This article is written by Gitika Jain, from Amity University, Kolkata. This article exhaustively deals with the allotment of shares with reference to the “Shri Gopal Jalan and Company v. Calcutta Stock Exchange Association Limited” case.
There are times when the structure of the company is to be changed which is done either by adding a new shareholder or by changing the current proportion of shares between shareholders. Allotment of shares is the formation and distribution of new shares by a company. New shares can be issued either to the new or current shareholders. Offers for shares are made on application forms provided by the company. When the application is accepted, it is called an allotment. The company offering to take shares is the same as the term “allotment”. Widely speaking it is an appropriation by the directors of shares to a specific person. Therefore where the forfeited shares are reissued, it is different from the allotment. An allotment to be valid has to abide by the requirements and instructions of the Companies Act, 2013 and principles of the Law of Contract relating to the acceptance of offers.
Concept of allotment of shares
Before diving deep into the topic of allotment of shares it is necessary to understand what allotment really means. The allotment is the allocation of a portion of shares to an underwriting participant during Initial Public Offering (IPO). When the shares allotted to the underwriting form, the remaining shares are allotted to other forms that participate in the same.
The process of appropriation of a certain number of shares and distribution among those who have submitted the return applications of shares is known as allotment of shares. Companies Act 2013 incorporated therein forms allotment of shares that are listed on NSE and BSE or any other stock exchanges in India. Other regulations that are applicable for subsidiaries of listed companies include the provision of SEBI Act, 1992 and Securities Contract Regulation Act, 1956.
Allotment of shares is basically creating and issuing a new number of shares by the company to the new or existing shareholders. The purpose of allotting new shares is to bring new business partners.
General principles as to allotment of shares
An allotment to be effective has to comply with the requirements of the law of contract relating to the acceptance of an offer.
Allotment by proper authority
An allotment should be made by a resolution of the Board of directors. The Allotment is the primary duty of the directors and this duty cannot be delegated except in accordance with the provisions of the articles.
Within reasonable time
allotment should be made within a reasonable period of time otherwise the application fails. Reasonable time should remain a question of fact in each case. The interval of six months between application and allotment has been held unreasonable. If the reasonable time expires Section 6 of the Contract Act applies and the application must be deemed to be revoked.
Must be communicated
The allotment should be properly communicated to the applicant. Posting of a properly addressed and stamped letter of allotment is sufficient communication, even though the letter is lost or held up.
Absolute and unconditional
Allotment should be absolute and should be according to the terms and conditions of the application if any.
Nature of the shares
According to Section 44 of Companies Act, 2013 the shares of a company are immovable property and according to the articles of the company, are transferable in the manner specified therein. In the case of Vishwanath v. East India Distilleries, the nature of share is incorporeal and also has a bundle of rights and obligations.
How are shares allocated during IPO
Hearing the news of IPO launch by renowned companies, investors usually get excited. IPO, are an important financial tool to raise funds from the public for some companies which require it. IPOs are raised by companies when they feel confident about future performance.
From time to time IPOs are announced by companies among the public and investors who are waiting for this opportunity.
Companies, by issuing public share ownership, raise capital from the public, through IPO. Although there are various risks associated with announcing an IPO, only when the company feels that it has reached a certain maturity stage, where it can benefit their targeted public, the company announces IPO.
The number of IPOs defaults on a yearly basis depends entirely upon how the economy is doing. For example, during the 2008 financial crisis, the market for IPO was completely destroyed.
Though the company announces IPO to the public at large, it doesn’t mean that everyone is qualified to receive IPOs. It is only on the basis of the share volume of each investor that the company offers an IPO. The securities and exchange board of India (SEBI) governs the rules of allotment of shares.
Provisions of Companies Act relating to issue and allotment of shares
- A public company should file a prospectus or declaration in lieu of a prospectus inviting offers from the public for the purchase of shares.
- After reading the prospectus, the public applies for the company shares in printed forms. The company can ask the issue price to be paid in full, together with the application money or to be paid in instalments as share application money, share first call, second call, etc. The application money must be paid at least five percent of the nominal value of the share.
- The Allotment of shares cannot be made unless the minimum amount that is the minimum subscription stated in the prospectus is subscribed or applied. The minimum subscription should be mentioned in the prospectus.
- The share application amount should be deposited in the bank which can be operated by the company only after the commencement certificate.
- The company has to return and refund the entire subscription amount instantly if 90% of the issue amount is not achieved by the company within 60 days. For further delay, which is beyond 78 days, the company has to pay 6% interest per annum.
After allotment of shares, the company can call for the full amount or instalments which are due on shares from the shareholders according to rules mentioned in the prospectus. Usually, the articles of the company include provisions regarding calls. If there are no such provisions then the following provisions are applicable:
- No call should be for more than 25% of the nominal value of each share.
- The interval between two calls should not be less than a month.
- At least 14 days should be provided to each member for the call mentioning the amount, date, and place of payment.
- Calls should be made on a uniform basis on the entire body of shareholders falling under the same class.
Procedure of allotment of share
The general procedure that is accepted in the law of contract also applies to the allotment of shares. These are:
- The resolution of the board of directors must be done prior to allotment. The directors cannot be delegated this duty and it becomes very important that a valid resolution is passed by the board for allotment in a valid meeting. (Portuguese consolidated copper mines 1889)
- According to Section 6 of the Indian contract Act, 1872, it is important that the allotment of shares is done within a reasonable period of time but this reasonable time varies from case to case. The refusal to accept the shares by the applicant is the choice of himself if the allotment is made after a very long time to him. The same thing happened in the case of Ramsgate Victoria Hotel Company v. Montefiore 1866, wherein the allotment of the share was made at an interval of six months between application and allotment and it was held unreasonable.
- Moreover, the allotment must be unconditional and absolute and must be allotted on the same terms upon which they were agreed upon during the acceptance of the application.
- Acceptance is the key to allotment and without acceptance of valid allotment cannot be made just on an oral request.
Statutory restrictions on the allotment of shares
- Minimum subscription and application money (S-39) – The first essential requirement for a valid allotment is that of minimum subscription. The amount of minimum subscription has to be declared in the prospectus at the time when shares are offered to the public. Shares cannot be allotted unless at least so many amounts have been subscribed and the application money, which must not be less than 5% SEBI may decide the various percentage of the nominal value of the share, has been received in by cheque or other instruments. It has been established by various cases that it is a criterion to valid allotment that the entire application money should be paid to and received by the company by cheque or other instruments. If the shares allotments are made without application money being paid it is invalid. If the minimum subscription has not been received within thirty days of the issue of the prospectus, or any such period as specified by SEBI the amount has to be returned within such time and manner as prescribed. [S-39(4)] Application money can be appropriated towards allotment or it has to be returned or refunded.
- Return of allotment [S.39 (4)] – A return of allotment has to be filed with the registrar in the prescribed manner whenever a company makes an allotment of shares having a share capital.
- Penalty for default [S. 39 (5)] – In case of default, the company and its officer who is in default are liable to a penalty for each default of Rs 1000 for each day during which the default continues or Rs 1,00,000 whichever is less.
- Shares to be dealt in on stock exchange [S.40] – Every company aiming to offer shares or debentures to the public by the issue of the prospectus has to make an application before the issue to any one or more of the accepted stock exchanges for permission for the shares or debentures to be dealt with at the exchange. The need is not merely to apply but also to obtain permission. In the prospectus, the name or names of the stock exchanges to which the application is made must be stated.
This requirement is precedent for listing that the application money is deposited in a separate bank account which will be used only for adjustment against allotment of shares if the shares have the permission to be dealt with in the specified manner in the prospectus. Hence the money will be used for the repayment to applicants within the time specified by SEBI if the company has not been able to allot shares for any other reasons. [S. 40 (3)]. The object of the section is that it will help shareholders to find a ready market so that they can convert their investment into cash whenever they like. In the Supreme Court case Union of India v. Allied International Products Ltd, this objective of the section was explained.
- Over-subscribed prospectus- Where the permission of stock exchange being granted and the allotment being valid the prospectus gets oversubscribed, the oversubscribed portion of the money received has to be returned to the applicants within the same specified period.
Reference case and other important case laws
- The term allotment has not been defined in the Companies Act. The meaning can be interpreted from various cases that were decided in India and in England, one such case in the Indian context is:
Shri Gopal Jalan and company v. Calcutta Stock Exchange Association Limited, in this case, it was held that appropriation of shares to a particular person by any company is allotment of shares. allotment of shares also includes acceptance which leads to a contract between the company and the shareholder whereas the application for shares is an offer.
- There was a case where it was held that the allotment of shares is a creation and not a transfer of shares. This was held in the case of Khoday distilleries v. CIT. In this case, the contention that allotment of right and bonus shares by the company in an inappropriate manner was done because it was a gift was held outright rejected. The creation of shares by an appropriation to a particular person out of appropriate share capital is known as the allotment. It was also held that according to Section 4(1)(a) of the gift tax Act an allotment is not a transfer and it does not attract this section. The company which issued the bonus shares was nothing but the capitalization of the profits of the company.
Therefore we can conclude that allotment of shares is basically issuing new shares by the company to the public at large who are either original or existing shareholders. The main confusion amongst the public lies between the issue of shares and allotment of shares. To sum up we can see that the issue of shares is offering the shares to the shareholders where the allotment of shares is the distribution of shares in the company and the decision of acceptance taken by the company itself in this case. The most important procedure in the company is the allotment of shares which mainly means expansion of business by offering shares to the public at large.
LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join: