BUSINESS LAW- III
(COMPANY LAW)
LAW 634
SHARES
(ALLOTMENT)
Prof Arun Upadhyay
MODULE 2 Prospectus, Allotment & related Matters
1. Companies Act 2013: prospectus: meaning, contents, registration and liabilities
2. Shares: Concept, classification, allotment, call, allotment & forfeiture
3. Shareholders’ rights
4. Charges: classification, registration & crystallization
5. Leading cases
Allotment of Shares
The public companies can issue the shares of their company to the public, which is to be followed in
accordance with the Companies Act 2013.
The offer for shares is made when application forms are issued by the company. It is considered an
allotment when an application is accepted.
The allotment is considered as an act of appropriation out of the previously un-appropriated capital of a
company. Consequently, where forfeited shares are re-issued , it is not the same thing as an allotment.
There are some general provisions pertaining to the allotment of shares:
According to Section 39 of Companies Act, 2013, the first requisite of a valid allotment is that of minimum
subscription. In the given prospectus of the company the amount of minimum subscription shall be stated when
shares are offered to the public. The minimum subscription amount of 90 percent of the issue is to be
achieved by the company in 60 days from the date of closure of the issue. In case if it is not met, the
company will have to refund the entire subscription amount with an interest to investors at a rate of
15% per annum.
Allotment of Shares
An allotment is valid when the permission of a stock exchange has been granted, and the prospectus being
considered as over-subscribed portion of the money received shall be sent back to the applicants within the given
time frame.
Allotment is made by a resolution of the Board of directors.
Allotment is basically made within a reasonable or specified period of time otherwise the application shall lapse.
The specified time frame of six months between application and allotment is held to be not reasonable.
There must be communication of the allotment to the applicant. Posting of a properly addressed and stamped
letter of allotment is considered as a sufficient communication.
The allotment must be absolute and unconditional.
Allotment of securities through Private Placement (Section 42) –
Private placement means any offer of securities or invitation to subscribe securities or invitation to subscribe securities
to a select group of persons by a company (other than by way of public offer) through issue of private placement offer
letter.
Allotment of Shares
The private placement of securities is governed by Section 42 of the Companies Act, 2013 read with Rule 14 of the
Companies (Prospectus and Allotment of Securities) Rules, 2014.
A private placement offer cannot be made to more than 200 people in aggregate (in total) in a financial year excluding
“Qualified Institutional Buyers (QIBs)” and employees of the company being offered securities under a scheme of
employee’s stock option as per the provisions of clause (b) of Sub-Section (1) of Section 62.
If a company, whether listed or unlisted makes an offer to allot or invites subscription, or allots, or enters into an
agreement to allot, securities to more than 200 persons, whether the payment for the securities has been received or not
or whether the company intends to list its securities or not on any recognized stock exchange in or outside India, the same
shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of chapter III.
No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation
made earlier have been completed or that offer, or invitation has been withdrawn or abandoned by the company.
Allotment of Shares
The number of such offers or invitations shall not exceed 4 in a financial year and not more than once in a calendar
quarter with a minimum gap of 60 days between any 2 such offers or invitations.
The value of such offer or invitation shall be with an investment size of not less than Rs. 50,000/- per person.
No company offering securities under this section shall release any public advertisements or utilize any media,
marketing or distribution channels or agents to inform the public at large about such an offer.
Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all
provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India
Act, 1992 shall be required to be complied with.
The procedure can be listed as below:
a. The company has to send Notice for convening Board Meeting at least 7 days before convening the Board Meeting.
b. Thereafter, Notice shall be sent to shareholders for convening of Extra Ordinary General Meeting for the approval of
private placement offer Letter.
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c. Thereafter, the private placement offer letter is to be drafted.
d. Special Resolution shall be passed in the EGM so convened, which shall remain valid for a period of 12 months.
e. File Form MGT -14 with the ROC within 30 days of passing Special Resolution.
f. Issue offer letter in PAS-4 within 30 days of record of name of persons
g. Prepare complete record of Private Placement in PAS-5
h. File Form PAS-4 and Form PAS-5 with ROC within 30 days of issue of offer letter in Form GNL-2
i. Make Allotment of shares within 60 days of receipt of Money from the persons to whom right was given.
j. Call Board Meeting for allotment of shares
k. File PAS-3 with ROC within 30 days of Allotment.
l. Issue share certificate to the respective shareholder within 2 months from the date of allotment of shares.
Allotment of Shares
Allotment of securities through Rights Issue (Section 62) –
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.
As per Section 62 (1), where at any time, a company having a share capital proposes to increase its
subscribed capital by the issue of further shares, such shares shall be offered:
(a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as
nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of
offer subject to the following conditions, namely: –
(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being
less than fifteen days and not exceeding thirty days from the date of the offer within which the offer,
if not accepted by 90% of its members, shall be deemed to have been declined;
Allotment of Shares
(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a
right exercisable by the person concerned to renounce the shares offered to him or any of them in favour
of any other person; and the notice referred to in clause (i) shall contain a statement of this right;
(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the
person to whom such notice is given that he declines to accept the shares offered, the Board of Directors
may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;
The procedure can be listed as below:
a. Send Notice for convening Board Meeting at least 7 days before convening the Board Meeting.
b. Pass a Board resolution for approving “Letter of offer”. The offer letter shall include right of
renunciation also.
c. Send the Letter of offer to all existing shareholders through registered post or speed post or through
electronic mode at least three days before the opening of the issue.
Allotment of Shares
d. Receive acceptance, renunciations, rejection of rights from shareholders.
e. Issue notice in writing to every Director at least seven days’ before convening the Board meeting. [Sec
173 (3)]
f. Convene a Board Meeting and pass Board resolution approving the allotment and issue of shares.
g. File with Registrar a return of allotment in E-Form PAS-3 within 30 days of allotment of shares.
h. Issue share certificate to the respective shareholder within 2 months from the date of allotment of shares.
Preferential Allotment of shares (Section 62) –
The issue of shares on a preferential basis is governed by Section 62(1)(c) of the Companies Act, 2013
and Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014.
Preferential Offer means an issue of shares or 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, employee stock option scheme,
Allotment of Shares
employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country
outside India or foreign securities.
The procedure can be listed as below:
(i) Check the provision in the Articles of Association of the Company regarding Preferential Allotment of shares and if the same is
not there then the Articles of Association needs to be amended suitably as per the provisions of the Companies Act, 2013.
(ii) Issue Notice for convening Board Meeting for making the proposal for Preferential Allotment of shares and approval of notice
of convening the General Meeting.
(iii) The following disclosures shall be given in the explanatory statement to be annexed to the notice of the general meeting
pursuant to Section 102 of the Companies Act, 2013: -
The objects of the issue;
The total number of shares or other securities to be issued;
The price or price band at/within which the allotment is proposed;
Allotment of Shares
Basis on which the price has been arrived at along with report of the registered valuer;
Relevant date with reference to which the price has been arrived at;
The class or classes of persons to whom the allotment is proposed to be made;
Intention of promoters, directors or key managerial personnel to subscribe to the offer;
The proposed time within which the allotment shall be completed;
The names of the proposed allottees and the percentage of post preferential offer capital that may be held by them;
The change in control, if any, in the company that would occur consequent to the preferential offer;
The number of persons to whom allotment on preferential basis have already been made during the year, in terms of number of securities
as well as price;
The justification for the allotment proposed to be made for consideration other than cash together with valuation report of the registered
valuer; and
Allotment of Shares
The pre issue and post issue shareholding pattern of the company in the prescribed format.
(iv) Issue Notice of the General Meeting at least 21 clear days before the date of the Meeting to all the
Shareholders, Directors and Auditors as required Section 101 of the Companies Act, 2013.
(v) In General Meeting pass the Special Resolution for Preferential Allotment of shares.
(vi) File E-Form MGT-14 with Registrar of Companies within 30 days of passing the Special Resolution.
(vii) The securities allotted by way of Preferential offer shall be made fully paid up at the time of
allotment.
(viii) The allotment of securities on a preferential basis made pursuant to the special resolution passed
pursuant to sub-rule (2)(b) shall be completed within a period of 12 months from the date of passing of
the special resolution. If the allotment of securities is not completed within 12 months from the date of
passing of the special resolution, another special resolution shall be passed for the company to complete
such allotment thereafter.
Allotment of Shares
(ix) the price of the shares or other securities to be issued on a preferential basis, either for cash or for consideration other than cash, shall be
determined on the basis of valuation report of a registered valuer and when convertible securities are offered on a preferential basis with an option to
apply for and get equity shares allotted, the price of the resultant shares shall be determined beforehand on the basis of a valuation report of a
registered valuer and also complied with the provisions of Section 62 of the Act.
(x) Where shares or other securities are to be allotted for consideration other than cash, the valuation of such consideration shall be done by a
registered valuer who shall submit a valuation report to the company giving justification for the valuation.
(xi) Where the preferential offer of shares is made for a non-cash consideration, such non-cash consideration shall be treated in the following manner
in the books of account of the company. (xii) Where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be
carried to the balance sheet of the company in accordance with the accounting standards.
Allotment of Shares
(xiii) Where clause (i) is not applicable, it shall be expensed as provided in the accounting standards. (xiv) Once the allotment is made, the company
shall within 30 days of allotment, file with the Registrar a return of allotment in E-Form PAS.3, along with the fee as specified in Companies
(Registration of Offices and Fees) Rules, 2014.
(xv) Issue share certificates within a period of 2 months from the date of allotment.
(xvi) Intimate the details of allotment of shares to the Depository immediately on allotment of such shares
(xvii) In case of listed companies, the conditions/procedures prescribed under Chapter VII of SEBI (ICDR) Regulations are to be complied with.
(xviii) Where the preferential offer of shares or other securities is made by a company whose share or other securities are listed on a recognized stock
exchange, such preferential offer shall be made in accordance with the provisions of the Act and regulations made by the Securities and Exchange
Board of India (SEBI).
Allotment of Shares
(xix) If a company defaults in filing the return of allotment within the period prescribed, the company, its promoters and directors shall be liable to a penalty
for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.
(xx) If a company makes an offer or accepts monies in contravention of the provisions of this Act, the company, its promoters, and directors shall be liable
for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund
all monies with interest to subscribers within a period of thirty days of the order imposing the penalty.
(xxi) Any private placement issue not made in compliance of the provisions of the Act shall be deemed to be a public offer and all the provisions of this Act
and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be applicable.
Allotment of Shares
(xxii) The MCA vide its Notification dated 05th May, 2022 has notified Companies (Prospectus and Allotment of Securities) Amendment
Rules, 2022 to amend the existing Companies (Prospectus and Allotment of Securities) Rules, 2014.
(xxiii) The amendment pertains to insertion of a proviso in Rule 14 (private placement) with regards to not giving an offer or invitation of any
securities under Rule 14 to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body
corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt
Instruments) Rules, 2019 and attached the same with PAS-4 and also insertion of check box in form PAS-4 (Private Placement Offer cum
Application Letter) with regards to whether applicant is required to obtain Government approval under the Foreign Exchange Management
(Non-debt Instruments) Rules, 2019 prior to subscription of shares or not.
(xxiv) If such an approval is required to be obtained, then it is mandatory to enclose the approval letter with form PAS-4.
Q&A