Introduction[1]:
The term “Company” has not been defined in a legal sense, but in general, Section 2(20) of the Companies Act, 2013 defines the company as a body incorporated under this Act or any other previous law.[2] To get a better understanding Prof. Haney defines the company as, “an artificial person created by law, having separate entity, with a perpetual succession and common seal.”This definition makes it clear that the company holds its separate identity which makes it different from its members holding a legal personality. Law creates a registered company and law alone holds the right to regulate, modify and dissolve it. There are certain essential characteristics of the company which makes it a corporate body, such as:
Incorporated Association
A company must be incorporated or registered under the Companies Act. As per Section 3 of the Companies Act, 2013, the company can be incorporated with 1, 2, or 7 members, called a One-person Company, a private company, public company respectively.
Separate Legal Entity
The company has its sole rights and duties which are entirely different from its members. The company becomes a legal person distinct from its members. Shareholders act as an agent to the company, not that company is the agent of its shareholders.[3]Shareholders, directors, officers, etc. are the representative of the company.
Artificial Person
Even if the company is having a separate legal entity, still it is considered an artificial person. A company needs shareholders, directors to carry out its natural work. The authority of these natural people is restricted, and thus they need to act accordingly. Whatever they do is on the behalf of the company and thus they bind the company. A company exists in contemplation of law.
Limited Liability
A company has its shareholders, who own the share of the company. In the case of a company limited by shares, the liability of the shareholders is extended towards the amount of the shares they own. Once the nominal value of the share and the premium, agreed on has been paid by the previous shareholders, they then no longer need to contribute anything. In the case of a company limited by guarantee, the liability of its members, known as guarantor, guarantees to pay a nominal amount at the time of the company’s wound up.
Separate Property
This principle was laid down in the case of Bacha F. Guzdar v. CIT[4], Hon’ble S.C. laid down the principle of separate power. Hon’ble S.C. held that the property of the company is not owned by its shareholders, fully or partly. The shareholders are only granted certain rights by law, for example, to vote, to attend meetings, or to receive a dividend.
Perpetual Succession
Once the company is incorporated, only law can dissolve it. The distinction of the company as an artificial person makes it run forever. The death, insolvency, illness, retirement of its members does not affect it. In case when any of the members die, their legal heirs will become the shareholder of the company.
Common Seal
The common seal is a seal used by the corporation as a symbol of its incorporation.[5] Since the company is not a natural person, to consist of body parts, hence it consists of a common seal under which all the agreements are validated. In case, when the members agree on behalf of the company, the deed needs to be signed and sealed by its representative. As per Section 25 of the Companies (Amendment) Act, 2015, the company authorizes its representative to enter into a deed or agreement on its behalf under its common seal, making the company binding.
Transferability of Shares
In the case of Joint Stock Company, Section 44 of the Act empowers the members of the company to transfer their shares or debentures or any other interest in the manner prescribed in Article of Association of company. The shareholder doesn’t require the permission of the other shareholders for the transfer of shares. AoA can restrict shareholders to transfer shares in a certain manner, to a certain extent but not wholly.
In the case of a public company, AoA can restrict the members to transfer their shares with the compliance of its statutory definition. Certain restrictions on the transfer of shares can be imposed but this right can’t be taken away absolutely either in the case of the private company or public company.
It was the case of State Trading Corporation of India v. CTO[6], Hon’ble Supreme Court held that a company cannot hold the status of a citizen under the Constitution of India.
Shares[7]
Shares in general refer to the part of the company, granted to the shareholders. According to Section 2(84), shares mean the share in the share capital of a company, including stock. It refers to the interest of the shareholders of the company. The capital of the company is divided into different proportions of fixed amounts those proportions are known as shares. In the case of Commissioner of Income Tax v. Standard Vacuum Oil Co.[8] shares were defined as an interest of money value, which grants the rights and liability specified in the Article of Association.
The transferability of shares makes it a movable property. Section 44 of the Act makes the share a movable property and transferable in the manner prescribed by the Article of Association of the company. Being movable does not mean moving on as an object. By movable, it means the transferability of shares. Shares hold the materialistic existence in the society and thus can be movable at the discretion of their shareholders. It is up to the will of the shareholder as to whether he wants to withdraw his shares or to expand them. The rights of transferability of shares lie in the hands of the shareholders. In the case of Vishvanath v. East India Distilleries[9], the Madras High Court held that, unlike other commodities, the shares are brought into existence by the legislation and thus are immovable or incorporeal, only consisting of right and liabilities.
Shares are not a negotiable instrument. They act as a linkage between the private relationship of the shareholder and the company. A share certificate issued by the company under its common seal is evidence of the share held by the shareholder. It consists of the rights and liabilities, which gives the shareholders the possession of the capital of the company depending on the proportion of the share they hold.
Section 43 of the Companies Act, 2013, authorize the company to issue two kinds of shares, namely:
- Preference share capital,
- Equity share capital—
- with voting rights, or
- with differential rights as to dividend, voting, or otherwise in accordance with such rules and subject to such conditions as may be prescribed. [10]
However, under Section 41, the company can also issue Global Depository Receipts.
Procedure of Issuance of Shares
Since the allotment of shares is done to raise money for a company, hence the allotment has to be carried with the procedure prescribed.
Issue of Prospectus
Once the company is incorporated, the board of directors passes a resolution stating the number of shares and its price. the resolution has to be valid, passed in a valid meeting. The private company cannot release a prospectus asking for a share, therefore, the public company issue prospectus for the purchase of a share in the company. The prospectus contains the name of the directors, terms of issue, opening and closing date of the share issue, application fees, bank details for the deposit, and minimum shares for application.
Receiving of Application
After the release of the prospectus, interested investors apply for the shares along with the application fees. The application can be either over-subscription or under- subscription. Oversubscription is the case when the number of applications is more than the number of shares issued, whereas in the case of under- subscription the number of shares issued is less than the desired or unexpected applications. It is necessary that the amount paid for the application must be at least 5% of the nominal amount of share.
Allotment of Shares
The decision of allotment then lies in the hands of the company, i.e., directors. When the decision of allotment of shares to whom be made, is taken, and shareholders are handed over the shares it is called acceptance. Minimum Subscription refers to the minimum amount stated in the prospectus, a company should raise during the time of issue of shares. An Allotment is received by the shareholders, and then they are obliged to pay the remaining amount due on shares according to the procedure mentioned in the prospectus.
The minimum subscription amount of 90% of the issue has to be received by the company within 60 days and if failed to do, the company will have to refund the entire subscription amount. If failed to pay within the prescribed time will have to pay 6% per annum annually.
Thus, the applicant now finally becomes the shareholder of the company.
The general rule applies in a case where there is no prescribed rule in the prospectus. The rules are as follows:
- More than 25% of the nominal value of shares can be called for;
- Only after one month, the next amount of share can be called for by the company;
- A notice has to be issued in favor of each member before 14 days stating the amount and date of payment;
- Since different shareholders fall under different classes, hence call for payment should be made on regular basis on a particular body of shareholders.
In the case of In Re Florence Land & Public Works Ltd.[11]It was observed that allotment is the mere acceptance by the company of the offer to take shares.
In the case of Shri Gopal Jalan and Company v. Calcutta Stock Exchange Association Limited[12], it was held that the grant of shares to a particular person by the company is an allotment of shares including acceptance which leads to a contract between shareholders and company.
Statutory Restrictions on Allotment[13]
Statutory Restrictions on the allotment are as follows:
Minimum Subscription and Application Money
Section 39 talks about the minimum subscription and application money. The company while offering shares to the public has to declare a minimum subscription in the prospectus. The shares cannot be allotted unless the minimum amount has been subscribed and the application money (not less than 5% as prescribed by SEBI) be received by cheque or another instrument. For a valid offer, the application has to be accompanied by such payment.
Section 39(3) states that in case minimum subscription has not been received within 30 days of prospectus then the amount received is to be returned within such time and manner prescribed. The company if deems fit, can appropriate application money towards allotment.
Section 39(4), when the company makes an allotment of shares having a share capital, a return of allotment has to be filed with the registrar in the prescribed manner.
Section 39(5), In case the company is unable to pay, then the company and its officers are liable to pay Rs. 1000 for each day till the default last or 1,00,000 whichever is less.
Shares to be Dealt in on the Stock Exchange
Section 40 talks about this principle. It says if a company wants to offer shares or debentures, it has to inform one or more recognized stock exchange boards to seek permission for the exchange of shares or debentures. A Prospectus must contain the name(s) of the exchange board. When the appeal has been filed against the refusal of the stock exchange, then under Section 22 of Securities Contract (Regulations) Act, 1956, the allotment doesn’t become void, until the dismissal of the appeal, but the over-subscribed proportion of money received has to be refunded within the prescribed period.
General Principles Related to Allotment[14]
Law of Contract talks about the principle of acceptance of offers. A valid allotment has to comply with the requirements and the principles stated in the law of contract. These principles are as follows:
Allotment by Proper Authority
An allotment has to be made by the resolution of boards of directors, or the committee authorized by the board to allot shares. An allotment without proper authority is considered invalid. It is a primary duty of the directors and can’t be delegated unless provided in the article of the company, as held in the case of Changa Mal v. Provisional Bank[15]. In the case of Home District Consolidated Gold Mines Re[16], it is necessary for the board to pass a valid resolution of allotment before the valid meeting.
Must be Communicated
The allotment must be communicated to the general public through the prospectus. This communication makes the allotment legally complete. The communication if stated needs to comply with the provisions stated in the prospectus. Communication to the applicant or his agent must be made who is authorized to receive it. In the case of Household Fire Insurance Co. v. Grant[17], the allotment is considered complete once the letter of allotment is posted in case of postal communication.
Within Reasonable Time
If the allotment is not made within a reasonable time, no applicant is bound to accept it. In the case of, Karachi Oil Products Ltd. V. Kumar Shree Narendrasinghji[18]court held that an allotment made after a year of an application is held to be ineffective.
Must Not be in Contravention of Any Other Law
Shares must not be allotted to the minor, if allotted, becomes void. The court in the case of Unit Trust of India v. Om Prakash Berlia[19] held that an allotment of shares made with an evil motive can be stuck down. Also, if shares are allotted with compliance to any other law, then it must be held void, and invalid and confer no rights, or title on the allottee, in relation to the shares, as held in Re Trans-Atlantic Life Assurance Co. Ltd[20].
Must be Against Applications Only
The allotment has to be made on the request made in writing. No request made in oral will be entertained. Section 2(55) makes it mandatory for the applicant to give in writing for becoming a member. In the case of H.H. Manabendra Shah v. Official Liquidator,[21]the court held that no allotment be made unless a written application is given. Application has to be made in the form supplied by the company.
Absolute and Unconditional
The prospectus contains the information of offer of shares, in the prescribed manner. It also contains the price of the share. Thus, an allotment has to be made on the same terms they were applied for. The terms cannot be changed or altered at the time of allotment. If the alteration introduces a new term, it will make a new offer and thus will not be effective on the previous application. The applicant has to accept this new term and then allotment shall be made. If the allotment is still made, it will be considered invalid or void. This was held in the case of Gackson v. Turquand[22]. Also, in the case of Ramanbhai v. Ghasi Ram[23], it was held that once the terms of application are altered, then the applicant is not bound by the allotment.
Conclusion
An allotment is the issuing of new shares by a company at large for the existing shareholders and new ones. Application of allotment is mere offer and acceptance. The allotment has to comply with the provisions of the Indian Contract Act. Issue of shares refers to the offering of the shares and an allotment simply means distribution of shares. Thus, for the expansion of business, shares are issued and allotted to generate capital and run the business. The decision to expand the business is taken by the board of directors and so is the acceptance of allotment.
References:
[1]http://www.ddegjust.ac.in/studymaterial/bba/bba-201.pdf
[2]http://ebook.mca.gov.in/default.aspx
[3] [1895-99] All. ER 33 (HL)
[4](1955) AIR 750
[5]Cited in Venkataramaiyan’s Law Lexicon
[6]1963 AIR 1811, 1964 SCR (4) 89
[7]24th Edition, Taxmann, Company Law and Practices
[8] (1957) 27 Comp. Cas. 175
[9] AIR 1957 Mad 341
[10]http://ebook.mca.gov.in/default.aspx
[11](1955) 29 Ch. D. 421
[12]1964 AIR 250, 1964 SCR (3) 698
[13]https://blog.ipleaders.in/allotment-shares-appropriation-share-inappropriate-share-company/
[14]https://lawtimesjournal.in/shares-and-general-principle-of-allotment-of-shares/
[15](1914) ILR 36 All 412
[16](1888) 39 Ch. D 160 (CA))
[17] LR 4 Ex D 216
[18] (1948) 18 Comp. Cas. 215 (Bom.)
[19](1983)54 Comp. Case 723 (Bom.)
[20](1979) 3AllER 352
[21](1977) 47 Comp. Case. 356
[22](1869) LR 4 HL 305
[23](1918) Bom. LR 595
){kind=link}
0 Comments