This article is written by Sneha Chawla while pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata.
Introduction
Sub-section 84 of Sectopm 2 of the Companies Act 2013, defines “Shares” as, “Share” means a share in the share capital of a company including stocks. Shares are considered as a type of security. Securities is defined in the Sub-section 80 of Section 2 of the said Act, which refers to the definition of the securities as defined in clause (h) of section 2 of the Securities Contracts Act, 1956.
According to Section 44 of the said Act, the shares of any member in a company shall be movable property. It is considered to be transferable in the manner provided by the articles of the company. 1
According to Section 45 of the said Act, it mandates on all companies having a share capital to ensure that the shares of the company shall be distinguished by a distinctive number. This requirement does not apply where a share is held by a person whose name is entered as holder of beneficial interest in the records of depository. 2
Allotment of Securities
Offers for shares are basically made when application forms are supplied by the company. It is considered an allotment when an application is accepted. It is considered as an appropriation out of the previously un-appropriated capital of a company. Consequently where forfeited shares are re-issued, it is not the same thing as an allotment.3
For an allotment to be considered valid it shall comply with the requirements of the and principles of the law of contract that is regarding acceptance of offers.
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Statutory Restrictions on Allotment
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Minimum subscription and application money
According to Section 49 of Companies Act, 2013 the first requisite of a valid allotment is that of minimum subscription. In the given prospectus of the company the amount of minimum subscription shall be stated when shares are offered to the public. No shares shall be allotted unless a specified amount has been subscribed and the application money, which shall not be less than the appeal that was held to be successful, the decision of stock exchange was set aside and the listing would be granted. The allotment would be saved.4
2. Over-subscribed Prospectus
An allotment is valid when the permission of a stock exchange has been granted and the prospectus being considered as over-subscribed portion of the money received shall be sent back to the applicants within the given time frame.
Principles of Allotment of Shares
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Allotment of shares by proper authority
Allotment is generally made by a resolution that consists of the Board of directors. But where the articles so provided, an allotment made by secretaries and treasures was held to be regular.
2. Within the reasonable time
Allotment is basically made within a reasonable or specified period of time otherwise the application shall lapse. The specified time frame of six months between application and allotment is held to be not reasonable.
3. Shall be communicated
It is primary that there must be communication of the allotment to the applicant. Posting of a properly addressed and stamped letter of allotment is considered as a sufficient communication even if the letter were to be delayed or lost.5
4. Absolute and unconditional
As per the terms and conditions of the applicant the allotment must be absolute and unconditional. Thus where a person applied for 400 shares on the condition that he would be appointed cashier of a new branch of the company, the Bombay High Court held that he was not bound by any allotment unless he was so appointed. 6
Global Depository Receipt
As given under Section 41 of the Companies Act 2013, a company may pass a resolution in its general meeting authoritising it to issue depository receipts in any foreign country in such manner and subject to such conditions as prescribed by the company.7
Private Placement
According to Section 42 of Companies Act 2013, a company may make a private placement through issue of offer letters for private placement. Provisions of Section 42 become applicable to such placement. Provisions of Section 42 become applicable to such placement. The offer of securities or invitation to subscribe for securities can be made to a number of persons but not exceeding 50 or such higher number as may be prescribed. This number is not to include qualified institutional buyers and employees of the company being offered securities under a scheme of employees stock option as per the provisions of Section 62(1)(b). This can be done in one financial year and on such conditions as may be prescribed which is to include the form and manner of private placement.8
The first Explanation to sub-section (2) provides that an offer of private placement to more than the prescribed number is deemed to be an offer to the public and is governed by the provisions of (Ss. 23-41) relating to public issues. This will be so whether the company intends to go in for enlistment or not in or outside India.
The Second Explanation to Sub-Section (2) states that for the purposes of this sub-section, the expression used in it will have the following meaning –
“A qualified institutional buyer” means one as defined in SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 as amended from time to time.
According to [Section 42(3)] no fresh offer or invitation is to be made by the company unless allotments under any earlier offer have been completed or that offer has been withdrawn or abandoned.
All moneys payable towards subscription have to be paid through cheque or demand draft or other banking channels and not cash.
As per Section 42(5) Securities have to be allotted within 60 days of receipt of application money failing which the application money would have to be refunded within 15 days or else 12 per cent interest would become chargeable. The money received on application is to be kept in a separate bank account in a scheduled bank and is to be utilized only for adjustment against allotment of securities or refund as given under Section 42(6).
Offers can be made only to persons whose names are recorded by the company prior to the offer. They should receive the offer by name. A complete record of such offers has to be kept by the company in a prescribed manner. A complete information about an offer has to be filed with the Registrar within a period of 30 days of circulation of the relevant private placement offer letter. As given under Section 42(7) a company offering securities under this section is not to release any public advertisements or utilize any media, marketing distributing channels or agents to inform the public about the offer.
Section 42(8) explains that after making allotments, the company shall file with the Registrar a return of allotment in the prescribed by the company which consist of the complete list of all the security holders along with their full names, addresses, number of securities allotted and also any other information.
Consequences for the default
Section 42(10) provides an explanation stating that any contravention of the section would make the company, its promoters and directors liable to a penalty which may extend to the amount involved in the offer, or two crore rupees whichever is higher. The company shall then be in a position to refund the money to subscribers within a specified time frame of 30 days of the order imposing the penalty.
Numbering of shares
Every share in a company has to be distinguished by its distinctive number. The proviso to this declaration says that this section is not to apply to a share held by a person whose name is entered as a holder of beneficial interest in a share in the records of a depository.
Certification for shares
An allottee is generally permitted to have from the company a document, that is the share certificate. And this certificate certifies the allottee is the holder of the specified number of shares in the company.9 Shares in a depository record are not required be given their distinctive numbers. The right of an allottee to get his certificate cannot be defeated by putting up the right of lien for any dues owed by the allottee to the company.
A complaint was allowed to be filed at a place other than the company’s registered office.
Duplicate Certificate
A shareholder shall carefully preserve and store his certificate as he shall not be issued a duplicate unless and until it he shows that the original certificate is lost, damaged or destroyed by any means and is surrendered to the company. 10
References
1 Section 44 of Companies Act,2013,
2 Section 45 of Companies Act,2013,
3 CIT v SSV Meenakshi, (1984) 55 Comp Cas 545. In Plate Dealers Assn ,
4 Rishyashringa Jewellers Ltd v Bombay Stock Exchange, (1995) 6 SCC 714:AIR 1996 SC 480,
5 See, Ss. 4,5 and 6, Indian Contract Act, 1872,
6 Ramanbhai v Ghasiram, ILR (1918) 42 Bom 595,
7 Section 41 of Companies Act 2013,
8 Section 42 of Companies Act 2013,
9 Section 46 of Companies Act, 2013,
10 Section 46 of Companies Act, 2013,
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