Allotment of Shares

Introduction

Offers for shares are made on application forms supplied by the company. When an application is accepted, it is an allotment. A valid allotment has to comply with the requirements of the Act and principles of the law of contract relating to acceptance of offers.

Statutory restrictions on Allotment

1. Minimum subscription and application money [s.39]

When Shares are offered to the public, the amount of minimum subscription has to be stated in the prospectus. No shares can be allotted unless at least so much amount has been subscribed and the application money (which must not be less than five per cent, SEBI may prescribe a different percentage) has been received by cheque or other instruments.

An application for shares, if not accompanied by any such payment, does not constitute a valid offer. If the minimum subscription has not been received within 30 days of the issue of the prospectus, or such other period as may be prescribed by SEBI, the amount received is to be returned within such time and manner as may be prescribed. [S. 39 (3)]

2. Shares to be dealt in on stock exchange [S. 40]

Every company intending to offer shares or debentures to the public by the issue of a prospectus has to make an application before the issue to any one or more of the recognized stock exchange for permission for the shares or debentures to be dealt with at the exchange. This is known as listing.

The name or names of the stock exchange to which the application has been made must also be stated in the prospectus. Where an appeal has been preferred under Section 22, Securities Contracts (Regulation) Act, 1956 against the refusal of a stock exchange, the allotment does not become void until the dismissal of the appeal.

The over-subscribed portion of the money received must be sent back to the applicants within the same specified period.

General principles as to allotment

1. Allotment by proper authority

In the first place, an allotment must be made by a resolution of the Board of Directors. “Allotment is a duty primarily falling upon the directors”, and this duty cannot be delegated except in accordance with the provisions of the articles.

2. Within a reasonable time

Allotment must be made within a reasonable period of time, otherwise the application lapses. What is a reasonable time depends upon the facts of the case. On the expiry of reasonable time Section 6, Contract Act applies and the application must be deemed to have been revoked.

3. Must be communicated

The allotment must be communicated to the applicant. Posting a properly addressed and stamped letter of allotment is sufficient communication even if the letter is delayed or lost in the course of the post. [SP Gaekwad v. Shantadevi Gaekwad, (2005) 11 SCC 314]

4. Absolute and unconditional

Allotment must be absolute and in accordance with the terms and conditions of the application, if any.

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