Allotment of Shares

Rules Regarding Allotment of Shares:

The following rules regarding allotment of shares are noted:

(a) Application Form:

A prospectus is an invitation to the public to purchase shares. Naturally, the intending purchaser has to apply in a prescribed form (given in the prospectus) for the purpose which is known as ‘application form’.

Needless to mention that the prospectus fixes the time when the application will be opened and the allotment will be made. Letter of allotment should be sent to the applicant of shares after the allotment is made.

(b) Offer and Acceptance:

We know that membership of a company after purchasing shares is nothing but a contract. The application form which is given by the members is the ‘offer’ and allotment by directors is the ‘acceptance’ of that ‘offer’ and, similarly, the notice of acceptance which is sent is the ‘acceptance of the offer.’

(c) Conditional offer and Acceptance for ‘Offer’:

Usually, the conditions are printed in the application form, e.g., in case of over-subscription of shares, shares will be allotted on pro-rata basis etc. Conditions for acceptance is practically invalid.

(d) Proper Authority:

It should be remembered that allotment of shares should always be made by the proper authority e.g., by the board of directors, and allotment made without proper authority is void. Although allotment can be delegated to some persons if the Articles so provide.

(e) Reasonable Time:

After receiving the application form allotment should be made as soon as possible by the directors i.e., within a reasonable time. Otherwise, applications for ‘offer’ will be revoked if such reasonable time expires.

(f) Fictitious Name:

Sec. 68A states that any person who

(i) Makes in a fictitious name for acquiring or subscribing for any share; or,

(ii) induces a company to allot, register any transfer of shares to him or any other person in a fictitious name shall be punishable by imprisonment up to 5 years.

Restrictions on Allotment of Shares:

The following restrictions have been prescribed by the Companies Act regarding allotment of shares:

(a) Minimum Subscription:

Sec. 69(1) states that no allotment can be made by the company until the minimum subscription has been received.

(b) Application Money:

Sec. 69(3), however, lays down that the amount payable on each share with the application form must not be less than 5% of the nominal value of the shares.

(c) Money to be Deposited in a Scheduled Bank:

Sec. 69(4) states that money received from the applicants must be deposited in a Scheduled Bank until the certificate to commence business has been obtained or until the entire amount payable on applications for shares in respect of the minimum subscription has been received by the company.

(d) Returns of Money:

Sec. 69(5) states that if the minimum subscription has not been raised or if the allotment could not be made within 120 days from the date of publication of the prospectus, the directors must return the money received from the applicants. If the money is refunded within 130 days no interest is payable, beyond which the directors are liable to pay interest @ 6% p.a. from the 130th day to the day of repayment.

(e) Statement in lieu of Prospectus:

Sec. 70 of the Companies Act states that a public company which has not issued any prospectus must deliver to the Registrar for registration a statement in lieu of prospectus signed by every director or proposed director or his agent in the form prescribed in Schedule III of the Act, at least 3 days before the first allotment of shares.

(f) Opening of the Subscription List:

Sec. 72 lays down that no allotment can be made until the beginning of the 5th day after the publication of the prospectus or such later time as may be prescribed for the purposes in the prospectus.

(g) Revocation of Application:

Application for shares cannot be revoked until after the expiration of the 5th day after the time of opening of the subscription list except in one case, i.e. if any responsible person gives public notice of withdrawal of the consent to the issue of the prospectus, any applicant can revoke his application.

Effects of an Irregular Allotment of Shares:

The following consequences are to be made if the allotment is made in contravention of Sees. 69, 70 and 73, stated earlier:

(i) Option:

See. 71(1) and (2) states that the allotment becomes voidable at the option of the shareholders. The option to avoid the contract must be exercised within 2 months of holding the statutory meeting or where no statutory meeting is held or where the allotment is made after the holding of the statutory meeting, within 2 months after the date of allotment.

The same can be exercised even if the company is in course of liquidation.

(ii) Compensation:

Sec. 71(3) lays down that if any director knowingly or wilfully contravenes the rules or authorizes the contravention, he is liable to pay compensation to the shareholders concerned for any loss or damage suffered by him. But the suit for compensation must be filed within 2 years from the date of allotment.

(iii) Fine:

Sec. 72(3) states that the validity of an allotment shall not be affected by any contravention of the foregoing provisions of this section, but,, in the event of any such contravention, the company, a fid every officer of the company who is in default, shall be punishable with fine which may extend to Rs. 5,000.

(iv) Void:

If any allotment is made in violation of Sec. 73, the same is treated as void.

Returns as to Allotment of Shares:

According to Sec. 75 of the Companies Act, a company having a share capital (whether public or private) must file with the Registrar a return of the allotment within 30 days after making such allotment of shares giving full particulars of allotment made, such as:

(i) The number and the nominal amount of the shares allotted;

(ii) The names, addresses and occupations of the allottees; and

(iii) The amount paid or payable on each share.

If any shares (other than bonus shares) are allotted as partly paid-up or fully paid-up (other than cash) the company must produce for the inspection of the registrar:

(i) A contract in writing constituting the title of the allottee to the shares;

(ii) The contract of sale or for services or other consideration for which the allotment was made; and

(iii) file with the Registrar—(a) copies or the contract (mentioned above) and (b) a return stating the number and nominal amount of the share so allotted.

While allotting bonus shares, the return should state the names, addresses and occupations of the allottee, in addition to the number and nominal amount of the shares constituted in allotment together with a copy of the resolution authorising the issues of such shares.

It should be remembered that no return need be filed relating to the issues and allotment of shares which the company had forfeited for non-payment of calls. Re-issue of forfeited shares is not an allotment within the meaning of Sec. 75(1).