Procedure for Allotment of Shares under Company Law

The allotment of shares is a critical process under company law, shaping the capital structure and establishing the contractual relationship between a company and its shareholders. Governed primarily by the Companies Act, 2013, this process is fundamental to corporate governance, ensuring compliance with statutory provisions and protecting the interests of both the company and its stakeholders. In this detailed guide, we will discuss the procedural steps, legal framework, and key considerations for share allotment.

What is Meant by Allotment of Shares

Allotment of shares refers to the process by which a company formally allocates its shares to applicants, creating a legally binding relationship between the company and its shareholders. It is the final stage of the share issuance process, where the company accepts an application for shares and issues share certificates to the allottees. This process determines the ownership structure and is crucial for raising capital and expanding the business. 

Governed by the Companies Act, 2013, allotment requires compliance with statutory provisions, board approvals, and adherence to principles of fairness and transparency. Proper documentation, including board resolutions and allotment letters, is essential. Once allotted, the shareholders gain rights and responsibilities as members of the company.

Importance of Share Allotment

1. Capital Structuring: Share allotment determines the ownership and investment structure of the company.
2. Corporate Governance: Ensures transparency, fairness, and compliance with statutory provisions.
3. Stakeholder Relationships: Establishes clear rights and obligations for shareholders.

Law Governing Share Allotment

The allotment of shares in India is governed by the Companies Act, 2013, associated rules, and SEBI regulations for public companies. These laws ensure a structured and transparent process while protecting shareholder interests.

Key Legal Provisions

1. Section 39(4): Stipulates the minimum subscription requirement for public offers.
2. Section 42: Governs private placements, emphasising pre-determined investors and compliance.
3. Section 62: Regulates rights issues, granting existing shareholders a preferential right to subscribe.
4. Section 71: Covers allotment against consideration other than cash, requiring valuation reports for transparency.

Statutory Restrictions

• Minimum Subscription: Public offers cannot proceed unless the minimum subscription is met.
• Board Resolutions: Every allotment must be authorised by a valid board resolution.
• Timely Communication: Applicants must be informed promptly about the allotment or rejection of shares.

What is the Procedure for Allotment of Shares?

The procedure for share allotment involves meticulous planning, compliance, and record-keeping. Below is a step-by-step guide:

1. Details of Shareholders and Shareholdings

Existing Structure

The first step involves assessing the company’s current shareholding structure. This includes analysing:

• Authorised Share Capital: The maximum number of shares the company is allowed to issue.
• Issued Share Capital: The number of shares already offered to investors.
• Subscribed Share Capital: The portion of issued shares taken up by shareholders.

New Allotment Requirements

The company must determine the purpose of issuing new shares, such as raising share capital, expanding ownership, or rewarding employees. Based on this, the number of shares to be issued is decided.

Information Collection

For new shareholders, the company must gather and verify essential details:

• Full name and date of birth
• Nationality and residential address
• Identification documents (e.g., passport, Aadhar card)
• Relationship with existing shareholders, if any

This ensures transparency and compliance with regulatory requirements.

2. Appointment of the Allotment Committee

An allotment committee is formed to oversee and streamline the process.

Role of the Committee

The committee is tasked with:

• Evaluating the need for share allotment
• Recommending the number and method of allotment
• Submitting a detailed report to the Board of Directors for approval

Members

The allotment committee typically includes:

• Board members
• The company secretary
• Legal and financial advisors, as needed

This ensures that the process is fair, legally sound, and aligned with the company’s goals.

3. Conduct of Board Meeting

A board meeting is convened to discuss and finalise the share allotment.

Purpose

The board reviews:

• The proposed shareholding structure after the allotment
• The method of allotment (e.g., private placement, rights issue)
• The issue price of shares
• The details of applicants and the allotment list

Confidentiality

To maintain transparency and prevent misuse of sensitive information, the proceedings of the board meeting must remain confidential.

Documentation

Accurate documentation is critical. The following records are maintained:

• Minutes of the Meeting: Detailed records of discussions and decisions
• Allotment List: A comprehensive list of allottees, signed by the chairman and secretary

This ensures accountability and serves as evidence of compliance.

4. Passing a Resolution for Allotment

A formal resolution is passed during the board meeting to authorise the share allotment.

Board Resolution

The resolution empowers the company secretary to:

• Issue letters of allotment to successful applicants
• Collect the allotment money from shareholders

This step ensures that the allotment is legally binding and enforceable.

5. Collection of Allotment Money

The next step involves collecting the funds from shareholders as per the terms of allotment.

Allotment Letters

Letters of allotment are issued to successful applicants, specifying:

• The number of shares allotted
• The amount payable and due date
• Payment instructions

Bank Arrangements

The company coordinates with its bank to facilitate the smooth collection of allotment money. The funds must be received within the stipulated timeline to avoid complications.

Compliance

Ensuring timely collection is critical to prevent penalties and maintain the company’s financial health.

6. Issuance of Share Certificates

Once the allotment money is collected, the company proceeds with issuing share certificates.

Timeline

According to the Companies Act, share certificates must be issued within two months of the allotment date.

Cancellation of Old Certificates

If the allotment involves changes to previously issued shares, the old certificates are canceled, and new ones are issued.

Register of Members

The company’s register of members is updated to reflect the new ownership structure. This document serves as a legal record of all shareholders.

7. Filing Returns with the Registrar of Companies (RoC)

The final step is to ensure compliance by filing the necessary documents with the Registrar of Companies.

Forms

For private placements or preferential allotments, Form PAS-3 must be filed, detailing:

• The number of shares allotted
• The names and details of allottees
• Resolutions passed during the board meeting

Deadline

The filing must be completed within 30 days of the allotment to avoid penalties. Timely submission ensures compliance and transparency.

Methods of Share Allotment

The Companies Act, 2013, allows for several methods of share allotment, each with its own procedures and requirements:

Public Offers (IPOs and FPOs)

Initial Public Offering (IPO)

An IPO is the first sale of a company’s shares to the public, marking its transition from a private to a public entity. It is primarily used to raise substantial capital and expand business operations.

Follow-on Public Offering (FPO)

An FPO involves issuing additional shares to the public after the company has already been listed on a stock exchange. It helps raise further capital while expanding the shareholder base.

Compliance Requirements

Public offers are strictly regulated by the Securities and Exchange Board of India (SEBI) and must adhere to the following:

• Filing a Prospectus: A legally mandated document detailing the company’s financials, risks, and objectives of the share issuance.
• Minimum Subscription: Ensuring a minimum percentage of shares are subscribed before proceeding with the allotment.
• Handling Over-Subscription: If demand exceeds the number of shares offered, allotment is conducted through pro-rata or lottery systems, ensuring fairness.

Private Placements

A private placement involves offering shares to a pre-selected group of investors, such as institutional buyers, rather than the general public. It is a targeted method often used for raising capital quickly and efficiently.

Procedure

• Private Placement Letter: Instead of a prospectus, the company issues a private placement letter to identified investors.
• Special Resolution: Approval from shareholders is obtained through a special resolution passed at the general meeting.
• Compliance: Section 42 of the Companies Act, 2013, mandates adherence to specific guidelines, including caps on the number of investors and filing returns with the Registrar of Companies (RoC).

Advantages

Private placements are faster, less expensive, and more flexible compared to public offers.

Preferential Allotments

Preferential allotments are typically used to issue shares to strategic investors, such as venture capitalists or business partners, at a negotiated price. This method is employed for quick capital infusion or to maintain strategic control.

Requirements

• Board and Shareholder Approval: The allotment must be authorised through resolutions at board and shareholder meetings.
• Valuation Report: A valuation report is required to determine the fair issue price of the shares, ensuring transparency and regulatory compliance.

Benefits

• Allows companies to raise funds without diluting control significantly.
• Attracts investors who bring strategic value to the business.

Rights Issues

In a rights issue, shares are offered to existing shareholders in proportion to their current holdings. This method ensures that existing shareholders maintain their percentage of ownership in the company.

Key Features

• Discounted Price: Rights shares are often issued at a price lower than the market value, making them attractive to shareholders.
• Renunciation Clause: Shareholders who do not wish to subscribe can renounce their rights in favor of another investor.

Advantages

• Provides an opportunity for existing shareholders to increase their stake in the company.
• A cost-effective method for raising capital, as it avoids underwriting and marketing expenses associated with public offers.

Bonus Issues

A bonus issue involves distributing additional shares to existing shareholders at no cost, drawn from the company’s free reserves. It is often viewed as a reward to shareholders for their trust and investment.

Advantages

• Liquidity Enhancement: Bonus shares increase the number of shares in circulation, improving market liquidity.
• Market Sentiment: This method boosts investor confidence and can positively influence the company’s stock price.
• No Capital Infusion: Since bonus shares are issued from reserves, the company does not require new capital.

Limitations

• Does not raise new funds for the company.
• May dilute earnings per share (EPS), as the total number of shares increases.

Employee Stock Option Plans (ESOPs)

ESOPs are designed to incentivise employees by offering them the option to purchase shares at a predetermined price, often lower than the market value. This aligns employee interests with the company’s growth and performance.

ESOPs are governed by specific provisions under the Companies Act and SEBI regulations. The key requirements include:

• Approval through a special resolution at the general meeting.
• Maintaining detailed records of options granted, exercised, and outstanding.

Advantages

• Encourages employee loyalty and motivation.
• Helps attract and retain top talent.
• Aligns employees’ financial interests with the company’s success.

Challenges

• May lead to dilution of ownership for existing shareholders.
• Requires careful valuation and monitoring to avoid misuse.

Key Considerations and Best Practices for Allotment of Shares

Ensure Proper Authority and Approvals

The allotment of shares must be authorised by the Board of Directors and, where necessary, approved by the shareholders through a special resolution. The Articles of Association (AoA) of the company should explicitly grant the board the power to allot shares. Proper authority ensures that the process adheres to legal provisions and minimises the risk of disputes or regulatory challenges. Additionally, resolutions must be documented accurately, reflecting all decisions taken during board meetings.

Maintain Transparency and Fairness

Transparency is critical in ensuring shareholder trust and avoiding conflicts. Allotment terms, such as the issue price and the method of distribution, should be clearly communicated to applicants. Independent directors play a crucial role in overseeing preferential allotments or private placements, ensuring impartiality and preventing conflicts of interest. Adhering to valuation norms and disclosing relevant details further reinforces fairness in the process.

Adhere to Statutory Requirements and Deadlines

Timely compliance with the provisions of the Companies Act, 2013, and other applicable regulations is essential. Share certificates must be issued within two months of allotment, and necessary filings, such as Form PAS-3, should be submitted to the Registrar of Companies (RoC) within 30 days. Missing statutory deadlines can result in penalties and reputational damage, emphasising the importance of maintaining a compliance calendar.

Focus on Accurate Record-Keeping

Meticulous record-keeping is vital for demonstrating compliance and safeguarding against legal challenges. Allotment-related documents, such as board resolutions, allotment letters, shareholder registers, and payment records, should be maintained diligently. These records not only support transparency but also serve as critical evidence during audits, inspections, or legal proceedings, ensuring that the allotment process remains defensible and compliant.

Difference Between Issue and Allotment

Understanding the difference between issuing and allotting shares is crucial:

1. Issue of Shares:
   • Represents an offer to potential investors.
   • Can be withdrawn before acceptance.
2. Allotment of Shares:
   • Formal acceptance of the offer, creating a binding contract.
   • Includes issuing share certificates and updating the register of members.

Conclusion

The procedure for allotment of shares is a cornerstone of corporate governance, requiring meticulous compliance with statutory provisions and regulatory guidelines. Whether issuing shares through public offers, private placements, or other methods, companies must prioritise transparency, fairness, and timely communication. By adhering to the principles outlined in the Companies Act, 2013, and leveraging best practices, businesses can effectively manage their share allotment processes, fostering trust and stability among shareholders and stakeholders alike.