Allotment of Shares in Company Law: Key Rules

A share is a share or a unit of ownership in a corporation, which confers on the shareholder voting rights in matters about the corporation and allows for the sharing of profits through proportionate dividends. The sale of shares helps raise capital to meet various operational needs of a company, as well as to meet financial needs in the process of expanding business operations. An acquirer of share stocks becomes a shareholder, exercising some form of influence over the company. Section 2 (84) of the Companies Act 2013 states that a share means a share in the share capital of a company and includes a stock.

Share capital refers to the money raised by a company while selling shares to investors. It is divided into two types: authorised share capital, which is how much a company can raise, and issued share capital, denoting the amount raised through the selling of shares in practice. Share capital is a fundamental component of an equity structure in a company because it forms the financial base for the organisation, thereby financing its operations and promoting growth over the long term.

What is the Allotment of Shares?

Allotment of shares refers to the process whereby a company extends the right to a member to take shares after he has applied for them on a subscription offer. This procedure signifies that the shares are issued after he has applied for them on a subscription offer. Section 42 of the Companies Act of 2013 governs the allotment of shares relating to capital formation. On allotment of shares, the applicant becomes a member and acquires property rights based on the shares’ nature and conditions.

Modes of Share Allotment Under the Companies Act. 2013:

Public Offer: Public issuance of shares can be through an initial public offering or a follow-on public offering. Here, all the requirements regarding the public issue must strictly be followed according to the provisions of SEBI. A company issues a prospectus to let the public know that a particular date will be announced for subscribing to shares.

Private Placement: It will issue shares to relatively fewer investors, such as institutional investors and high-net-worth individuals. Private placement means that you’ll have to give an offer letter in Form PAS-4 while adhering to Section 42 of the Companies Act 2013. This is a creative method of raising capital that does not involve an issue through a public offering.

Rights Issues: Current shareholders are granted the option to subscribe to additional shares proportionate to their existing ownership position. This method enables an organisation to raise capital while at the same time ensuring that the current ownership by its members is preserved. The method is regulated under Section 62 of the Companies Act of 2013.

Bonus Issue: This is an issue of bonus shares to the existing shareholders without paying any price for the investment made by them. Such shares are issued from the company’s treasury and governed under section 63 of the Companies Act 2013.

Preferential Allotment: The allotment carries a specific price for the reserved allotment to the limited shareholders, mainly the promoters.

Employee Stock Option Plan: The issuance of shares to employees as part of their compensation or perk. As aligned with the Companies Act 2013, under section 62(1)(b), along with corresponding regulations, ESOPs are valid. Section 62(1)(c) and Rule 13 of the Companies (Share Capital and Debentures) Rules 2014 apply. It raises the company’s quick funds.

Section 39 of the Companies Act 2013

Section 39 of deals with the allotment of company securities. Therefore, under this law, public companies, as well as the process of public offering shares, are impacted. The seriousness of this law lies in the fact that it speaks about the allotment procedure of shares in public companies with a view to attaining standard regulation for all allotment procedures. On the other hand, it also deals with transparency, investor protection, and regulatory compliance.

The application money threshold is described in a subsection. It provides that all applications for shares shall bear 5% of the nominal value of shares, or such other amount as the Securities and Exchange Board of India may determine from time to time, as application money in order make applicants' serious money order to make applicants serious and deter all applications with no money in the game. The application money is therefore held in trust and cannot be used by the company until shares have been allotted.

Section 39(4) speaks to the return of allotment. The return of allotment in the prescribed format to the ROC is filed by the company after the allotment of the shares. This complies with the format to ROC, which is filed by the company after the allotment of the shares. This complies with the said company’s laws. The filing shall be made within a timeframe of 30 days following the allotment. Information required includes names of the allottees, the number of allotted shares, and the consideration so received against such shares. The legal requirement being breached will naturally attract fines on the entity as well as its officials.

Section 39(5) carries penalties for breaches; any corporation or an officer dealing with said provisions violating the same section would entail an infirm or defective corporation and may be liable for punishment, which the said company’s laws. The same section would entail an infirm or defective corporation and may be liable towards punishment, which comprises of fines along with various other regulatory activities as listed in the same act, which means accountability towards strict compliance.

Sri Gopal Jalan CO.V Calcutta Stock Exchange Association LTD. 1963 AIR 248

Facts: In sri gopal jalan and co. v calcutta stock exchange association ltd. In 1963, the Calcutta Stock Exchange Association issued the shares in favour of a specific group of people, out of whom one was sei gopal jalan anc co. The case arose when the company issued shares retrospectively. The contention put forward by Shree Gopal Jalan was that the allotment was invalid because it was made after the issuance of shares by the company and was even backdated to meet some statutory requirements.

Issue: In such a case, the issue at the centre was the retrospective allotment of shares, which was permissible under the companies act 1956, wherein the companies act 2013 superseded it. This concern was merely about the validity of such backdated allotment of shares and whether such an act would amount to a statutory obligation and corporate governance principles as well.

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Judgment: The court held that allotment of shares must follow proper procedures and cannot be made retroactive. The allotment will have effect only after the application from is given intimation of the allotment. Retrospective share allotments cannot be permitted because such procedures are against the principles of transparency and equity in corporate practices. Consequently, the retrospective allotment of shares was deemed invalid, reinforcing the necessity for adherence to proper procedural standards in share allotment practices.

Conclusion

The share allotment mechanism under the companies act 2013 is a well arranged and legally governed process that guarantees transparency, fairness and statutory compliance. The process begins with the company issuing a prospectus or offer document in the case of a public offering or an offer letter for private placement or rights issues. Thereafter, applications are collected along with the necessary application fees.

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FAs

What is the allotment of Shares?

Allocation of shares: Allocation of shares refers to the allocation of shares by a company to those who are seeking shares after application and funds are received by the company. It establishes a legal relationship between a company and shareholder.

What is the law that regulates the allocation of shares in India?

The allocation of shares is regulated by the Companies Act 2013 and SEBI rules in the case of listed companies.

A firm can assign stocks without collecting application money, right?

No, according to company law, a company cananot allot shares unless it has received the minimum applicatio money as stated within the prospectus.

What is the minimum subscription required?

Minimum subscription means the minimum sum specified within the prospectus which must be received, before any shares are allocated. In the absence of that, the applied amount will be refunded by the company.

Within how many days shall the shares be allotted?

Stock can be allocated within a period of 60 days from the date of receiving the application amount. In case of non-allocation of stock, the amount will be refunded within the next 15 days.

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