Allotment is the appropriation by the Board of Directors of a certain number of shares to an applicant in response to their application. It is the acceptance by the company of the applicant's offer to take shares. Until allotment, no person becomes a shareholder.
Legal Framework
| Provision | Content | Effect |
|---|---|---|
| S.39 | Minimum subscription must be received before allotment (public company) | Investor protection |
| S.39(3) | If not received within 30 days, refund within 15 days | Refund obligation |
| S.40 | Public offer through prospectus only; listing mandatory | Public offer rules |
| S.42 | Private placement: max 200 identified persons per FY; no advertisement | Private route |
| S.52 | Securities premium credited to Securities Premium Account; restricted use | Premium regulation |
| S.53 | Prohibition on issue at discount (except sweat equity S.54) | No discount to par |
Why: Allotment rules protect public investors from promoters collecting money without genuine business plans. Minimum subscription ensures sufficient capital to commence. Prohibition on discount protects existing shareholders from dilution below face value.
Conditions for Valid Allotment
| Condition | Statutory Basis | Consequence of Breach |
|---|---|---|
| Application on prescribed form | S.39(1) | Allotment void |
| Minimum subscription received | S.39(1) | Cannot allot; refund within 15 days |
| Application money (min 5% of nominal value) | S.39(2) | Allotment voidable |
| Listed on stock exchange | S.40(1) | Allotment void; refund |
| Filed with ROC (return within 30 days) | S.39(4) | Penalty |
| Private placement: offer to identified persons | S.42 | Deemed public offer |
Minimum Subscription (S.39)
| Rule | Detail |
|---|---|
| Amount | 90% of the offer (SEBI ICDR); or as stated in prospectus |
| Time limit | Within 30 days of issue of prospectus |
| Failure | Refund all money within 15 days; else interest at 15% p.a. |
| Liability | Directors jointly and severally liable for repayment with interest |
Issue at Premium and Discount
Premium (S.52)
| Rule | Detail |
|---|---|
| Permitted | Company can issue at any premium market bears |
| Securities Premium Account | Premium credited here |
| Permitted uses | Bonus shares, write off preliminary expenses, write off commission, provide premium on redemption, buy-back |
| Cannot be used for | Dividends; general expenses |
Discount (S.53)
| Rule | Detail |
|---|---|
| Prohibition | No issue at discount to face value |
| Exception | Sweat equity shares under S.54 |
| Penalty | Fine Rs.1 lakh to Rs.5 lakh |
Public Offer vs Private Placement
| Parameter | Public Offer (S.40) | Private Placement (S.42) |
|---|---|---|
| Offer to | General public through prospectus | Identified persons (max 200/FY) |
| Document | Prospectus | Offer letter (Form PAS-4) |
| Listing | Mandatory | Not required |
| Advertisement | Permitted | Prohibited |
| Minimum subscription | Applies | Does not apply |
| Allotment within | Per prospectus timeline | 60 days of receipt of application money |
| Non-compliance | Void; refund with interest | Deemed public offer |
Illustrations
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Minimum subscription failure: "EcoPower Ltd" offers 10 lakh shares at Rs.100 each (total Rs.10 crore). Minimum subscription: Rs.9 crore (90%). After 30 days, only Rs.7 crore received. Company CANNOT allot any shares. Must refund Rs.7 crore within 15 days. If delayed, directors personally liable to pay 15% interest.
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Issue at premium: Infosys issues shares at Rs.1,500 per share (face value Rs.5). Premium = Rs.1,495 per share goes to Securities Premium Account. Can use this for bonus shares but CANNOT use for dividends or daily operations.
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Issue at discount (prohibited): A startup wants to issue Rs.10 face value shares at Rs.7 to attract early investors. Illegal under S.53. Must issue at minimum Rs.10. Only way: issue at par with expectation of appreciation, or sweat equity under S.54 for IP/services.
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Private placement limits: ABC Pvt Ltd raises Rs.5 crore from 10 HNI investors via offer letters under S.42. Cannot advertise. If it offers to 250 persons (exceeding 200 limit), the offer is deemed a public offer with full prospectus and listing requirements.
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Return of allotment: After allotting 5 lakh shares, XYZ Ltd must file Form PAS-3 with ROC within 30 days. Failure: penalty of Rs.1,000/day of default on company and officers.
Recall Check
- What happens if minimum subscription is not received within 30 days?
- Can a company issue shares at a discount under the 2013 Act? What is the exception?
- What are the permitted uses of the Securities Premium Account?
Key Cases
Ooregum Gold Mining Co. v. Roper (1892) Ooregum-Gold-Mining-v-Roper-1892
- Issue: Whether shares can be issued at a discount to face value.
- Rule: Shares cannot be issued at discount; nominal value is the minimum price.
- Held: Issue at discount void. Now codified as S.53.
Hiranand v. Raoji (1946) Hiranand-v-Raoji-1946
- Issue: When does allotment become complete and binding?
- Rule: Allotment is acceptance; complete only when communicated to applicant.
- Held: Mere Board resolution without communication insufficient. Allotment effective only on intimation to applicant.