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.
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:
Figure: Allotment of Shares
(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.
|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:
Figure: Allotment when public offer is made
(B) Subsequent Allotment of Shares- In case of subsequent allotment of shares, most of the above provisions apply. Thus, the company has to –
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 –
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