Year: 2020

Allotment of Shares refers to the process by which a company distributes its shares to applicants who have subscribed during an offering, such as an Initial Public Offering (IPO) or private placement. Once the subscription period ends, the company reviews the applications, determines the allocation of shares, and officially assigns them to the investors. Allotment is done based on the availability of shares and the demand. If the offering is oversubscribed, shares may be distributed on a proportionate basis or through a lottery system, ensuring fairness to applicants.

Types of Allotment of Shares:

1. Public or Initial Allotment:

This occurs when a company issues shares for the first time through an Initial Public Offering (IPO) or a Follow-on Public Offer (FPO). Shares are allotted to the public based on their applications and may be determined through a fixed price or book-building process. If oversubscribed, allotment is done proportionally.

2. Private Placement:

Shares are allotted to a select group of investors, such as institutional investors, private equity firms, or wealthy individuals. It doesn’t involve public participation and is often quicker and subject to fewer regulatory hurdles.

3. Rights Issue Allotment:

Existing shareholders are given the opportunity to purchase additional shares in proportion to their current shareholding, often at a discounted price. Shares are allotted based on the shareholder’s entitlement and their decision to take up the offer.

Rules Regarding Allotment of Shares:

1. Minimum Subscription Rule:

A company can allot shares only if it receives a minimum subscription of 90% of the total issue within a specified period. If the company fails to achieve this, the issue must be canceled, and the application money is refunded to investors.

2. SEBI Guidelines (for Public issues):

Securities and Exchange Board of India (SEBI) sets rules for public issues, including requirements for disclosing financial details, ensuring fair pricing, and the process for allotting shares. Companies must follow these guidelines when issuing shares through IPOs or public offers.

3. Time Limit for Allotment:

Shares must be allotted within a prescribed time frame, usually 60 days from the date of receiving the application. If the company fails to allot shares within this period, it must refund the application money within 15 days. Otherwise, the company is liable to pay interest on the amount.

4. Return of Allotment:

After allotting shares, the company must file a Return of Allotment (Form PAS-3) with the Registrar of Companies (ROC) within 30 days. This document details the number of shares allotted, the shareholders, and the allotment process.

5. Listing Requirements:

If the shares are issued through an IPO or public offer, the company must ensure that the shares are listed on a recognized stock exchange. The allotment must comply with the rules and regulations of the stock exchange as well.

6. Proper Allotment Procedures:

The company must follow proper procedures during the allotment, including board approval, maintaining proper records of applicants, and ensuring fairness in case of oversubscription (proportional allotment or lottery system).

7. Non-Payment of Allotment Money:

If a shareholder fails to pay the allotment money, the company has the right to forfeit the shares after providing due notice.

Restrictions on Allotment of Shares:

1. Minimum Subscription:

Company cannot proceed with the allotment of shares unless it receives at least 90% of the total issue as a minimum subscription. If this threshold is not met, the company must refund the application money to investors. This ensures that the company raises adequate capital to meet its objectives.

2. Approval by Regulatory Authorities:

In the case of public offers, companies must receive approvals from regulatory authorities such as the Securities and Exchange Board of India (SEBI) and comply with its guidelines. Any non-compliance can lead to a restriction on the allotment process.

3. Time Limit for Allotment:

Shares must be allotted within 60 days from the date of receiving the share application. If the company fails to allot shares within this period, the application money must be refunded to the investors within the next 15 days. If not, the company must pay interest at a specified rate.

4. Prohibition on Allotment Before Filing the Prospectus:

Companies issuing shares to the public must file a prospectus with the Registrar of Companies (ROC) before making any allotment. Allotment without issuing or filing a prospectus is prohibited and can be declared void.

5. Return of Allotment:

After allotment, companies are required to file a Return of Allotment (Form PAS-3) with the ROC within 30 days of the allotment. If this form is not filed, further allotments may be restricted, and penalties may be imposed.

6. Oversubscription and Proportional Allotment:

In cases of oversubscription (when applications exceed the number of shares available), the company is restricted from issuing more shares than initially offered. It must allocate shares on a proportionate basis or through a fair method, such as a lottery system, to ensure equitable distribution.

7. Restrictions on Allotment to Certain Investors:

• Foreign Investors: Allotment to foreign investors must comply with the Foreign Direct Investment (FDI) guidelines. Companies cannot allot shares to foreign nationals or institutions without adhering to these rules.
• Restricted Categories: Allotments may be restricted for certain categories of investors, such as related parties or company insiders, without appropriate board approvals or shareholder resolutions.

8. Non-Payment of Allotment Money:

If the allotment money is not paid by the applicant within the specified time, the company has the right to forfeit the shares. The allottee loses their entitlement to the shares and any amount already paid.

9. SEBI Regulations (for Listed Companies):

For listed companies, allotment of shares must comply with SEBI’s guidelines, including transparency, proper disclosures, and fair pricing. Failure to adhere to these regulations can restrict further share allotments.

10. Lock-in Period:

For certain types of shareholders, especially promoters and institutional investors in private placements, a lock-in period may apply. During this period, these shareholders are restricted from selling or transferring their shares.

Reputed companies require the applicants to send the full value of the shares along with the applications. This is because, the Companies Act does not prohibit companies to collect the entire amount at the time of issue itself. But the usual practice of the companies is to collect a certain percentage of the face value of the shares on application and allotment and the balance in one or more installments known as calls.

A call may be defined as a demand made by the company on its shareholders to pay a part or the whole of the unpaid balance within a specified time. Lord Lindley says that the expression “Call” denotes both the demand for money and also the sum demanded.

The following points should be noted, in this context, so that the reader can understand what a call really means.

1. Time for Making the Call: The call can be made at any time during the life time of the company or during the course of winding up. During the life time, the call should be made by the Board of Directors and during the course of winding up, it should be made by the liquidator.
2. Obligatory: Each shareholder is obliged to pay the amount of call as and when the call is made. But, this liability arises only when the call is made and not before.
3. Debt Due: As soon as a call is made, the call amount shall become a debt due from the shareholders to the company.
4. Consequences of Default: If a shareholder fails to pay the call amount, the company can enforce payment of the amount together with interest or can forfeit the shares.
5. Calls and Other Payments: A call is different from other payments made by a shareholder. The amounts paid on application and allotment are not calls. Similarly, if a company requires the shareholders to pay the entire amount either on application or on allotment, it is not a call under this Act.

Legal Provisions Relating to the Calls

The statutory provisions relating to the making of calls can be summed up as follows:

1. Call should Bona fide: The power to make call is generally in nature of a trust and so it can be exercised bona fide and for the benefit of the company. It should not be made for private ends. It means the directors or the liquidator can make the call only when there is a bona fide need for funds.
2. Uniformity: The calls should be made on an uniform basis on all the shares falling under the same class. If a call is made only on some shareholders of the same class but not on others or a greater amount is demanded from some shareholders and a lesser amount from others of the same class, the call is not valid.
3. Provisions of the Articles: The calls should be made strictly in accordance with the provisions of the Articles. If this is not done, the call will be invalid.

Procedure for making Calls

Generally, the procedure for making calls is incorporated in the Articles of most companies. If a company has its own Articles, it should follow the provisions of its Articles. If not, the regulations specified in Table A of the Act shall apply.

The following provisions of Table A can be noted at this stage.

1. The power to make calls generally vests in the Board of Directors.
2. The calls should be made by passing a resolution at the meeting of the Board.
3. The call money should not exceed 50% of the face value of the share at one time. However, companies may have their own Articles and raise this limit.
4. There must be at least 30 days interval between two successive calls.
5. When a call is made a letter known as “Call Letter” or “Call Notice” should be sent to all the shareholders of the same class.
6. The notice should also specify the amount of the call, place of payment etc. and should be sent at least 14 days before the last date for payment.
7. The Board of directors has the power to revoke or postpone a call after it is made.
8. Joint shareholders are jointly and severally liable for payment of calls.
9. If a member fails to pay call money, he is liable to pay interest not exceeding the rate specified in the Articles or terms of issue. The directors are free to waive the payment of interest.
10. If any member desires to pay the call money in advance, the directors may at their discretion accept and pay interest not exceeding the rate specified in the Articles.
11. A defaulting member will not have any voting right till call money is paid by him.

Sec. 2(36) of the Companies Act describes a prospectus as “any document issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any share in, or debentures of a body corporate.”

In other words, it is a document which invites deposits from the public or invites offers from the public for the subscription of shares in, or debentures of, a company. The words “inviting deposits from the public” were added by the Companies (Amendment) Act, 1974.

Features and Characteristics of Prospectus:

(i) It is a document issued as a prospectus;

(ii) It is an invitation to the member of the public;

(iii) The public is invited to subscribe to the shares or debentures of the company;

(iv) It includes any notice, circular, advertisement inviting deposits from the public;

(v) It is a document by which the company procures its share capital needed to carry on its activities.

Forms and Contents of the Prospectus:

Sec. 56 states that every prospectus must

1. State the matters specified in Part I of Schedule II, and
2. Set out the reports specified in Part II of Schedule II.

The Statement in Lieu of Prospectus is a document filed with the Registrar of the Companies ( ROC ) when the company has not issued prospectus to the public for inviting them to subscribe for shares. The statement must contain the signatures of all the directors or their agents authorized in writing. It is similar to a prospectus but contains brief information. The Statement in Lieu of Prospectus needs to be filed with the registrar if the company does not issues prospectus or the company issued prospectus but because minimum subscription has not been received the company has not proceeded for the allotment of shares.

If a public company does not invite the public to subscribe for its shares but acquires to have money from private sources it may not issue a prospectus. In the circumstances, the promoters are required to prepare a draft prospectus which is known as ‘Statement in lieu of Prospectus’ which must contain the information required to be disclosed by Schedule III of the Act.

Sec. 70(1) states that a company having a share capital which does not issue a prospectus shall not allot any of its shares or debentures unless at least 3 days before the allotment of shares or debentures there has been delivered to the Registrar for registration a statement in lieu of prospectus.

The statement shall be signed by every person who is named therein as a director or proposed director of the company or by his authorised agent in writing. It shall be in the form and contain particulars set out in Schedule III of the Act.

Sec. 70(4) lays down that, in contravention of Sec. 70(1), the company and every director of the company, who wilfully authorizes or permits the contravention shall be punishable with fine which may extent to Rs. 1,000.

Similarly Sec. 70(5) also states that where the statement in lieu of prospectus contains any untrue statement, the persons responsible, for the issue thereof, may be punished by imprisonment which may extend to 2 years or with fine which may extend to Rs. 5,000, or with both.

Red Herring Prospectus:

A Red Herring Prospectus is a document which is submitted by an issuer company who intents to have public offerings of securities (i.e.; stock or bonds). It is associated with an Initial Public Offering (IPO). It must be filed with the Securities and Exchange Commission (SEC). The term Red herring comes from the tradition where young hunting dogs in Great Britain were trained in order to follow a scent by the use of ‘Red’ (i.e. salted and smoked) herring (i.e., kipper).

It is interesting to note that this pungent fish would be dragged across a trail until the puppy learned to follow the scent. But the term is used in prospectus simply due to disclosure statement which is printed in red ink on the cover which clearly states that the issuing company is not attempting to sell its shares.

Contents of Red Herring Prospectus:

(a) Purpose of the issue;

(b) Proposed offering Price Range;

(c) Promotion expenses;

(d) Copy of the underwriting agreement;

(e) Underwriter’s commission and discount;

(f) Disclosure of any option agreement;

(g) Balance Sheet;

(h) Net proceeds to the issuing company;

(i) Earning statement for .last three years;

(j) Legal option on the issue;

(k) Copies of the Articles of Incorporation of the issuer; and

(l) Names and addresses of all offices, underwriters, directors and stockholders owning 10% or more of the existing outstanding stock.

Share Warrant is a negotiable instrument issued by a company that entitles the holder to acquire a specific number of shares at a predetermined price within a certain period. It is often used by companies as a means of raising capital or offering incentives to investors. Share warrants can be traded on the stock market like shares, but they do not carry voting rights or entitle the holder to dividends until the warrant is exercised, i.e., converted into shares.

Key Characteristics of Share Warrants:

• Negotiable Instrument:

Share warrant is a transferable instrument that can be freely traded. The holder of a share warrant can sell it in the market, offering flexibility in investment decisions.

• Right to Subscribe to Shares:

Share warrant grants the holder the right, but not the obligation, to purchase shares at a specified price (called the exercise price) within a set time frame. This option is attractive to investors because they can benefit from price fluctuations of the company’s shares.

• No Ownership Rights:

Share warrant holders do not own the shares until they exercise the warrant. They are not considered shareholders and do not have voting rights or dividend entitlements.

• Specified Time Period:

Warrants have an expiration date by which they must be exercised. After this period, the warrant becomes void, and the holder loses the opportunity to purchase shares at the pre-agreed price.

• Issued by the Company:

Share warrants are issued by the company directly and are different from other market instruments like options, which are often issued by financial institutions or traded in the derivatives market.

• Discounted Pricing:

Companies sometimes offer warrants at a price lower than the market price to make them attractive to investors. This can be particularly beneficial if the company’s share price increases before the warrant’s expiration, as the holder can buy the shares at a lower price.

Advantages of Share Warrants:

• Capital Raising:

Companies can raise capital without immediately diluting shareholder equity. If warrants are exercised, the company will receive the exercise price as additional capital.

• Incentive for Investors:

Share warrants can serve as a sweetener for investors, providing an additional benefit that increases the attractiveness of the investment.

• Leverage Opportunity:

Investors can potentially gain leverage through warrants by buying shares at a lower price, benefiting from future appreciation in the company’s stock price.

Disadvantages of Share Warrants:

• No Immediate Shareholder Rights:

Until exercised, the warrant holder has no claim to dividends or voting rights, limiting their influence in the company.

• Expiration Risk:

If the company’s stock price does not rise above the exercise price before the warrant’s expiration, the warrant can become worthless.

Legal Provisions in India:

Under the Companies Act, 2013, the concept of share warrants is not commonly used by private companies, as the Act mandates all securities to be fully paid up before being issued. However, listed companies often use share warrants as part of capital raising or financial restructuring strategies.

Share Certificate

Share Certificate is an official document issued by a company that certifies ownership of a specific number of shares in that company. It serves as evidence of the title of a shareholder and acts as a legal proof of the ownership of shares. Share certificates are issued to shareholders after the shares have been allotted and fully paid up.

Key Characteristics of Share Certificates:

• Proof of Ownership:

Share certificate is the primary document that certifies ownership of shares in a company. It acts as proof that the shareholder owns the shares mentioned in the certificate.

• Physical or Dematerialized Form:

In the past, share certificates were issued in physical form, but with the rise of dematerialization, most companies now issue shares in electronic form. However, in cases where shares are still held in physical form, a physical certificate is provided.

• Essential Information:

A share certificate contains key information such as:

1. The name and address of the shareholder.
2. The number of shares held by the shareholder.
3. The unique share certificate number.
4. The distinctive numbers of the shares.
5. The face value of each share.
6. The date of issue of the certificate.

• Legal Document:

Share certificates are legal documents that can be presented in court as evidence of ownership. They must be signed by authorized company officers (usually the company secretary and one director) and bear the company’s seal.

• Transferability:

Shares represented by share certificates are transferable, and the certificate plays a role in the transfer process. When shares are transferred, the old certificate is typically surrendered to the company, and a new certificate is issued to the new owner.

• Issuance Timeline:

Under Indian law, the company is required to issue the share certificate within two months from the date of allotment of shares or within one month from the date of transfer of shares.

Advantages of Share Certificates:

• Legal Recognition:

Share certificate legally proves that a shareholder owns a part of the company. This is crucial in situations like litigation or disputes over ownership.

• Ease of Transfer:

In the case of physical shares, the certificate facilitates the transfer process, as it must be surrendered and reissued when ownership changes.

• Historical Importance:

Before dematerialization, physical share certificates were important records of ownership and were often kept for long periods.

Disadvantages of Share Certificates:

• Risk of Loss:

Physical share certificates can be lost, stolen, or damaged, leading to complications in proving ownership and requiring reissuance by the company.

• Cumbersome Transfer Process:

In the case of physical share certificates, the transfer process can be time-consuming, as it requires physical handling and verification by the company.

Legal Provisions in India:

Under the Companies Act, 2013, companies are required to issue share certificates within the prescribed time frame (as mentioned above). Share certificates must be signed by authorized officers and stamped with the company’s seal. If a shareholder loses a certificate, the company must follow due legal procedures for reissuing a duplicate certificate.