Allotment of Securities (Shares) and Statutory Restrictions on Allotment

Introduction:

The term “share” [as defined in Section 2(84) of the Company Act, 2013] refers to the company’s share capital, which comprises stock. Security is a term used to describe shares.  Section 2(80) of the Securities Contracts Act, 1956, relates to the meaning of securities as specified in clause (h) of Section 2 of the Securities Contracts Act, 1956.

In Commr. of Income Tax v. Standard Vacuum Oil Co. Ltd.[1], shares were described as a money-valued interest that consisted of various rights and obligations stipulated in the Articles of Association.

In Sri Gopal Jalan and Company v. Calcutta Stock Exchange Association Limited[2], it was held that the issuance of shares comes before the allotment of shares. Preliminary to the issuance of shares, allotment of shares refers to the allocation of unissued shares to a certain individual. The act of issuing shares is separate from that of allocation and occurs after the allottee’s title has been completed. A re-allotment and re-issue of previously issued and forfeited shares is not a share issuance. In the shape of the issued share, a share issue establishes a moveable property. A share that has previously been issued and is already an existing unit of property cannot be issued.

Sporadically the structure of the firm is modified, either by adding a new shareholder or by adjusting the present shareholder proportion. The creation and distribution of new shares by a business are known as the allotment of shares. Either new or existing shareholders can get fresh shares. Offers for shares are made using company-provided application forms. An allotment is what happens after your application is accepted. The phrase “allotment” refers to a corporation that is offering to take shares.

What is Meant by Allotment of Shares?

Offers for securities or shares are made on the company’s application forms. An allotment of securities (shares), occurs when an application is approved. A legal allotment must adhere to the Act’s criteria as well as contract law rules governing offer acceptance. A share is a shareholder’s interest in an enterprise. One share is the shareholder’s interest in an enterprise. The company’s capital is split into specific set units, which are known as shareholdings.

The phrases “Issue” and “Allotment of Shares” are frequently interchanged. There may be a distinction in some situations, especially when stock is issued by a public corporation. Share allotment is the process of assigning the right to certain shares to certain individuals.

During an Initial Public Offering, an allotment is the allocation of a percentage of shares to an underwriting participant (IPO). When the shares allocated to the underwriting form are depleted, the remaining shares are allocated to other forms participating in the same.

Allotment of shares refers to the procedure of acquiring a specific number of shares and distributing them among people who have submitted share return applications. The Companies Act 2013 incorporates the allocation of shares listed on the NSE and BSE, as well as any other stock market in India. The provisions of the SEBI Act, 1992, and the Securities Contract Regulation Act, 1956, are also applicable to subsidiaries of listed firms. The act of a corporation issuing a fresh number of shares to existing or new owners is known as the allotment of shares. New shares are issued in order to attract new business associates.

General Provisions Governing the Allotment of Shares[3]

The principles regulating the allocation of securities (shares) can be defined in the following to be effective, an allotment must meet the standards of contract law pertaining to the acceptance of an offer. The principles regulating the allocation of securities (shares) are as follows:

Allocation by a Competent Authority

In order to ensure the allocation to be legitimate, an allotment must be done by a proper authority, such as the company’s Board of Directors, an Assignment or Allotment Committee, or the Managing Director or Manager entitled to assign securities (shares) on behalf of the Board of Directors. The allocation should be done in accordance with the Articles of Association.

Within Reasonable Time

The proposal for allotment of shares must be approved within a reasonable period (Section 6 of the Indian Contract Act, 1872). However, what constitutes a specific timeframe in each situation is a question of fact. If the allocation is done after a lengthy period, an applicant has the opportunity to decline shares. In the case of Ramsgate Victoria Hotel Company v. Montefiore,[4] it was held that the time gap of roughly 6 months between application and allocation was excessive.

Absolute and Unconditional

The allocation must be unconditional and unrestricted. Shares must be distributed on the same terms as those indicated in the application. Certain qualifying requirements must be met before a share is allocated. The allocation cannot be described as an absolute allotment if the number of shares granted is less than those sought for.

Must be Communicated

The applicant should be adequately informed of the allocation. Even if the letter is lost or delayed, sending a properly addressed and stamped letter of assignment should be enough communication. A valid communication is an allotment letter or allotment advice. For instance, even if the letter of allotment never reaches the applicant, he is still a shareholder of the business and is responsible for the company’s responsibilities. It was held in the case of Official Liquidator, Bellary Electric Supply Co. v. Kanniram Ramwoothmal[5] that simply entering a shareholder’s name in the company’s record is inadequate to prove whether or not allocation was made.

Allotment Must be Contrary to Written Request Only

The only way to get an allotment is to fill out an application. An oral request will not result in a legal allocation. To join the firm, a person must sign a written agreement.

Receipt from the Worldwide Depository

According to Section 41 of the Companies Act 2013, a company may indeed in its general meeting, make a resolution authorizing it to distribute depository receipts, in the form and circumstances defined by the Company, in any sovereign entity.[6]

Provisions of Companies Act Pertaining to Issuance and Allocation of Shares[7]

1. In the absence of a prospectus, a public business should file a declaration soliciting public offers for the purchase of shares.
2. The general public applies for company shares in printed form, following the reading of the prospectus. The firm may request that the issue price be paid in whole, together with the application money, or in instalments, such as share application money, share first call, share the second call, and so on. At least 5% of the share’s nominal worth must be paid as application money.
3. There will be no issuance of shares unless the Minimum Subscription (Section 39 of the Company Act, 2013) stated in the prospectus has been met. The prospectus must indicate the minimum subscription amount.
4. The sum of the share application should be put in a bank that the company can only function after receiving the beginning certificate.
5. If the company does not reach the required subscription amount of 90% of the issue within 60 days of the issue’s closing, the company is responsible to repay the entire subscription price. If the delay exceeds 78 days, the firm must pay interest at the rate of 6% per year.

The firm can demand the whole amount or instalments payable on shares from owners following the allotment of shares, according to the regulations outlined in the prospectus. Call provisions are usually included in the company’s articles of incorporation. In the absence of such requirements, the following clauses apply:

• A demand for more than 25% of the nominal value of each share should be avoided.
• Two calls should not be separated by less than a month.
• Each member shall be given at least 14 days’ notice of the call, along with the amount, date, and location of payment.
• On a consistent basis, calls should be made on the whole body of shareholders in the same class.

In the case of Spitzer v. Chinese Corpn[8], it was established that allotment is the appropriation of a particular number of shares in a business as a response to an application by resolution of the Board of Directors of the firm.

Private Placement(S.42)[9]

Section 42 of the Companies Act permits that a company may execute a private placement by the issuance of a private placement offer letter, pursuant to the terms of this section, without contravention of Section 26. For this placement, the provisions of Section 42 may apply. An offer of securities or an invitation to subscribe for securities can be given to a limited number of people, up to 50 or a bigger range as required by law. This rule excludes qualified institutional purchasers and employees of the firm-issued securities through an employee stock option program in accordance with the terms of section 62 (1)(b).[10]

This clause does not apply to an offer made to a company’s existing shareholders. Furthermore, if an offer is made to a group of individuals that exceeds the specified number, it is considered a public offer and is subject to the laws governing public problems. According to Section 62 (3), the firm cannot make a new offer/invitation for the allocation of securities unless the previous ones have been fulfilled or retracted.

Furthermore, any offer that does not adhere to the criteria of this section must be considered as a public offer and must meet the requirements of the Securities Contracts (Regulations) Act, 1956, and the Securities Exchange Board of India Act, 1992. The only option to pay for securities subscriptions is by check, demand draft, or other banking methods; however, cash is not accepted.

Consequences in Case of Default

Section 42(5) states that securities must be assigned within 60 days after receipt of application money; otherwise, the application money must be repaid by the company within 15 days, or 12% interest would be charged. The company must hold the money received on an application in a separate bank account in a scheduled bank and must only be used exclusively for adjustments against securities allotments or refunds as provided under Section 42(6).

Proposals can only be made to those whose names have been registered with the firm prior to the offer. They should be addressed by name when they get the offer. The firm must keep a comprehensive record of such offers in a regulated way. Within 30 days of the distribution of the applicable private placement offer letter, comprehensive information regarding the offer must be lodged with the Registrar. The firm issuing security under this section is not permitted to use any media, marketing distribution channels, or agents to educate the public about the offer, as stated in Section 42(7).

According to Section 42(8), after making allotments, the company must submit a return of allotment with the Registrar in the form provided by the business, which must include a comprehensive list of all security holders, their real names, addresses, the number of securities given, as well as any additional information.

Contravention Punishment

Section 42(10) states that a company that makes an offer or accepts funds in violation or contravention of this clause, as well as its promoters and directors, faces a fine or penalty of up to two crore rupees, whichever is significantly highest and is also required to repay any money to subscribers within thirty days of the penalty order.

Statutory Restrictions[11]

Minimum Subscription and Application Money [S.39]:

The minimum subscription amount must be mentioned in the prospectus when shares are sold to the general public. No shares can be issued unless a minimum quantity has been subscribed and the application money (which must not be less than 5%; SEBI may impose a different proportion) has been collected by check or other means. If a share application is not accompanied by a payment, it is not considered a genuine offer. If the minimum subscription is not obtained within 30 days of the prospectus’s release, or such other period as SEBI may specify, the money received must be refunded within the time and manner specified by SEBI.

Consequences in Case of Default

The penalty for non-compliance by the firm or the officer-in-charge is Rs. 1,000 for each day the default persists or Rs. 1,00,000, whichever is somewhat less.

Stock Exchange Shares to be Rraded [S. 40]

Before issuing a prospectus, every business seeking to sell shares or debentures to the general public must apply to one or more recognized stock exchanges for authorization to trade the shares or debentures. This is referred to as listing. The prospectus must also include the name or names of the stock exchanges to which the application has been submitted. When an appeal is filed under Section 22 of the Securities Contracts (Regulation) Act, 1956, against a stock exchange’s denial, the allotment does not become void until the appeal is dismissed.

Consequences in Case of Default

If the company violates this section, a fine of at least five lakhs can be imposed, which can be increased to fifty lakhs, and any officer who violates this section can be punished with incarceration for up to one year or a fine of fifty thousand, which can be increased to three lakhs, or both.

Conclusion

A firm can make an allocation of securities by following all of the essential compliances outlined in the Act and Rules. The issuing of new shares by a corporation to its original or existing shareholders is known as the allotment of securities. The public frequently confuses the terms “share issuance” and “share allotment.” Issuance of shares refers to the act of issuing shares to shareholders, whereas allotment refers to the process of distributing shares in a corporation, and the decision to allow or accept shares is made by the corporation itself. Since a result, allotment of shares is the most important operation in the firm, as it is primarily used to develop the business by selling shares to the general public.

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References:

[1]AIR 1967 Cal 68.

[2] 1964 AIR 250, 1964 SCR (3) 698

[3]Ayush Verma, Allotment of shares: appropriation of share from the inappropriate share capital of a company, Ipleaders (May 7, 2021) https://blog.ipleaders.in/allotment-shares-appropriation-share-inappropriate-share-company/

[4] (1866) LR 1 Ex 109.

[5] (1933) 64 MLJ 130.

[6]Section 41 of Companies Act, 2013.

[7]   Ayush Verma, Allotment of shares: appropriation of share from the inappropriate share capital of a company, Ipleaders (May 7, 2021) https://blog.ipleaders.in/allotment-shares-appropriation-share-inappropriate-share-company/

[8](1899) 80 L.T. 347.

[9] Section 42 of Companies Act,2013.

[10]Divya, Statutory Restrictions on Allotment of Securities: An overview, Legal service India e-journal. http://www.legalserviceindia.com/legal/article-210-statutory-restrictions-on-allotment-of-securities-an-overview.html

[11]  Mayank Shekhar, Allotment of shares, Legal Bites (June 14,2017) https://www.legalbites.in/allotment-of-shares/