This article focuses on the Allotment of shares by a Public Company in an Open Market system with IPO & FPO in detail. I. Introduction The definition of a public company is provided under Section 2(71) of the act as amended by the Amendment act of 2015, that it is a company that is not private in nature… Read More »

This article focuses on the Allotment of shares by a Public Company in an Open Market system with IPO & FPO in detail. I. Introduction The definition of a public company is provided under Section 2(71) of the act as amended by the Amendment act of 2015, that it is a company that is not private in nature and has a minimum paid-up share capital as prescribed. A subsidiary of any public company shall also be deemed to be a public company even where such subsidiary company continues to be...

This article focuses on the Allotment of shares by a Public Company in an Open Market system with IPO & FPO in detail.

I. Introduction

The definition of a public company is provided under Section 2(71) of the act as amended by the Amendment act of 2015, that it is a company that is not private in nature and has a minimum paid-up share capital as prescribed. A subsidiary of any public company shall also be deemed to be a public company even where such subsidiary company continues to be a private company in its article of memorandum and association. Section 3 says that for a public company minimum number of persons would be 7 in number and there is no restriction on a maximum number of persons.

Section 44 provides that shares of any member of a company are movable property and is no restriction in transferability in the manner provided by the article of the company. Section 2(68) a public company unlike a private one can issue a prospectus. According to section 149, a public company may have at least 3 directors and section 152 says that in the public company at least 2/3rd of the directors must be those whose office period is subject to retirement by rotation.

Shares: Concept, Meaning, and Share Capital

Under Section 2(84) of the Companies Act 2013, characterizes “Shares” as, “Offer” signifies an offer in the offer capital of an organization including stocks. Shares are considered a sort of security. Securities are characterized in Sub-section 80 of Section 2 of the said Act, which alludes to the meaning of the securities as characterized in section 2(h)[1].

Section 2(84) of the Companies Act 2013, characterizes “Shares” as, “Offer” signifies an offer in the offer capital of an organization including stocks. Shares are considered a sort of security. Securities are characterized in Section 2(80) of the said Act, which alludes to the meaning of the securities as characterized in proviso (h) of section 2 of the Securities Contracts Act, 1956.

II. Allotment of Shares

Company issues different types of stock to the public as an effort of expanding of their businesses or to pay their debts. Fresh Issue is the share that is issued at the time of the incorporation of the company while after incorporation issuance of share is called Private Issue. Though public companies can issue their shares of the company to the public-private companies do have certain restrictions on this thing.

Provisions and procedures under the companies act for allotment and issuance of shares/securities:-

  • Issuing of the prospectus: to raise money for the company is the first step and a prospectus is basically an invitation to the public to purchase the shares of the company. “The organization needs to present a duplicate of the prospectus to the SEBI through the privately owned businesses don’t have to give any prospectus. The prospectus of an organization gives the data about the responsible company – names of Directors, terms of issue, opening and shutting date of the share issue, names of Directors, application expenses, bank subtleties for a deposit, and least shares for application.
  • Receiving the application: In this second step, it is of applying for shares alongside the application expense by the intrigued financial purchasers or investors. At the point when the quantity of offers applied for is more than the number of offers given, this is named as Over-membership while the quantity of use for the issue of the offer is not exactly expected then this is known as “Under-Subscription”. The sum paid for the application cash should be in any event 5 per cent of the ostensible measure of the offer.
  • Allotment of shares: “The choice of the allotment of shares depends on the respective company. The designation of shares to its investors is called Acceptance and is preposterous until membership. The base membership measure of 90% of the issue is to be accomplished by the organization in 60 days from the date of conclusion of the issue. In the event that on the off chance that it isn’t met, the organization should discount the whole membership sum. There is an unwinding of 18 days. For any postponement following 78 days, the organization should pay an interest of 6 per cent for each annum as a punishment. After the Acceptance of offers, the candidates become investors in the organization.”

The court in another case[3]said that “Offers for shares are essentially made when the forms of application are provided by the company”. It is viewed as an allotment of share when an application is acknowledged. That is presumed as an appointment out of the already un-appropriated capital of an organization. Subsequently, where relinquished offers are re-given, it isn’t something very similar to a distribution. For a portion to be viewed as legitimate it will consent to the necessities of the and standards of the law of agreement that is with respect to acknowledgement of offers.

Method for the Allotment of Shares after Company’s Incorporation

The issue of shares in an organization is the interaction by which organizations apportion new shares to the investors. According to the provisions of the Companies Act of 2013, a company issue shares to the shareholders. In another case [4] the court held that “Allotment of shares against promissory notes shall not be valid.”

Restrictions on Allotment

According to section 39 of the Companies Act 2013 :

(i) Minimum subscription and application money: Minimum Subscription is the base sum expressed in the prospectus that is needed to maintain the Business. As per Section 49 of the Companies Act, 2013 the primary essential of a legitimate portion is that of least membership. In the given prospectus of the organization, the measure of least membership will be expressed when offers are offered to the general population.

As indicated by Section 69(1) of the Companies Act, no apportioning can be made by the organization until the base Subscription has been gotten.”As observed in a leading case[5] no shares shall be allotted unless a specified amount has been subscribed and the application money, which will not be less appeal that was held to be effective, the choice of stock trade was saved and the posting would be allowed. The allotment would be saved.

(ii) Over-subscribed Prospectus: An allotment is substantial when the consent of a stock exchange has been conceded and the outline being considered as over-bought part of the cash got will be sent back to the candidates under the given time period. In another case [6], the court said — in the event of insufficiency of consideration, the shares will be considered as not completely paid and the shareholder will be obligated to cover them, except if the agreement is deceitful.

(iii) Application money & Money to be deposited in a Scheduled Bank: As per Section 69(3), the sum due on a particular share ought not to be under 5 per cent of the nominal worth of the shares. According to Section 69(4), the Money got from the candidates should be saved in Schedule Banks up to the endorsement of the beginning of Business has been acquired. As indicated by section 69(5), if the Allotment can’t be made inside 120 days from the date of distribution of the prospectus or if the base Subscription has not been raised, the Director needs to restore the cash got from the candidate.

(iv) Opening of the Subscription List & Rejection of Application: As per Section 72, no apportioning can be made before the start of the fifth day after the distribution of the prospectus or any time later as referenced in the prospectus. On the off chance that any individual gives public notification of withdrawal of the consent to the issue of the prospectus, any candidate can renounce this application.

III. Principles of Allotment of Shares

  • Allotment of shares by proper authority: in general, allotment is made by a goal that comprises of the Board of directors. In any case, where the articles so gave, an allotment made by secretaries and treasures was held to be standard.
  • Within a reasonable time: It is essentially made inside a sensible or indicated timeframe in any case the application will slip by. The predetermined time span of a half year among applications and allotment is held to be not sensible.
  • Shall be communicated: It is essential that there should be the communication of the allotment to the candidate. Posting of an appropriately tended to and stepped letter of allotment is considered as an adequate communication regardless of whether the letter was to be deferred or lost.
  • Absolute and unconditional: As indicated by Section 6 of the Indian Contract Act 1872 the allotment application should be acknowledged inside a sensible time and should be outright and unqualified. In this way where an individual applied for 400 offers depending on the prerequisite that he would be delegated clerk of another part of the organization, the Bombay High Court held that he was not limited by any allotment except if he was so designated as expressed by the court in Ladliprasad’s Case[7].

In Gopal Jalan’s case[8], the respondent Company did not file any return of the re-issued forfeited shares under section 75(1) of the act and therefore the appellant shareholder moved to the high court for an order requiring it to do so. The word allotment of shares has been discussed in section 75 to indicate the creation of shares by appropriation out of the unappropriated share capital to a particular person.

The question was that was is the meaning of allotment occurring in section 75 of the act. The Supreme court while dismissing the case said that “the trade was not subject to record any arrival of the relinquished shares under Section 75(1)[9]Corresponds to section 39 when the equivalent was re-issued.

The Court saw that when an offer is relinquished and re-issued, there is no allotment, in the feeling of apportionment of shares out of the approved and unappropriated capital and affirmed the perceptions of Chief Justice Harries in another case[10] case that:

On such forfeiture, all that happened was that the right of the particular shareholder disappeared but the shares considered as a unit of issued capital continued to exist and was kept in suspense until another shareholder was found for it.” The case was based on article 21,22 and 24 of the Indian constitution. It was also held that “allotment is the appropriation of shares to a particular person by the company. While the application of share is an offer, allotment constitutes acceptance leading to a binding contract b/w the company and the shareholder”.

IV. Initial Public Offer (IPO)

IPO is the abbreviation for Initial Public Offering. It is the offer of stock by an organization to the public. An IPO is fundamentally alluded to as ‘opening up to the world’ on the grounds that until an organization’s stock is offered available to be purchased to the public, the last can’t put resources into it. Section 23 (1)[11]arrangements with a Public proposal by both Public and Private Companies.

In the matter of Sahara[12] the supreme court said that “the actions and intentions on the part of the two companies clearly show that they wanted to issue securities to the public in the garb of a private placement to bypass the various laws and regulations to that effect.” The Apex Court at long last concluded that regardless of the idea of the offer being offered, in the event that it’s done as such to in excess of 50 individuals it will be understood as a public issue. Section 67[13] arrangements with offers made by an organization of in excess of 50 people and explicitly portrays it as a ‘public offer’.

Rules for IPO under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018

  • Regulation 4 accommodates the following general qualification conditions for the issue of IPO i.e, Issuer, its advertiser gathering or chiefs or people in charge of the issuer or in charge of some other organization ought not to be suspended from getting to the capital market. Issuer to make an application to at least one perceived stock trades for posting of shares. Issuer to go into a concurrence with a store for Demat of indicated securities. All somewhat settled up value shares have been made completely settled up which made firm plans of account through irrefutable methods towards 75% of the expressed methods for money barring the add up to be raised through the issue or through inside gatherings.
  • The Capital and Disclosure Requirements regulations govern the Initial Public Offers provides the procedure norms apart from the Companies Act which indeed is the parent legislation for all the rules. The regulations of ICDR issued by SEBI comprises of brief provisions regulating and governing the Initial Public Offer and provide detailed guidelines. Regulation 6 defines the eligibility requirements for making an Initial Public Offer.

Sub-section 1 says that to create an IPO an issuer must assure that-:

  • The company has the ‘net tangible assets; evaluating to at least 3 Crores INR in each of the preceding 3 years prior to the issue of an Initial Public Offer. Also, out of these 3 crores, the monetary assists must not exceed a value of 50 per cent of the total. However, if such monetary assists are over 50 per cent, the issuer has to make a promise to use such excess monetary assets in its business and project. The company must assure to achieve an average operating profit of at least 15 crore INR during the three years preceding the issue of the Initial Public Offer. Regulation 26 deals with profits and assets.
  • The organization should have total assets of at any rate 1 crore INR in every one of the former three years before the issue of the Initial Public Offer. In the event that the organization has changed its name in any way, shape, or form, inside the most recent year, at any rate, half of the income should be acquired (when contrasted with the occasions before the name was changed) under its new name.

More rules and regulations:-

  • Disclosure requirements- the companies are required to disclose details and information regarding them at the time of issuing the Initial Public Offer and some of the key disclosure requirements are as follows-
  • Corporate and Legal Matters- the disclosure requirements can be broadly classified into details about the company structure including governance & administration. The business model followed by the company depicts the strengths, weaknesses, risk factors, etc. Utilization of proceeds received from issuing shares. License materials etc. Apart from such matters, the legal matters must be disclosed by the companies as well.
  • General Financial Disclosure- The financial statements be it standalone statements, supplementary statements, or the adjustment over the final records, all are bound to be disclosed
  • Publicity guidelines- ICDR also imposes publicity restrictions on issuers and intermediaries during the Initial Public Offer process. This period commences when the board of directors approves the Initial Public Offer and ends after the listing of shares. In this period, no statements, interviews, public communications can be shared which can affect the investors. Advertising and all promotional activities shall also be consistent with the past with no new changes during this period.

V. Further Public Offer (FPO)

FPO stands for ‘Follow on Public Offer’ or Further public offer. FPO is a process by which a listed company on the stock exchange can raise capital by offering new shares to the investors or the existing shareholders of the company.

FPO has two purposes:

  1. To raise additional capital and
  2. To reduce existing debt.

Types of FPO: ‘

  1. Dilutive FPO and
  2. Non-Dilutive FPO.’

In the previous, the organization issues an extra number of shares in the market yet the estimation of the organization’s shares stays as before. This diminishes the general offer cost and consequently lessens the profit per share likewise though in the last mentioned, Non-dilutive IPO happens when large investors of the organization like the governing body sell their secretly held shares in the market. This strategy doesn’t expand the number of shares for the organization yet the number of shares accessible for the overall population increases.

Unlike dilutive FPOs, since this technique doesn’t build the number of shares, it doesn’t influence an organization’s EPS ratio. Since we have realized above what is an IPO and what is FPO with types and models. Presently let us comprehend the contrast between IPO and FPO.

Rules and Regulations regarding Further Public Offer-

Regulation 155 talks regarding the rules and guidelines for the Further Public Offer. To successfully issue Further Public Offer a company must:-

Have the equity shares enlisted on any stock exchange for a minimum period of 3 years before the date of issue of further public offer? Dematerialize the entire shareholding of the promoter group from the reference date.

Have the normal marker capitalization of public shareholding at least 1,000 crore INR. ‘Normal market capitalization of public shareholding’ alludes to the amount of everyday market capitalization of public shareholding for a time of one year up to the furthest limit of the quarter. Have the annualized exchanging turnover of the value shares of at any rate two per cent of the weighted normal number of value shares during the half-year time frame before the issue. Have the annualized conveyance-based exchanged turnover of value shares, at any rate, a modest amount of annualized exchanging turnover of value shares during the time of a half year before the issue?

About 95% of complaints and issues were resolved which were received by investors till the end of the quarter. No Show-cause notice issued or prosecuting initiated against by the board three years prior to the issue. Have not gotten the issue of equity shares suspended from trading in the form of any sort of a disciplinary measure during the last three years prior to the issue. Have no conflict of interest between the lead managers and the company or its group companies.

VI. Conclusion

Allotment of Securities is the issue of new shares by an association to the first or existing financial backers. General society all things considered get jumbled between the issue of shares and Allotment of shares. Issuance of the offer is the commitment of shares to the financial backers while Allotment of shares is the methodology for movement of shares in the association and the Allotment or affirmation decision is taken by the real association. So Allotment of shares is the most basic strategy in the association, which is basically suggested for expanding the Business by offering shares when all is said in done society.

While IPOs are more productive than FPOs as they are more dangerous and it is extremely unlikely to realizing how an IPO will perform. Henceforth, it is vital to delve further into the possibilities and essentials of the organization.

Sanjoli Verma


  • Allottment of Shares as Per Companies Act, 2013, TaxGuru, Available Here
  • Company Law and Practice – A Comprehensive Textbook on Companies Act 2013 (24th Edition August 2019) by Dr. G.K. Kapoor
  • Allotment of Shares, Clear Tax, Available Here
  • Overview of Features, Types and Incorporation of a Company under the Companies Act 2013, Ipleaders, Available Here
  • Allotment of Shares, Provenience, Available Here
  • What is Allotment of Shares, India Study Channel, Available Here
  • IPO & FPO: Know the Difference Between IPO & FPO, Available Here
  • Follow on Public Offer, Investopedia, Available Here
  • IPO and FPO: Know the Difference, Available Here

[1] Securities Contracts Act, 1956

[2] Harmony and Montage Tin and Copper Mining Company, (1873) 8 Ch App 407

[3] CIT v. SSV Meenakshi, 1966 60 ITR 253 SC

[4] Chokkalingam v. Official Liquidator, AIR 1944 Mad. 87

[5] Rishyashringa Jewellers Ltd v. Bombay Stock Exchange, 1996 AIR 480, 1995 SCC (6) 714

[6] Alote Estate v. R.B. Seth Hiralal Kalyanmal Kasliwal, (1970) 1 SCC 425

[7] Ramanbhai M. Nilkanth v. Ghashiram Ladliprasad, (1918) 20 BOMLR 692

[8] Shree Gopal Jalan and Company v. Calcutta Stock Exchange, 1964 AIR 250, 1964 SCR (3) 698

[9] Companies Act, 1956

[10] S. M. Nandy & Ors v. State Of West Bengal & Ors, 1971 AIR 961, 1971 SCR (3) 791

[11] the Company Act, 2013

[12] Sahara India Real Estate Corporation Ltd. v. SEBI, [2012] 174 Comp Cas 154 (SC)

[13] Companies Act, 1956

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Updated On 11 March 2021 7:05 AM GMT
Sanjoli Verma

Sanjoli Verma

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