishes to raise capital by placing its shares privately through brokers and underwriters. The company allots shares without submitting a duly signed statement in lieu of prospectus to the Registrar three days before the first allotment of securities. The company and every director in default had to pay a fine of Rs 10,000.

When a public company offers its shares to public at large, it has to comply with some special provisions. The rules differ in case of ‘first’ and ‘subsequent’ allotment of shares. 

(A) First Allotment of Shares – Initial allotment of shares can be done only if the company follows the following rules:

Allotment of Share - Share Capital, Company Law B Com Notes | EduRev

Figure: Allotment when public offer is made

  • Registers its Prospectus - (Section 60(1)) – The company has to file a copy of the prospectus duly signed by the directors with the registrar on or before the date when the prospectus is made available to public.
  • Receives The Minimum Subscription – (Section 69) – A public company can allot shares only if it receives the ‘Minimum Subscription’ for its shares along with the application money. The amount of minimum subscription is stated in the prospectus and cannot be less than 90% of the issue. If the company fails to receive the minimum subscription within 120 days of issue of the prospectus, then it will have to repay the money received from applicants for shares within the next 10 days. If the company fails to do so, the directors of the company will be jointly and severally liable to repay that money with interest (@ 6%p.a.) after the said time limit. However, these provisions should be read in combination with SEBI guidelines 12.
  • Receives Application Money (Section 69) – According to Section 69(3), the amount of application money cannot be less than 5% of the face value of the share.
  • Deposits the amount received in a Separate Account – According to Section 69(4), the amount of application money received has to be deposited in a separate account in a scheduled bank till the company receives a certificate of commencement or till it raises the minimum subscription for the issue.
  • Follows the rules regarding the Subscription List (Section 72) – A company can only start allotting shares from the fifth day after the issue of prospectus (or at a later time as prescribed in the prospectus). This time is known as the ‘opening of the subscription list’. According to Section 74, while counting the fifth day, any day which is a public holiday under the Negotiable Instruments Act, 1881, is not to be included. Although a default in following the provisions of section 72 does not invalidate allotment but such a failure imposes on the company and every defaulting officer a fine extending upto Rs 50,000. The Companies Act, 1956 does not specify the number of days for which the subscription list is to be kept open. But as per the norms of the stock exchanges, the list must remain open for a minimum of 3 days and should be closed within 10 days.
  • Gets Shares listed on a Stock Exchange (Section 73) - The company must apply to one or more recognised stock exchanges for listing its shares. The name of the stock exchange(s) where such permission is sought must be given in the prospectus. If the company fails to get the shares listed before the expiry of ten weeks from the date of the closing of the subscription lists the allotment is void. In such a case, the company has to refund without interest all money received from applicants within 8 days. If it fails to do so, the company and every defaulting director will be jointly and severally liable to pay back the money with interest at such rate as may be prescribed 13 .

(B) Subsequent Allotment of Shares- In case of subsequent allotment of shares, most of the above provisions apply. Thus, the company has to –

  • Register its Prospectus - (Section 60(1))
  • Receive Application Money (Section 69)
  • Follow rules regarding the Subscription List (Section 72)
  • Get the Shares listed on a Stock Exchange (Section 73)

It is, however, not required to ensure a minimum subscription and to deposit the money in a separate bank account.

In case of allotment of debentures, the company is required to follow the following special provisions as explained above – 

  • Register its Prospectus - (Section 60(1))
  • Follow rules regarding the Subscription List (Section 72)
  • Get the Debentures listed on a Stock Exchange (Section 73)

Allotment of Share - Share Capital, Company Law B Com Notes | EduRev

Figure:  Debentures 

Unlike shares, the first or subsequent allotment of debentures does not require the company to ensure a minimum subscription or to raise a minimum amount of application money or to deposit the money in a separate bank account.

According to Section 71 of the Companies Act, 1956, an allotment is said to be irregular if it is done without following the provisions of section 69 or 70. The table below indicates the circumstances when allotment is considered irregular:

TABLE  – Type of Issue and Conditions when it becomes Irregular

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