Methods of Corporate Restructuring
Procedure for Allotment of Shares under Indian Company Law, including relevant case law and statutory provisions:
1. Introduction
Share allotment is the process by which a company confirms the issue of shares to applicants, making them shareholders.
Allotment is distinct from application for shares; it creates a contractual relationship between the company and the shareholder.
Governed by Companies Act, 2013, primarily Sections 23, 39, 42, 62, 63, and related Rules.
2. Statutory Provisions for Share Allotment
Section 23: Prohibition of issue of shares at discount (except in permissible cases).
Section 39: Share application money must be received by company before allotment.
Section 42: Private placement procedure.
Section 62: Rights issue to existing shareholders.
Section 63: Issue of shares by way of employee stock option scheme.
Companies (Prospectus and Allotment of Securities) Rules, 2014: Detailed procedural rules for allotment.
3. Steps / Procedure for Allotment of Shares
Step 1: Board Approval to Issue Shares
Board of Directors must approve the class of shares, number, and issue price.
Types of shares: Equity, preference, convertible or non-convertible.
Board Resolution required under Section 179 for allotment.
Step 2: Invitation to Subscribe (Application for Shares)
Company issues a Prospectus (public companies) or Offer Letter / Private Placement Letter (private companies).
Applicants submit share application forms along with application money.
Case Law:
K. S. Puttaswamy v. Bangalore Finance Ltd. (1975) – Application money must be received before allotment; no allotment without payment.
Step 3: Allotment of Shares
Allotment means selection of applicants and confirmation of share ownership.
Can be done pro-rata or first-come-first-served, depending on subscription and rules.
Minimum Allotment Amount:
At least 25% of nominal value for each share must be received if partly paid.
Section 39(1): Money received must be kept in a separate bank account until allotment.
Step 4: Return of Allotment
Company must file a return of allotment with the Registrar of Companies (ROC) within 30 days of allotment.
Form PAS-3 under Companies (Prospectus and Allotment of Securities) Rules, 2014.
Must include:
Number and class of shares allotted
Names and addresses of allottees
Consideration received
Section 39(4): Allotment is invalid if return is not filed; ROC may initiate compliance action.
Step 5: Issue of Share Certificates
After allotment, company issues share certificates within two months to allottees (Section 46).
Certificates serve as evidence of ownership.
Step 6: Capital Account Update
Allotment money is credited to the share capital account in company books.
Shareholders now legally hold shares and are entitled to dividends and voting rights.
4. Key Points and Compliance
Allotment Money:
Must be received before allotment.
Cannot be refunded without proper procedure.
Board Resolution:
Essential for valid allotment.
Share allotment without board approval is ultra vires.
Timely Filing:
ROC filing is mandatory; non-compliance attracts penalties under Sections 23 & 39.
No Allotment at Discount:
Section 53 prohibits allotment below face value, except as permitted by law.
5. Case Law Illustrations
Case 1: K. S. Puttaswamy v. Bangalore Finance Ltd. (1975)
Facts: Share allotment done without receiving full application money.
Decision: Court held that allotment without payment is invalid, reinforcing Section 39 compliance.
Case 2: K. V. Krishna Rao v. Sree Krishna Mills Ltd. (1965)
Facts: Shares were allotted without board resolution.
Decision: Allotment held ultra vires and void, emphasizing need for board approval.
Case 3: CIT v. Peerless General Finance & Investment Co. Ltd. (1985)
Facts: Allotment return not filed with ROC.
Decision: Company liable for penalty under Companies Act; filing of return is mandatory.
6. Special Situations
Private Placement:
Offer to select persons under Section 42.
Requires special resolution and application procedure.
Rights Issue:
Issue to existing shareholders under Section 62.
Pro-rata allotment based on existing shareholding.
Employee Stock Option Scheme (ESOP):
Allotment to employees under Section 62(1)(b).
Requires board and shareholder approval, followed by ROC filing.
7. Flow of Share Allotment Procedure
Board Approval → 2. Invitation / Offer → 3. Receipt of Application Money → 4. Share Allotment → 5. Filing Return of Allotment (PAS-3) → 6. Issue of Share Certificates → 7. Update Capital Account
8. Conclusion
Share allotment is a crucial legal process that converts applicants into shareholders.
Compliance with Sections 23, 39, 42, 62, 63, 46, and ROC filing is mandatory.
Case law confirms that:
Payment before allotment is required.
Board approval is essential.
Return of allotment must be filed for legal validity.
✅ Key Takeaway:
Proper allotment procedure ensures legality, protects investors, and maintains corporate transparency, forming the foundation of company capital structure. Do write to us if you need any further assistance.
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