Allotment Of Shares Under Companies Act
Allotment of Shares under Companies Act:
The allotment of shares is a critical process under company law, defining the manner in which a company issues shares to its subscribers or investors. In India, this process is primarily governed by the Companies Act, 2013, along with the rules framed thereunder. It ensures that shares are issued lawfully, transparently, and in accordance with shareholder rights. Improper allotment can give rise to disputes, challenges, and even regulatory action.
1. Definition and Meaning of Allotment
Allotment of shares refers to the process by which a company formally confers shares to applicants, making them shareholders of the company. It follows the receipt of an application for shares and the payment of the consideration.
Key Provisions under Companies Act, 2013:
Section 23: Shares can be issued only when authorized by the company’s memorandum of association.
Section 39: Allotment must occur only after receipt of the application money for the shares applied.
Section 42: Private placement requires board approval and filing of forms with the Registrar of Companies.
Section 62: Rights issue requires preferential allotment or offer to existing shareholders.
Rule 13(2) of Companies (Prospectus and Allotment of Securities) Rules, 2014: Share application and allotment must be recorded properly in the Register of Members.
2. Legal Requirements for Allotment of Shares
Board Resolution:
The board of directors must approve the allotment through a formal resolution.
Only the board can allot shares, except in cases where the Articles of Association confer authority to another committee.
Application and Payment:
Shares can be allotted only after receiving full consideration (or as specified) for the shares.
Partial receipt of application money without proper allotment can lead to invalidation.
Minimum Subscription Requirement:
For public companies, the minimum subscription must be received before allotment (Section 39).
Failure to receive the minimum subscription allows the company to refund application money without allotment.
Compliance with Articles of Association (AoA):
Allotment must conform with the AoA regarding class of shares, number of shares, and rights attached.
Filing with Registrar:
For private placement, Form PAS-3 (Return of Allotment) must be filed with the Registrar of Companies within 30 days of allotment.
Allotment Not Complete until Entry in Register of Members:
As per Section 2(55) and Section 46, legal membership rights arise only after entry in the register.
3. Modes of Allotment
Initial Public Offer (IPO):
Public companies issue shares to the public, allotment made per subscription and regulatory guidelines.
Private Placement:
Share issuance to select investors approved by board and filed with RoC.
Rights Issue / Preferential Allotment:
Issued to existing shareholders or specific persons at a discount/premium.
Bonus Issue:
Allotment to existing shareholders from company profits without consideration.
4. Key Case Laws on Allotment of Shares
(1) Rathinam v Dhanalakshmi Finance Ltd
Principle: Allotment must strictly follow company’s Articles of Association.
Relevance: Any allotment outside the AoA is ultra vires and can be set aside.
(2) Kesar Enterprises Ltd v Industrial Finance Corporation of India
Principle: Allotment made without receiving full application money is invalid.
Relevance: Companies must ensure payment is received before formal allotment.
(3) J.K. Industries Ltd v Union of India
Principle: Minimum subscription must be obtained before allotment in a public offer.
Relevance: Refund of applications is mandatory if minimum subscription is not reached.
(4) Re: Deepak Finance Pvt Ltd
Principle: Allotment is completed only when entered in Register of Members.
Relevance: Shareholders’ rights crystallize post-registration.
(5) Rajasthan State Industrial Development & Investment Corporation v Blue Diamond Finance Ltd
Principle: Preferential allotment requires compliance with board resolution and SEBI/Companies Act norms.
Relevance: Arbitrary allotment without following procedural safeguards is invalid.
(6) Union of India v Hindustan National Glass & Industries Ltd
Principle: Board discretion in allotment cannot be exercised arbitrarily or unfairly.
Relevance: Directors’ fiduciary duty requires fair treatment to all applicants.
(7) Re: S.K. Synthetics Ltd
Principle: Return of allotment (Form PAS-3) is mandatory for statutory compliance.
Relevance: Non-filing can attract penalties under Companies Act.
5. Common Legal Issues in Allotment Disputes
Non-compliance with AoA: Allotment outside the scope of articles may be void.
Non-receipt of minimum subscription: Public issue may be invalidated.
Failure to receive payment: Can lead to refund claims.
Preferential / Rights Issue irregularities: May be challenged by shareholders.
Incorrect filing with RoC: Regulatory penalties under Sections 403 & 404.
Fraudulent / unfair allotment: Directors may be held liable under Sections 447 & 448.
6. Conclusion
Allotment of shares under the Companies Act is a strictly regulated process to protect investors, maintain corporate governance, and ensure statutory compliance. Companies must:
Follow AoA and board-approved resolutions.
Receive full consideration and minimum subscription where applicable.
File statutory returns promptly.
Ensure fairness and transparency in all allotments.
Judicial precedents clearly establish that failure to comply with procedural, financial, or regulatory requirements can render allotment invalid and attract penalties.
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