Allotment of Shares under company law .pptx

Company law

1. ALLOTMENT of SHARES Dr. Damodar M. Hake

2. Allotment of Shares The Expression an Allotment is not defined under the Companies Act Offers for shares are made on the application form supplied by the Company. When the application is accepted, it is an allotment. It means and implies a division of the share capital into defined shares of a particular value or of different classes and assignment of such shares to different persons (Re. Calcutta Stock Exchange Association Ltd. [1957] 27 Comp. Cas. 559). Meaning of the Allotment of Shares ‘appropriation out of the previously unappropriated capital of the company of a certain number of shares to a person ( Sri Gopal Jalan and Co v. Calcutta Stock Exchange Association Ltd AIR 1964 SC 250)

3. ( CIT v. VSSV Meenakshi, (1984) 55 Comp Cas 545) Where forfeited shares are re-issued, it is not the same thing of an Allotment . Since the re-issue of forfeited shares does not constitute appropriation out of unappropriated capital, it does not constitute allotment. Florence Land &Public Works Ltd. Re (1885)29 LR Ch 421) What is termed ‘Allotment’ is generally neither more nor less than acceptance by the company of the offer to take shares.

4. General Principles as to Allotment : a) Allotment by Proper Authority: The allotment should be made by proper authority, i.e., the Board of Directors of the company or a committee authorized to allot shares on behalf of the Board. An allotment made without proper authority will be invalid. In P.V. Damodara Reddy v. Indian National Agencies Ltd. [1945] 15 Comp. Cas. 148 (Mad.), R&N applied to the company for allotment of shares. Their applications were considered by the Board and accepted and their names entered in the register. The Articles of the Company however provided that the shares could not be allotted to outsiders without the consent of the company in general meeting. Eight months later, on the objection of the Auditor, the allotment was cancelled and the names of R&N removed from the register. The contention of the company was that acceptance of the applicants’ offers by the directors alone was entirely inoperative and accordingly there were no allotments and that the applicants must be deemed to have contracted on the footing of the Articles of Association .

5. followed the case of Royal British Bank v. Turquand )- the applicants were entitled to assume that the directors were acting regularly. b) Allotment should made only against the application: No valid allotment can be made on oral request for shares. [S/2(55)]provides that to become a member a person must agree in writing. Thus, no allotment can be made without a written application [H.H. Manabendra Shah v. Official Liquidator [1977] 47 Comp. Cas. 356. In practice, the application is to be made on the form supplied by the company in this regard. [Rahul Subodh Windoors Ltd. v. A.K. Menon [1999] 96 Comp. Cas.597 (SC)]. Where there was no application in writing for allotment of shares and allotment was made in blank, the company was rightly directed by the Special Court to return money paid for shares.

6. c) Allotment not to be in contravention of any other law: - (Re Trans Atlantic Life Assurance Co. Ltd {1979} 3 All ER 352) allotment made in violation of FERA would be invalid and Void Unit Trust of India V. Om Prakash Berlia {1983}53 Comp Cas 723 Bom. Allotment made for any improper motive is bad and can be struck down d) Allotment must be made within a reasonable time: Allotment must be made within a reasonable period of time otherwise the application lapses What amounts to reasonable time is a matter of fact and varies from case to case In Ramsgate Victioria Hotel V. Montefiore (1866) LRIEx 109) Six months delay in an allotment was considered as Unreasonable. Where there is an unreasonable delay in allotment of shares by the Company and besides this shares are accepted by the applicant and not repudiated, he cannot plead that his offer has lapsed.

7. e) Must be Communicated: ( Universal Banking Corporation, In re (1867) LR 3 CH APP 40 (CA) The allotment must be communicated to the applicant ( Changa Mal v. Provincial Bank, 1914, 36 ILR 412) Unless and until allotment is communicated to the person he cannot be treated as a Shareholder f) The allotment must be absolute and unconditional: The allotment must be absolute and unconditional, i.e., must be made on the same terms as stated in the application. Thus, where a person applied for 500 shares, he is not bound to accept an allotment of, say, 100 shares. Ramanbhai v. Ghasi Ram [1918] Bom. LR 595. Where an applicant applied for shares in a company on the condition that he should be appointed a branch manager of the company; shares were allotted to him but he was not appointed the branch manager. Held, he was not bound by the allotment

8. Statutory provisions relating to allotment Registration of prospectus - Sec 26(4) No prospectus shall be issued by or on behalf of a company or in relation to an intended company unless on or before the date of its publication , there has been delivered to the Registrar for registration , a copy thereof signed by every person who is named therein as a director or proposed director of the company or by his duly authorized attorney .

9. Cont. b) Application money Sec.39(2): amount payable on securities shall not be less than 5% of the nominal amount of the security or such other percent or amount as may be specified by SEBI by making regulations in this behalf. As per SEBI Reregulation 2009 Application money must not be less than 25% of the nominal amount of the Share. Money received as application money to be kept in separate bank account Gujrat High Court in Rich Paints Ltd. V. Vadodara Stock Exchange(1998)15SCL128/28 Comp. Cas. Held Irrespective of the fact of physical delivery money unless the money deposited in separate bank account with the Scheduled Bank(s) which are bankers to the issue , it will not be considered as actual paid to and received by company.

10. Cont. c) Minimum Subscription [Sec. 39 (1 & 3)] No allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company by cheque or other instrument. As per SEBI Guidelines it must receive at least 90% of   Minimum Subscription  before making allotment  If 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 Securities and Exchange Board , the amount received under sub-section ( 1 ) that is (Application Money) shall be returned within such time and manner as may be prescribed.

11. Cont. - Return of minimum subscription amount : Rule 11 of Companies (Prospectus and Allotment of Securities) Rules, 2014; -If the stated minimum amount has not been subscribed and the sum payable on application is not received within the period specified therein , then the application money shall be repaid within a period of fifteen days from the closure of the issue and if any such money is not so repaid within such period, the directors of the company and its officers in default, shall jointly and severally be liable to repay that money with interest at the rate of fifteen percent per annum . -The application money to be refunded shall be credited only to the bank account from which the subscription was remitted.

12. Cont. - Penalty for Failure to Repay the Amount[Sec. 39(5)] In case of Company’s failure to return amount, 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.

13. Cont. d) Returns as to Allotment : [Sec. 39(4)] 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

14. Cont. e) opening date of the subscription list: No allotment shall be made where a prospectus is issued until the beginning of the 5 th day after the date on which the prospectus is so issued or such latter date as specified in the prospectus .

15. Cont. f) Closing date of the Subscription list: Though Companies Act is silent on the matter , SEBI Regulation of 2009 states that the subscription list for the for the Public issue : must be kept open for at least for 3 working days and for not more than 10 working days period is inclusive of price revised if any. - Right Issue: Issue Shall remain open for minimum period of 15 days and not more than 30 days.

16. Cont. g) Permission to deal in a stock Exchanges( Sec. 40)- -Every company making public offer shall, before making such offer, make an application to one or more recognized stock exchange or exchanges and obtain permission for the securities to be dealt with in such stock exchange or exchanges .

17. Cont. - Where a prospectus states that an application has been made , such prospectus shall also state the name or names of the stock exchange in which the securities shall be dealt with. -Money received on application should be kept in separate account till the permission from stock exchanges are received

18. Cont. - Punishment for Default to comply with Sec. 40: 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 for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees , or with both.

19. Cont. In Rishyashringa Jewellary Ltd v Stock Exchange 1995 6 SCL (SC) 227 , SC held that unless permission is granted by each or everyone of the stock exchange named in the prospectus for listing of shares to which application is made by the company the consequence is to render the entire allotment void . However where appeal is preferred, the allotment is not void till the appeal has been disposed off.

20. Cont. The object of the Sec. has been explained by Supreme Court in Union of India v. Allied International Products Ltd.(1970)3 SCC 594 “The Principal object of this provision is to enable shareholder to find a ready market for their shares so that they can convert their investment into cash whenever they like” Court further stated that permission by one of several stock exchanges applied is sufficient to validate the allotment.

21. Cont. h) Restriction on over-subscription and retention by issuer: -As per SEBI Regulation, 2009 ,no allotment shall be made by issuer in excess of the specified securities offered through the offer document . -Further SEBI guidelines disallow retention of over- subscription under any circumstances. They have to be repaid forthwith without interest.

22. Cont. The money has to be repaid within 8 days from the date the company becomes liable to pay, the company and every officer of the company is liable for punishment ( fine upto Rs 50,000 and repayment delayed beyond 6 months , then imprisonment of a term up to one year