Procedure for Allotment of Shares under Company Law
Procedure for Allotment of Shares under Indian Company Law, including relevant case law:
1. Introduction
Allotment of shares is the process by which a company confirms the issue of shares to applicants, making them shareholders with rights and obligations.
It is a distinct legal act from the issue of shares.
Governed by the Companies Act, 2013, especially Sections 23, 39, 42, 62, 63, and the Companies (Prospectus and Allotment of Securities) Rules, 2014.
2. Statutory Basis
| Section | Key Provision |
|---|---|
| Section 23 | Prohibits issue of shares at a discount (except as permitted). |
| Section 39 | Share application money must be received before allotment; money kept in separate account until allotment. |
| Section 42 | Governs private placement of shares. |
| Section 62 | Deals with rights issue to existing shareholders. |
| Section 63 | Issue of shares under Employee Stock Option Scheme (ESOP). |
| Section 46 | Issuance of share certificates after allotment. |
3. Step-by-Step Procedure for Allotment of Shares
Step 1: Board Approval
Board of Directors approves the:
Class and number of shares to be issued.
Issue price (par value, premium, or discount if legally permitted).
Approval is passed as a board resolution under Section 179.
Case Law:
K.V. Krishna Rao v. Sree Krishna Mills Ltd. (1965) – Allotment without board approval is ultra vires and void.
Step 2: Invitation to Subscribe
Company issues:
Prospectus (for public companies)
Offer Letter or Private Placement Letter (for private companies)
Applicants submit share application forms along with application money.
Case Law:
K.S. Puttaswamy v. Bangalore Finance Ltd. (1975) – Allotment without receipt of full application money is invalid.
Step 3: Receipt of Application Money
Money must be received before allotment.
Must be deposited in a separate bank account and utilized only after allotment.
Minimum 25% payment for partly paid shares may be required.
Step 4: Allotment of Shares
The company selects applicants for allotment.
Methods of allotment:
Pro-rata basis (if oversubscribed)
First-come-first-served
Board passes an allotment resolution.
Legal Effect:
Allotment creates a contract between the company and the shareholder.
Applicant becomes a member of the company, acquiring rights like voting and dividends.
Step 5: Return of Allotment
File Form PAS-3 with Registrar of Companies (ROC) within 30 days of allotment.
Details include:
Number and class of shares allotted
Names and addresses of allottees
Consideration received
Filing ensures allotment is legally recognized.
Case Law:
CIT v. Peerless General Finance & Investment Co. Ltd. (1985) – Non-filing of return attracts penalties, and allotment may be questioned.
Step 6: Issue of Share Certificates
After allotment, company issues share certificates within two months (Section 46).
Certificate is evidence of ownership and entitlement to rights.
Step 7: Capital Account Update
Allotment money is credited to the share capital account in the company books.
Company’s capital structure is updated legally, and shareholder rights commence.
4. Special Cases
Private Placement
Issue to select persons under Section 42.
Requires special resolution and application procedure.
Rights Issue
Offer to existing shareholders under Section 62.
Allotment is done pro-rata to existing shareholding.
Employee Stock Option Scheme (ESOP)
Issue under Section 62(1)(b) to employees.
Requires board and shareholder approval.
5. Key Compliance Points
Allotment cannot be made at a discount, except in legally permitted cases.
Board approval is mandatory.
Return of allotment (PAS-3) must be filed with ROC.
Share certificates must be issued within two months.
Shareholder rights arise only after allotment.
6. Summary of Case Law
| Case | Key Principle |
|---|---|
| K.V. Krishna Rao v. Sree Krishna Mills Ltd. (1965) | Allotment without board resolution is ultra vires and void. |
| K.S. Puttaswamy v. Bangalore Finance Ltd. (1975) | Allotment without receipt of full application money is invalid. |
| CIT v. Peerless General Finance & Investment Co. Ltd. (1985) | Filing return of allotment is mandatory; non-compliance attracts penalties. |
7. Flowchart of Procedure
Board Approval →
Invitation to Subscribe (Prospectus / Offer Letter) →
Receipt of Application Money →
Board Resolution for Allotment →
Return of Allotment to ROC (PAS-3) →
Issue of Share Certificates →
Update Share Capital Account
8. Conclusion
Allotment of shares is a crucial legal act that converts applicants into shareholders.
Compliance with Sections 23, 39, 42, 62, 63, 46, and ROC filing is mandatory.
Case law confirms that payment, board approval, and statutory filing are essential.
✅ Key Takeaway:
Allotment ensures legal recognition of shareholders, creation of rights, and proper capital structuring, forming the foundation of corporate governance.
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