The Process of Allotment of Shares 21/05/18, 9*29 PM

Allotment Of Shares: The Process

An allotment of shares is an acceptance by the company of the offer to take
shares. The offer of shares is made on application forms supplied by the
company. Generally, the offer is to accept a certain number of shares, or such
less number of shares as may be allotted and that offer is accepted by the
allotment, either of the total number mentioned in the offer or a lesser number,
to be taken by the person who made the offer. When an application money is
accepted, it amounts to an allotment. This constitutes a binding contract to
make that number according to the offer and acceptance.

Overview

When a company receives an application for shares issued by means of a

prospectus, it proceeds to allot shares on a predetermined basis (which is set out
in the prospectus). Where applications exceed the shares available, the
allotment is made proportionally, though often applications for shares up to a
stated number are accepted in full.

The allotment of shares is made by means of a letter of allotment. This entitles

the recipient to a certificate for the number of shares stated in the letter. His title
may, however, depend on his paying the sum previously stated as due on
allotment.

It means an appropriation of a certain number of shares to an applicant in

response to his application for shares. Allotment means a distribution of shares
among those who have submitted a written application.

Allotment in Private Limited Company v/s Public Limited

Company

There are many ways to issue shares like Right Issue of Shares, Private
Placement of Shares, ESOP, Sweat equity shares, preferential allotment of shares

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etc.One of the main distinctions between a Private Limited Company and a

Public Limited Company is the nature of allotment/ issuance of share. For a
Private Limited Company, it is prohibited to issue any prospectus to invite the
general public to subscribe towards share capital. Hence the shares can only be
taken up privately by the promoters and their relatives or friends. On the
contrary in the case of a Public Limited Company a proper procedure has been
set up by the Companies Act issue and allotment of shares.

In terms of Section 179 of Companies Act, 2013, the power to issue securities have
been vested on the Board of Directors of the company by way of passing a
resolution at meetings of the Board.

As per Section 23 of the new Companies Act, 2013, a public or private company
may issue securities in any of the following manners:

Public Company

To public through issue of Prospectus

Private Placement
Rights Issue or a Bonus Issue

Private Company

Rights or Bonus Issue

Private placement

Private Placement

Section 42 of the new Companies Act, 2013 deals with a private placement. Any
offer of securities or invitation to subscribe to securities to 200 persons or less
(excluding qualified institutional buyers and employees) in a financial year will
be a ‘private placement’ under Section 42(2) of the Companies Act, 2013. Reading
the Rule 13 of the of Companies (Share Capital and Debentures) Rules,
2014 makes it is very clear that any preferential allotment by rights issue has to

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comply with a private placement.

Preferential Offer

This refers to an issue of shares or other securities, by a company to any select

person or group of persons on a preferential basis and does not include shares
or other securities offered through a public issue, rights issue etc.Section 62(1)
(c) deals with preferential allotment of shares.

Certain conditions for Preferential Allotment of Shares given in the Act are-

1. Offer to be previously approved by Special Resolution:

The proposed offer of shares or invitation to subscribe shares has been

previously approved by the shareholders of the company, by a Special
Resolution, for each of the Offer of Invitation.

2. Authorization in Article of Association:

There should be an authority in AOA of the Company to issue shares/ securities

through PAS. If such power is absent then amend the clauses of AOA to insert
power to PAS.

2. Maximum No. of persons to whom offer can be made:

An offer can be made under a Private Placement Offer Letter to not more
than 200 people in a financial year.
Not just the limitation of allotment to 200 people but even an invitation to
subscribe can’t be made to more than 200 people.
The 200 people limit excludes Qualified Institutional Buyers and
Employees and the limit of 200 people is calculated individually for each
kind of security.

RIGHTS ISSUE OF SHARES

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The Right issue of shares means issue when new shares are offered to the
existing shareholders in proportion to their current shareholding. The Right
Issue of shares is governed by Section 62 of the Companies Act, 2013.

Dematerialised format regime brought about by new

Companies Act, 2013

Under Section 29;

1. Every company making a public offer; and

2. Such other class or classes of companies as may be prescribed

shall issue the securities only in the dematerialised form.

When any company issue its securities in dematerialised form, provisions of the
Depositories Act, 1996 and regulations made under that Act shall be
applicable.There is no bar for any other company to issue its securities in any
form. Any other company may convert its securities into dematerialised form.

As per the requirement, all the public issues of size in excess of Rs.10 crore, are
to made compulsorily in the demat more. Thus, if an investor chooses to apply
for an issue (which are generally over Rs. 10 crores) that is being made in
a demat mode, he has to logically have a demat account.

Certain Statutory compliances which need to be fulfilled

The company secretary has to see that the statutory conditions regarding the
allotment of shares are fulfilled before the Board proceeds to allot the
shares.The following are the statutory conditions which need to be fulfilled:

(i) Valid offer and acceptance: There should be a valid offer and acceptance for
the allotment to be a valid one. Here the company is the offertory and the
acceptors are the general public. If there is no company to offer then there
would be no public to accept.

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(ii) Unconditional Allotment: The allotment must be absolute and

unconditional and also as per the terms and conditions mentioned in the
application. The allotment should be unbiased, and not according to the caste,
creed, religion. It is not that rich shareholders pay more on the shares and the
poor shareholders pay less on the shares. All have to pay the same price for the
shares.

(iii) Collection of minimum subscription amount: The minimum subscription

amount as noted in the prospectus has been received within 120 days of the issue
of the prospectus.

(iv) Receipt of application money: Not less than 5% of the nominal value of the
share has been secured and has been received along with the applications.

(v) Deposition of application of money in a scheduled bank: All application

money received along with the applications must be deposited in a scheduled
bank. It cannot be withdrawn until the company gets a trading certificate or
where such certificate is already received or till the minimum subscription
amount is received.

(vi) Filing of prospectus with the registrar: A copy of the prospectus or

statement in lieu of prospectus has been duly filed with the registrar and at least
three days have elapsed after such filing before the allotment is taken up.

(vii) Time of allotment: No allotment of shares can be effected until the

beginning of the fifth day from the date of issue of the prospectus. The
subscription list must be opened for at least 3 days as disclosed in the
prospectus.

(viii) Proper communication: The allotment must be duly communicated to the

applicant through post i.e. registered post with necessary details.

(ix) Allotment strictly as per documents issued: The Board of Directors have to
make the allotment of shares strictly as per the documents issued which include

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the prospectus and the application form. The provisions made in the
Memorandum of Association and the Articles of Association must also be given
due consideration.

(x) SEBI nominee: If the issue is oversubscribed, the shares are allotted on a
proportionate basis. SEBI's nominee is associated while finalizing the basis of
allotment. The purpose is to see that the allotment is done on a fair and just
basis. The allotment also needs to be approved by a leading stock exchange.

Process of Allotment of Shares

Appointment of allotment committee

The secretary informs the Board, that the share applications are received and are
ready for allotment. If the issue is just subscribed or undersubscribed, the Board
will do the allotment of shares, but if the issue is oversubscribed, the Board
appoints an allotment committee to do the allotment work. The allotment
committee will study the problem, prepare a report and submit to the Board.

Board meeting for finalization of allotment formula

A meeting of the Board of Directors will be called to finalize the allotment

formula, which is being prepared by the allotment committee. If the shares are
listed, the allotment formula is to be finalized with the approval of the
concerned Stock Exchange Authorities.

SEBI's association with allotment work

A representative of SEBI needs to be associated while finalizing the allotment

formula. For this, the company has to request SEBI to nominate a public
representation for allotment work. SEBI's nominee is necessary when the issue
is oversubscribed.

Signature of chairman on the application and allotment list

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The secretary has to see that every sheet of application and allotment list is
signed by the chairman. The secretary also has to sign the application and
allotment lists.

Resolution of the Board for allotment

The secretary has to see that the Board passes a resolution regarding the
allotment of shares and authorizing him to issue letters of allotment and letters
of regret.

Issue of letters of allotment and letters of regret

After the Board's resolution to allot shares, the secretary prepares the allotment
list. Then he will send allotment letters to those who have been allotted shares
and regret letters to those who could not be allotted shares.

Refund / Adjustment of application money

The secretary has to make suitable arrangement for the repayment of

application money sent by the applicant. The refunded application money is
made to those shareholders who could not be allotted shares. The refund order
is sent along with the letters of regret. If an applicant has been allotted a smaller
number of shares than the number applied for, the secondary has to adjust the
excess amount with the amount due on allotment.

Collection of allotment money

The secretary has to make suitable arrangements with the Company's Bankers
for the collection of allotment money against the allotment letters.

Arrangement relating to letters of renunciation

To renounce means to give up. Certain applicants who are being allotted shares
do not want them, so they return the shares back to the company. this is known
as renunciation. The blank form of a letter of renunciation and letter of request

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for allotment along with the letter of renunciation duly executed and the
original letter of allotment from the renounces, the secretary has to make
necessary changes in the Application of Allotment list in order to enter the
names of the new allottees.

Arrangement relating to the splitting of allotment letters

Splitting means putting the shares in one or more names. In case any allottee
requests for a split of the allotment letter, the secretary places such a request
before the Board for approval. Once the Board approves the splitting of the
allotment letter, the secretary has to enter the details of the split in a separate list
of split allotments and issue the necessary 'split' letters.

Submission of return of Allotment

Every company whether public or private and having a share capital and within
30 days of allotment is required to send to the Registrar, a document known as
the "Return of Allotment". The return of allotment contains various details on
allotment of shares such as the nominal value of shares allotted, names and
addresses of allottees, the amount paid or payable on each share and particulars
of bonus shares and shares issued at discount. The secretary has to see that
these documents are prepared and submitted in time to the Registrar.

Preparation of Register of members and issue of share certificates:

The secretary has to prepare the Register of members from the Application and
Allotment lists. He has to see that the shares certificates are properly printed,
sealed, signed and distributed to all the allot-tees within three months after the
allotment of shares. He has also to see that the share certificates are issued
against the letters of allotment.

Timelines

Companies Act, 2013 provides for time limits within which shares are to be

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allotted once the company has received the share application money. Timelines
have been summarised below-

Where the company fails to allot shares within time:

1. 60 days - Allotment shall be done within 60 days of receipt of application

money.

2. Refund in 15 days- If the allotment is not done within 60 days then refund
the whole application money within next 15 days.

3. Liability if not refunded within 15 days- Refund application money along

with interest @12% p.a. after the expiry of 60 days.

Where shares are allotted and share certificate has to be

issued:-

Section 56(4) of the Companies Act, 2013 contains the provisions related to time
limits for the delivery of the certificates of all securities allotted, transferred or
transmitted.

1. In case of subscribers to memorandum- Within 2 months from the date of

incorporation.

2. In case of allotment of shares- Within 2 months from the date of allotment

3. In case of transfer or transmission of securities- Within 1 month from the

date of receipt by the company of the instrument of transfer or intimation
of transmission.

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