This article on Public Company and Allotment of Shares deals with the concept, provisions regarding the allotment of shares. Further, this also mentions IPO and FPO Rules. Introduction After the independence the Government of India in 1950 framed a committee to go revise the whole Indian Companies Act, the committee was headed by Shir H.C. Bhaba. The committee… Read More »

This article on Public Company and Allotment of Shares deals with the concept, provisions regarding the allotment of shares. Further, this also mentions IPO and FPO Rules. Introduction After the independence the Government of India in 1950 framed a committee to go revise the whole Indian Companies Act, the committee was headed by Shir H.C. Bhaba. The committee had to think largely in the context of developing trade and industry in India. Based largely upon the recommendation of this...

This article on Public Company and Allotment of Shares deals with the concept, provisions regarding the allotment of shares. Further, this also mentions IPO and FPO Rules.

Introduction

After the independence the Government of India in 1950 framed a committee to go revise the whole Indian Companies Act, the committee was headed by Shir H.C. Bhaba. The committee had to think largely in the context of developing trade and industry in India. Based largely upon the recommendation of this committee the Campiness Act 1956 was passed in the parliament.

Now after several amendments the Companies Act 2013 is applicable to various aspects of a company. Section 2(20) of the 2013 Act does not define a company in terms of its definition rather it states that “a company formed and registered under this Act or an existing company”.

According to Chief Justice Marshall of the USA, “A company is a person, artificial, invisible, intangible, and existing only in the contemplation of the law. Being a mere creature of law, it possesses only those properties which the character of the creation of its creation confers upon it either expressly or as incidental to its very existence.” The word company has been derived from a Latin word in which ‘Co means together or with and ‘panis’ means bread.

Some of the basic characteristic features of a company are: A company is usually incorporated or registered under the Companies Act, 2013; It has a legal entity separate from its members; A company though a juristic person, is still considered as an artificial person; A company has limited liability, mostly; It has perpetual succession and a common seal. All these features enable a company to be the most suitable and preferable form of business in today‟s scenario. Most newly set up startups and businesses prefer to form a company form of business over other forms like a partnership or Non-Profit Organization or Hindu Undivided Family Business.

II. Public Company and Allotment of Shares

According to Section 2(71) of the Companies Act, 2013 “a public company is a company which is not a private company and has a minimum paid-up share capital, as may be prescribed”. According to this article “a subsidiary company of a company which is not a private company will be deemed to be a public company even though it has been stated as a private company in its article”.

A Public Company is usually involved in big projects and therefore requires much larger capital to meet its requirement. Taking a loan from the bank is riskier than issuing shares through a public offering. A public offering can be defined as a process of selling equity shares and other financial instruments such as debentures or bonds to the general public to meet capital requirement. IPO i.e. Initial Public Offering is one the most useful and used ways to raise capital through a public offering. It is promptly used by younger companies intending capital for expansion by issuing public share ownership.

  • Allotment Of Shares

The word ‘Allotment’ has not been defined in the Companies Act 2013. A company usually offers its ownership shares to the general public and eventually receives various application forms in return. And when an application is accepted by the company it amounts to allotment of shares.

The term implies that a company divides its entire capital into small units called shares either of the same value or different and assigns or allots these shares to different subscribers[1]. The Hon’ble Supreme Court through its landmark judgment in Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd.[2] has defined allotment as “the appropriation out of the previously unappropriated capital of the company of a certain number of shares to a person.”

The court also ruled that “re-issue of forfeited shares does not amount to the appropriation of unappropriated capital thus; it is excluded from the ambit of allotment”. As per Chetty, J. In Re. Florence Land & Public Works Ltd.[3] allotment “is generally neither more nor less than the acceptance by the company of the offer to take shares.”

III. General Provisions Regarding Allotment Of Shares

  1. Proper Authority

Allotment of Shares requires proper authority i.e. Board of Directors or any other Committee authorized by them to do so. If there is no proper authority then allotment can be termed as invalid. It can be observed in P.V. Damodara Reddy v. Indian National Agency Ltd.[4] where the court rejected the contention of one of the subscribers to the shares that acceptance of applications for allotment of shares by the directors alone was ineffective to complete the process of allotment.

The court rejecting the contention held that the regular board of directors forms a proper authority to complete the process of allotment. But if allotment has been made by an irregularly formed Board of Directors can be prima facie held as inoperative or invalid.[5]

  1. Allotment Against Applications Only

Section 2(55) of the Act states that to become a member of the share capital a person should agree in writing, as allotment cannot reside upon any oral agreement or request. A written application for the allotment of shares forms the fundamental element for allotment. Hence there can be no allotment without a written request.[6]

A company usually issues a prescribed application form to be filled for the allotment of shares. In Rahul Subodh Windoors Ltd. v. A.K. Menon[7], the court rightly ordered the company to return the money to its shareholders as there were no applications received in writing for allotment of shares and the company made allotment in the blank.

  1. Allotment not to be in contravention of any other Act

Allotment of shares cannot be valid while in contravention to any other existing Act. If a company issues shares in such a manner that it comes in contravention to the foreign exchange regulation, such allotment would invalid and confers no good title to the allottee.[8]

Allotment of shares should be legal in every aspect and it should not violate any provision as such of any act. The Bombay High Court in Unit Trust of India v. Om Prakash Berlia[9] held that “an allotment of shares made for any improper motive is bad and can be struck down.” Likewise, if a company allots shares to a minor, it cannot be valid.

  1. Reasonable Time

This provision requires that allotment of shares must be within a reasonable time period or else the application lapses. Determination of reasonable time depends upon the facts and circumstance of each case. In Ramsgate Victoria Hotel Company v. Montefiore[10] the court held six months as the unreasonable time between application received and allotment made.

Section 6 of the Contract Act becomes operational after the expiry of reasonable time and the applications are deemed to be revoked. But if an applicant accepts allotted shares after the expiry of a reasonable time period then he cannot plead that his application has been nullified due to delay.

  1. Communications

The principle of Communication requires that the allotment of shares to an applicant should be properly communicated to him. It is just like the principle of communication under contract law. If there is any fallacy then the contract would not be enforceable and the same is her just the fact and circumstances are different. Communication in other terms means that there should be proper consent of the applicant and company to allot shares. In Changa Mal v. Provincial Bank[11] the court held that “a person cannot be treated as a shareholder unless a notice of allotment has been sent to him.”

  1. Absolute and Unconditional

Allotment made by a company should classify as being absolute and unconditional. It implies that allotment should be made on the same terms as having been specified in the application. For example, if an applicant has applied for 300 shares, then the company cannot compel him to accept 100 or 200 shares. In Ramanbhai v. Ghasi Ram[12] the court held that the applicant was not bound to accept the allotment of shares as the company agreed to appoint him as Branch Manager in agreement to buy shares, but they didn’t do so.

According to Section 42 and 62 of the Companies Act allotment of shares or securities by a company can be done in the following ways:

  1. Right Issue of Shares

The right issue of shares allows the Board of Directors to issue shares to the existing shareholders of the company in the same proportion as their current shareholding by issuing them a letter of offer to allot new shares. Section 62 of the Act deals with the right issue of shares. It states that such an offer shall be open for a minimum period of 15 days and a maximum of 30 days with a right of renunciation. And the offer should be dispatched via any means before three days of the opening of the issue.

  1. Private Placement

This procedure is governed by Section 42 of the Act. Under this rule, a company after passing a special resolution can allot shares to a group of selected persons by issuing them a “Private Placement Offer Letter (PPOL)”. Such an offer does not carry any right of renunciation. The total number of persons who can be issues such shares cannot exceed more than 200 in a financial number.

  1. Preferential Allotment

Preferential Allotment states that a company can issue shares to an existing shareholder or to an outsider and payment received of such shares can be either cash or even consideration different from cash. The price of shares issued through preferential allotment is to be fixed by evaluating the Valuation Report.

Provisions Under Companies Act, 2013 Regarding Allotment Of Shares

  1. Section 26 (4) – Registration of Prospectus

The section requires that a copy of the Company‟s prospectus signed by every director or proposed director of the company or by his duty authorized attorney shall be duly submitted to the registrar for registration on or before its publication. In failure to do so, a company can be fined from rupee 50,000 to 3, 00,000 and every person associated with such issue shall be punished with imprisonment for a term of one year or fine or both.

2. Section 39 (2) – Application Money

According to the section, the amount payable on the application of each share shall not be less than 5% of the nominal amount of the share or any other percentage or amount as may be prescribed by SEBI. However, according to SEBI Regulations, 2009 application money must not be less than 25% of the nominal amount of the share.

  1. Section 39 (1&3) – Minimum Subscription

The section states that there can be no possible allotment of any securities of a company unless the amount stated in their prospectus as the minimum subscription amount has been subscribed and the sums payable on the received applications have been paid to and received by the company. And if both the above requirement has not been fulfilled within thirty days or any other period as may be specified by the SEBI, the amount received under subsection 1 of this section shall be returned within such time and manner as may be prescribed.

  1. Closing of the Subscription List

According to the SEBI Regulations, 2018 the subscription list for public issue must be kept open for a minimum of 3 working days and a maximum of 10. The Companies Act is silent on this part. In case of revision of the prices, a company shall extend the bidding period for 3 working days.

  1. Section 40 – Permission to deal on a stock exchange

Before a company could issue and allot shares it must make an application to one or more recognized stock exchange and procure permission for trading its securities in such platforms. The prospectus which states that apply to the stock exchange has been made under section 1 should also state the names of such stock exchanges where the securities will be traded.

IV. Initial Public Offer

The Initial Public Offer is a process through which a company offers shares to the general public. It allows the public to raise fresh capital for its business operations. Before IPO a company is considered as a private company, but when it seems that it can grow more and need funds for the same it starts making its ownership public by allowing the general public to buy its shares. But there are some rules that bring uniformity and validating IPO to provisions of law.

An entity can successfully offer IPO if the following requirements are fulfilled:

  1. The issuer cannot make a lawful allotment to its shareholders if the total number of prospective allottees is less than 1000.
  2. The issuer can only make extra allotment of the securities which have been offered through the offer document in the special case of oversubscription for “the purpose of rounding off to make allotment in consultation with the designated stock exchange”.
  3. “The allotment of specified securities to applicants other than to the retail individual investors and anchor investors shall be on a proportionate basis within the respective investor categories and the number of securities allotted shall be rounded off to the nearest integer, subject to minimum allotment being equal to the minimum application size as determined and disclosed in the offer document”.
  4. The issuer should confirm that the allotted value of securities to any person “shall not exceed two lakh rupees for retail investors or up to five lakh rupees for eligible employees”.
  5. “The allotment of specified securities to each retail individual investor shall not be less than the minimum bid lot, subject to the availability of shares in retail individual investor category”.
  6. “The authorized employees of the designated stock exchange, along with the lead manner and registrars to the issue, shall ensure that the basis of allotment is finalized in a fair and proper manner in accordance with the procedure as specified in Part A of Schedule XIV”.

Further Public Offer

Also known as secondary offerings, further public offer or follow-on public offer is the issuance of additional shares by a company after the initial public offering. It is usually announced to raise additional equity or to reduce debt. FPO can be issued in three ways, first dilutive meant to add new shares; second non-dilutive meant to sell existing private shares publicly;

and finally at the market offering (ATM) through which a company could possibly offer secondary public shares whenever it desires so. ATM further public offerings are often termed as controlled equity distributions because they can be used to sell shares in the secondary market at the current price.

General Conditions for allotment under FPO

  1. the issuer should have made an “application to one or more stock exchange to seek an approval for listing of its securities on their platform and has chosen one of them as the designated stock exchange”.
  2. the issuer has “entered into an agreement with a depository for dematerialization of specified securities already issued and proposed to be issued”.
  3. “all its existing partly paid-up equity shares have either been fully paid-up or have been forfeited”.
  4. the issuer has made “firm arrangement of finance through verifiable means towards 75% of the stated means of finance for the specific project proposed to be funded from the issue proceeds excluding the amount to be raised through the proposed public issue or through existing identifiable internal accruals”.

Conclusion

Concluding, allotment of shares is a very specific and complex process in raising capital through a security offering. Provisions like communication and absolute and unconditional make it a very stringent and ordained process. Every company needs to adhere to provisions of the Companies Act and SEBI regulations and guidelines. IPO and FPO constitute the ways of offering ownership to the general public. Most of the new business adopts IPO to raise capital from public and in requirement of additional capital use FPO. Thus, shares are vital for the growth of a company as the most secured and useful source.


[1] Re. Calcutta Stock Exchange Associations Ltd. (1957) 27 Comp. Cas. 599

[2] AIR 1964 SC 250

[3] (1955) 29 Ch. D 421

[4] (1945) 15 Comp. Cas. 148

[5] Changa Mal v. Provincial Bank (1914) ILR 36 All 412

[6] H.H. Manabendra Shah v. Official Liquidator (1977) 47 Comp. Cas. 356

[7] (1999) 96 Comp. Cas. 597 (SC)

[8] Re. Trans Atlantic Life Assurance Co. Ltd (1979) 3 All ER 352

[9] (1983) 54 Comp. Cas. 723

[10] 10 (1866) LRI Ex. 109

[11] (1912) 36 ILR 412 (All).

[12] (1918) Bom. LR 595


  1. Law Library: Notes and Study Material for LLB, LLM, Judiciary and Entrance Exams
  2. Legal Bites Academy – Ultimate Test Prep Destination
Updated On 2021-06-18T03:36:21+05:30
Hrithik Yadav

Hrithik Yadav

Hrithik is a Law student at HNLU, Raipur.

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