Allotment of Securities and Its Principles

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This article discusses the concept of allotment of securities and its principles. In this, the author will explain in detail the allotment of securities and the general principles related to it, with the help of some case laws.

INTRODUCTION

According to Section 2(h) of the Securities Contracts (Regulation) Act, 1956, securities include the following: Shares, stocks, bonds, debentures, debenture stocks, etc. in or of any incorporated company. According to Section 23(1) of the Company Act 2013, a public company may give securities-

(a) To public through prospectus by consenting with the provisions of this Part; or

(b) Through private placement by following the provisions of Part II of this Section; or

(c) Through a rights issue or a reward issue as per the provisions of this Act and in the event of a listed company or a company which expects to get its securities listed likewise with the provisions of the Securities and Exchange Board of India Act, 1992 and the principles and guidelines made thereunder.

According to Section 23(2) of the Companies Act 2013, a privately owned company may give securities-

(a) By method of rights issue or reward issue as per the provisions of this Act; or then again

(b) Through private placement by following the provisions of Part II of this part.

There are explicit laws that should be followed for issuing the shares of a company. Be that as it may, it confines Private Limited Companies. Private Limited Companies can’t give any prospectus welcoming the overall population to buy in towards its share capital. Be that as it may, public companies can issue the shares of their companies to general society, which is to be continued as per the Companies Act provisions.

ALLOTMENT

A valid allotment must comply with the requirements of the Company Act and the basic principles of the law of contract about acceptance of an offer. Once an applicant submits the form issued by Company and is accepted, the communication of acceptance is nothing but allotment. It was held in the case of Spitzel Vs Chinese Corp. Ltd that allotment is nothing but an appropriation by the director of a Company of shares to a particular person. Also, in the case of Sri Gopal Jalan & Co. Vs Calcutta Stock Exchange Assn Ltd, it was held wherein Justice Sarkar observed that “allotment is an appropriation out of the previously inappropriate capital of a Company.

STATUTORY RESTRICTIONS ON ALLOTMENT

This concept is explained under section 39 of the Companies Act 2013. The restrictions are:

  1. Subscription & Application Money:
  2. For a valid allotment, there should be a minimum subscription. When shares are offered to the public, the amount of minimum subscription has to be stated in the prospectus.
  3. No shares can be allotted unless the amount has been subscribed and the application money not less than five percent has been received in cheque or other instruments. SEBI may prescribe a different percentage of the nominal share.
  4. For a valid Allotment, the whole of application money should have been paid to and received by the Company. It was observed in the case of Ramlalsao Gupta Vs MER Malak that an application for shares, if not accompanied by any such payment, does not constitute a valid offer.
  5. The objective of this provision is to prevent the company from getting underway unless and until it has raised the capital required to carry out the objects in which it has invited the public to participate.
  6. If the minimum subscription is not received within 30 days of the issue of prospectus or such other period as may be prescribed by the SEBI, the amount so received is returned as specified by SEBI within time and manner as per Section 39(3) of companies Act 2013.
  • Application money can be appropriated either towards allotment or it has to be refunded. It was held in the case of Pande vs Bais Surgical & Medical Institute (P) Ltd that the application money cannot be justified towards any claim of the Company against the applicant.
  1. Return of Allotment: When a company having a share capital, makes any allotment of securities, it has to file a return of allotment with the registrar as mentioned in Sec 39(4).
  1. Penalty for default Sec 39(5): In case of default, the Company and its officer who is in default is liable to a penalty for each default of Rs 1000 for each day during which the default continues or Rs 1,00,000 whichever is less.

GENERAL PRINCIPLES

The general principles of allotment are explained as follows:

  1. Allotment by proper authority: Allotment must be made by a resolution of the board. It is the duty of directors and it cannot be delegated except by following the AOA. It was observed in the case of Bank of Peshawar Vs Madho Ram that the allotment of shares by the general manager of the company which was improper delegation by the directors was held void. However, it was observed in another case of Pasurala Sanyai Vs Guntur Cotton & Jute & Paper Mills Co that if the AOA so provides, an allotment by CS & treasurers was held to be regular, being a proper delegation.
  1. Within Reasonable Time: If the allotment is not made within a reasonable time, the application shall lapse. Therefore, a question arises whether the reasonable time is based on the facts and circumstances of each case. A period of six months between application and allotment has not been held as a reasonable time. Therefore, what happens after the expiry of time; Section 6 of the Indian Contract Act applies and the application must be deemed to have been revoked as held in the case of Indian Coop Navigation & trading Co Ltd Vs Padamsey Premji.
  1. The Allotment must be communicated: The Allotment must be communicated to the applicant. Posting of a letter, properly addressed and stamped is a sufficient communication, even if the letter is delayed or lost in the course of the post.    
  1. Absolute and Unconditional: Allotment must be absolute and      follow      the terms and conditions of the application, if any. In the case of Ramanbhai Vs Ghasiram, a person applied for 400 shares on the condition that he would be appointed cashier of a new branch of a company, the Bombay HC held that he was not bound by any allotment unless he was so appointed.

CONCLUSION

Allotment of Securities refers to the issue of new shares by a company to the first or existing investors. The general population for the most part gets befuddled between the issue of shares and Allotment of shares. Issuance of shares is the contribution of shares to the investors while Allotment of shares is the technique for circulation of shares in the company. Allotment or acknowledgment choice is taken by the company itself. So, Allotment of shares is the most fundamental system in the company, which is primarily utilised for growing the Business by offering shares to the general population.

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