The main reason being raising capital by company to meet its financial requirements may be for starting a venture, repaying debts, expansion and diversification. When an investor buys securities he is enabling the company to carry on its business using those funds. Primarily, issues can be classified as a Public, Rights or preferential issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. Under section 25 of the Act, any document by which the offer or sale of shares or debentures to public is made shall for all purposes be treated as prospectus. The document “Offer for sale” is an invitation to the general public to purchase the shares of a company through an intermediary, such as an issuing house or a merchant bank. A company may allot or agree to allotment of shares or debentures to an “Issue house” without there being any intention on the part of the company to make shares or debentures available directly to the public through issue of prospectus. The issue house in turn makes an “Offer for sale” to the public. When a company wishes to issue shares to the public, there is a procedure and rules that it must follow as prescribed by the Companies Act 2013.
When the prospectus is issued, prospective investors can now apply for shares. They must fill out an application and deposit the requisite application money in the schedule bank mentioned in the prospectus. The application process can stay open a maximum of 120 days. If in these 120 days minimum subscription has not been reached, then this issue of shares will be cancelled. The application money must be refunded to the investors within 130 days since issuing of the prospectus.
Shares can be issued in the following modes:
- Private Placement
- Allotment of shares towards debt i.e., conversion of debt into equity
- Subsequent Public Offers
- Initial Public Offers (IPOs)
- Bonus shares.
- Rights Issue
- Preferential issues
Allotment of Shares:
Once the minimum subscription has been reached, the shares can be allotted. Letters of Allotment are sent to those who have been allotted their shares. This results in a valid contract between the company and the applicant, who will now be a part owner of the company. If any applications were rejected, letters of regret are sent to the applicants. After the allotment, the company can collect the share capital as it wishes, in one go or in instalments called calls.
Rules Regarding Allotment of Shares:
“Allotment” of shares means the act of appropriation by the Board of directors of the company out of the previously un-appropriated capital of a company of a certain number of shares to persons who have made applications for shares.
- The allotment must be made by proper authority: It is the duty of the Board of’ directors to allot the shares. However, the Board may delegate this authority to some other person or persons as per the provisions of the articles of association. Allotment of Shares made by an improper authority will make it void.
- The allotment should be made within a reasonable time: The offer to purchase shares of the company must be accepted within a reasonable time otherwise the applicants may refuse to take shares because after a reasonable time the offer lapses. What is the ‘reasonable time’ is a question of fact in each case.
- It must be communicated: An allotment is the acceptance of an offer to take shares by an applicant, and like any other acceptance, it must be communicated. There can be no binding contract unless the acceptance of the offer is properly communicated. Posting of a properly addressed and stamped letter of allotment will be taken as a valid communication. Even if this letter of allotment is delayed or lost in transit, the allottee will be liable. ‘G’ applied for certain shares in a company. The letter of allotment was despatched to him but it never reached. It was held that ‘G’ was liable as a shareholder (Household Fire Insurance Co. Ltd. v. Grant).
- It must be absolute and unconditional: The allotment of shares must conform to the terms and conditions of the application. If the allotment is not according to the terms and conditions, the applicant may refuse to accept the shares even though allotment has been made to him. If the conditions are not fulfilled, the applicant must reject the shares promptly. His silence or acceptance will debar him from this right.
Statutory Requirements of Act:
Preparation for Allotment of Shares:
The Company has to conduct the Board meeting to consider and discuss the authority given in the Articles of Association (AOA) of the Company to issue and allotment of shares or not. If no, then AOA must be altered using provisions of the Act. The Company has to conduct General Meeting of the members and pass thereat an ordinary resolution for further issue and allotment of shares in the capital of the company and consequential changes to the Memorandum of Association. Necessary paperwork and correspondence with concerned authorities to be completed.
Prospectus Requirement:
Issue of Prospectus (S. 25 of the Act):
Where a company offers to shares to the public, a prospectus must be issued and a copy of the same should be filed with the Registrar. The company cannot allot the shares immediately after issuing the prospectus. No allotment can be made until the beginning of the fifth day from the date of issue of prospectus. The fifth day is to be counted from the date of issue of prospectus was published or was otherwise notified to the public. The beginning of the fifth day is known as ‘the time of the opening of the subscription lists’. The object of this provision is to enable the public to go through the prospectus and to decide whether to apply for the shares.
Minimum Subscription Requirement:
Minimum Subscription (S. 39(1) of the Act):
No company can proceed to allot shares to the public until the minimum subscription has been subscribed, and the sum payable on applications for it has been received by the company by cheque or other instrument. If the company does not receive the minimum subscription, the entire subscription will be refunded to the applicants.
Application Money (S. 39(2) of the Act):
Application money is the amount which is payable on each share along with the application for purchase of shares. The amount payable on each share shall not be less than 5 per cent of the nominal amount of the share or such other percentage or amount, as may be specified by the Securities and Exchange Board by making regulations in this behalf.
Refund of Money (S. 39(3) of the Act):
In cases where the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days from the date of issue of the prospectus, or such other period as may be specified by the SEBI, the amount received as above shall be returned. The application money shall be repaid within such time and manner as may be prescribed and if any such money is not so repaid within such period, the directors of the company who are officers in default shall jointly and severally be liable to repay that money with interest at the rate of fifteen percent per annum.
Communication to Registrar (S. 39(4) of the Act):
Whenever a company having a share capital makes any allotment of securities, it shall file with the Registrar a return of allotment in such manner as may be prescribed.
Penalty for default (S. 39(5) of the Act):
In case of any default under sub-section (3) or sub-section (4), the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.
Requirement of Permission from Stock exchanges:
Application to Stock Exchanges (S. 40(1) and 40(2) of the Act):
- Every company making public offer shall, before making such offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange or exchanges.
- Where a prospectus states that an application under sub-section (1) has been made, such prospectus shall also state the name or names of the stock exchange in which the securities shall be dealt with.
Thus, now it is made compulsory that the shares must be listed on a recognised stock exchange. The prospectus must state the name of the stock exchange or each of such exchanges where the application has been ‘made. If the permission has not been granted before the expiry of stipulated period from the date of closing of the subscription lists, the company must immediately repay the money received from the applicants. On failure to do so Directors are made responsible for the delay. However, a director may escape liability if he can prove that there was no negligence or misconduct on his part.
Utilization of Application Money (S. 40(3) and 40(6) of the Act):
(3) All monies received on application from the public for subscription to the securities shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than–
(a) for adjustment against allotment of securities where the securities have been permitted to be dealt with in the stock exchange or stock exchanges specified in the prospectus; or
(b) for the repayment of monies within the time specified by the Securities and Exchange Board, received from applicants in pursuance of the prospectus, where the company is for any other reason unable to allot securities.
(6) A company may pay commission to any person in connection with the subscription to its securities subject to such conditions as may be prescribed
Penalty for default [Section 40(5)]:
If a default is made in complying with the provisions of this section, the company shall be punishable with a fine which shall not be less than five lakh rupees but which may extend to fifty lakh rupees and every officer of the company who is in default shall be punishable with imprisonment upto one year or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees or both.
Contractual Requirements:
Allotment to be by Proper Authority:
It is the duty of the Board of’ directors to allot the shares. However, the Board may delegate this authority to some other person or persons as per the provisions of the articles of association. Allotment of Shares made by an improper authority will make it void.
In Bank of Peshawar Ltd. v. Madho Ram, AIR 1919 Lah 351 case, the Court held that an allotment made by a General Manager under improper delegation by board is not valid.
In Changa Mal v. Provisional Bank, 25 Ind Cas 210 case, where an allotment of shares made by an irregularly constituted Board of directors. The Allahabad High Court held allotment was invalid.
According to Section 290 of the Act, and the Rule in Royal British Bank v. Turquand, an allotment may be valid even if some defect was there in the appointment of directors but which was subsequently discovered.
Allotment to be Within Reasonable Time:
The offer to purchase shares of the company must be accepted within a reasonable time otherwise the applicants may refuse to take shares because after a reasonable time the offer lapses. What is the ‘reasonable time’ is a question of fact in each case.
In Ramlalsao Gupta v. M.E.R. Malak, AIR 1939 Nag 225 case, where the application was received by the company in December and the shares were allotted in the August of the following year, the Court held that the acceptance cannot be said to have been made in reasonable time,
There Must be a Communication of Acceptance:
An allotment is the acceptance of an offer to take shares by an applicant, and like any other acceptance, it must be communicated. There can be no binding contract unless the acceptance of the offer is properly communicated. Posting of a properly addressed and stamped letter of allotment will be taken as a valid communication. Even if this letter of allotment is delayed or lost in transit, the allottee will be liable. ‘G’ applied for certain shares in a company.
In Household Fire Insurance Co. Ltd. v. Grant, [1879] 4 Ex D 216 case, where the letter of allotment was despatched to defendant but it never reached. It was held that a letter of allotment properly addressed, stamped and sent by post is sufficient communication, even if it is not actually received by the applicant.
In Official Liquidator, Bellary Electric Supply Co. v. Kanni Ram Ramwoothmal, AIR 1933 Med 320 case, the Court held that the mere entry of a shareholder’s name in the company’s register is insufficient to establish that an allotment was in fact made
The mere entry of a shareholder’s name in the company’s register is insufficient to establish that an allotment was in fact made. [Official Liquidator, Bellary Electric Supply Co. v. Kanni Ram Ramwoothmal]
The Allotment Must be Absolute and Unconditional:
The allotment of shares must conform to the terms and conditions of the application. If the allotment is not according to the terms and conditions, the applicant may refuse to accept the shares even though allotment has been made to him. If the conditions are not fulfilled, the applicant must reject the shares promptly. His silence or acceptance will debar him from this right.
In Motilal Chunilal v. Thakorlal, (1912) 14 BLR 648 case, where shares were allotted to an applicant on condition that he would have to pay for them only when dividend were declared by the company. The Court held that such a condition was not applicable and applicant was bound to pay for the shares, although the company had gone into winding up even before any dividend was paid.
The Allotment to Valid Application Only:
Allotment should be made against application only. No valid allotment can be made on an oral request. Section 2(55) of the Act requires that a person should agree in writing to become a member.
The Allotment Must be Not Against Any Law:
Allotment should not be in contravention of any other law. If securities are allotted on an application of a minor, the allotment will be void.
Calls:
A call is a demand, by the company in pursuance of a Board resolution and in accordance with the articles of the company, upon its shareholders to pay the whole or part of the balance still due on shares allotted or held by them made at any time during the life of the company. The amount payable in application on each share shall not be less than five per cent of the nominal amount of the share. The balance may be payable as and when called for in one or more calls.
In the event of default in payment of a valid call, the company can enforce payment of such moneys by legal process and forfeit the shares in case the call is not paid. The liability of members is enforceable only after a proper notice which is called ‘call letter’ or call notice as 1st, 2nd and final or so on, is given to him in accordance with the articles.
Requisites of Valid call:
- The power to make calls is exercised by the Board in its meeting by means of a resolution.
- The power to make call is in the nature of trust and must be exercised only for the benefit of the company, and not for the private ends of the directors. If the call is made for the personal benefit of directors, the call will be invalid.
- According to Section 49 of the Act, calls on same class of shares must be made on a uniform basis. In other words, there cannot be any discrimination between shareholders of the same class as regards amount and time of payment of call.
- The notice of call must specify the exact amount and time of payment
- If the issuer proposes to receive subscription monies in calls, it shall ensure that the outstanding subscription money is called within twelve months from the date of allotment of the issue.
Rules for Call money (Table-F of Schedule-I):
- For each call at least 14 days’ notice must be given to members.
- An interval of one month is required between two successive calls and not more than one-fourth of the nominal value of shares can be called at one time. However, companies may have their own articles and raise the limit.
- The Board of directors has the power to revoke or postpone a call after it is made.
- Joint shareholders are jointly and severally liable for payment of calls.
- If a member fails to pay call money he is liable to pay interest not exceeding the rate specified in the articles. The directors are free to waive the payment of interest wholly or in part.
- 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.
- A defaulting member will not have any voting right till call money is paid by him
Conclusion:
“Allotment” of shares means the act of appropriation by the Board of directors of the company out of the previously un-appropriated capital of a company of a certain number of shares to persons who have made applications for shares. Once the minimum subscription has been reached, the shares can be allotted. Letters of Allotment are sent to those who have been allotted their shares. This results in a valid contract between the company and the applicant, who will now be a part owner of the company. If any applications were rejected, letters of regret and refund orders are sent to the applicants. After the allotment, the company can collect the share capital as it wishes, in one go or in instalments called calls.