ALLOTMENT OF SHARES A public company limited by shares needs to issue a prospectus to invite the public to invest in its shares

to raise the capital for the commencement of its business. The application form for buying the company's shares is issued with the prospectus. Those who want to buy the company's shares send their applications to the company along with the application money, after which the company starts the process of allotment of shares. Meaning and Definition of Allotment Allotment of shares refers to the activity of a company with respect to alloting its shares to those who have applied to buy the company's shares after the issue of its prospectus. In other words, the issue of the company's shares on the basis of the applications received by it is called the allotment of shares. The Companies Act does not give any definition of allotment. According to Palmer, Allotment means the appropriation to an applicant by a resolution of the directors a certain number of shares in response to an application. Allotment means the appropriation of shares to the persons who have sent their applications for acquiring the company's shares. This act is done by a resolution of the Board of Directors. Allotment of shares is a kind of a contract, and the provisions of the Indian Contracts Act are applicable to it in the same manner as to other contracts. The prospectus issued by the company inviting the public to invest in its shares and debentures is 'an invitation for a proposal', and not 'a proposal as such. When the investor sends his application for the purchase of shares and debentures to the company, it is deemed to be a proposal to the company. The acceptance or non-acceptance depends upon the company's Board of Directors. The company accepts the investor's proposal by alloting him the shares and/or debentures i.e. allotment is the acceptance of the proposal by the company. But what is important is that the acceptance on the part of the company is not complete till the applicant has received the notice of allotment of the shares or debentures. If the notice of allotment is sent to the allotee by post, the acceptance is deemed to be complete when it is posted, even if the allotee has not received the notice sent by the company. In case there is a delay in the allotee receiving such notice, the allotee cannot (during the period of delay) revoke his offer. In this way, as soon as the allotment is made, a contract is established between the applicant and the company, and the applicant becomes the holder of the company's shams or debentures.

Provisions Regarding Allotment Under the provisions of the Companies Act, there is no restriction on allotment in the case of a private company, but a public company needs to fulfill many legal formalities before it can allot its shares. The provisions of law with respect to allotment of shares and debenture can be classified as under: (1) General provisions (under the Indian Contracts Act) (2) Special provisions (under the Companies Act).

(1)General Provisions of Indian Contract Act A valid allotment must be in conformity with the provisions relating to the 'acceptance of a proposal' as laid down in the Indian Contracts Act which implies that the following conditions must be met:

(2) Special Provisions of the Indian Companies Act According to the Companies Act, a public company can allot its shares arid debentures subject to the following restrictions: (a) Minimum Subscription: When a company has invited the public to buy its shares, it cannot make any allotment of shares till such time as it has not received the minimum subscription for its shares i.e. the minimum specified number of shares have been sold. Minimum subscription is the amount stated in the company's prospectus, which must be raised to provide for the following matters: (i) To pay the cost of properties acquired, or to be acquired, by the company. (ii) To meet the initial expenses related to incorporation and paying the commission to the underwriters. (iii) To pay off any loan or loans the company might have taken for the above purposes. (iv) To meet the working expenses of the company, i.e. as the company's working capital. (v) To meet such other essential expenses which have been stated along with their objects in the company's prospectus. Section 69

The conditions relating to the minimum subscription are as under: (i)Only Cash Amount: (ii)Amount Payable on Application: The company must receive at least five per cent of the nominal value of the shares as 'application money'. This is mandatory only for the first allotment of shares. (iii) Depositing Application Money in a Scheduled Bank: The application moneys received by the company must be deposited in a scheduled bank, and must remain deposited (with no withdrawals being made) till the company gets the 'certificate of commencement of business under Section 149. Where such certificate has been obtained, the amounts received as application money shall remain deposited until the total amount payable on application for shares in respect of minimum subscription has

been received by the company. (iv) Returning the Application Money: If the required minimum subscription is not received by the company within 120 days of the issue of its prospectus, the money received from the applicants must be repaid within the next 10 days, i.e. within 130 days after the prospectus is issued without any interest. If the money received is not paid back within 130 days, the directors of the company shall become jointly and severally liable to pay back the money with an interest of 6 per cent per annum after that date. But if the directors can prove that it was not because of any misconduct or negligence on their part, they are absolved of such liability. (vi) No Allotment within Five Days after the Issue of Prospectus: No allotment of any shares or debentures can be made after a prospectus is issued until the fifth day on which the prospectus is issued, or such time later as may be specified in the prospectus, which is called the 'time of opening of the subscription list'. If an allotment is made within these five days, the validity of the allotment is not affected. but the company, and every officer of the company who is in default, can be punishable with a fine which may extend to fifty thousand rupees. -Section 72 (vii) (viii) Permission of Reserve Bank: No company, without the permission of the Reserve Bank of India, can make any allotment of its shares to an alien who is not a citizen of the country. This provision of law applies to both public and private companies.

Irregular Allotment and its Effects In case an allotment is made that contravenes the provisions of Sections 69 and 70 (which require the prospectus to be filed with the Registrar of Companies), such allotment is void. This can happen in the following situations: (1) If a public company invites subscriptions from the public for its shares, and makes allotments of shares without fulfilling the following conditions: (a) It does not receive a minimum of five per cent of the face value of the shares in cash. (b) It does not reach the minimum subscription level, or (c) It does not deposit the moneys received in a scheduled bank.

(2) When a public company makes allotment of shares without issuing a prospectus, or has not delivered the prospectus to the Registrar of Companies at least three days before the allotment of shares.

The effects of an irregular allotment of shares are as under: (a) Voidable Contract: Irregular allotment of shares is a contract which is voidable at the instance of the allotee, but is not always void. The allotee must exercise his right within two months after the holding of the statutory meeting of the company, and not later. In case the company is not required to hold a statutory meeting, or the allotment is made after the holding of the statutory meeting, the allotee must exercise his right within two months after the date of allotment.

(b) Liability of Directors: The allotee, besides having the above right against the company. also has a right against the directors of the company. If any director of a company knowingly contravenes, or wilfully authorises or permits the contravention of the provisions of the Act with respect to allotment, he shall be liable to compensate the company and the allotee for any loss, damages or costs which the company or the allotee may have sustained or incurred thereby. The proceedings to recover any such loss, damages or costs shall not be commenced after the expiration of two years from the date of allotment. Section 71

Return of Allotment When a company with sham capital makes an allotment of its shams, it must deliver a return of allotment to the Registrar of Companies within 30 days after the allotment in which the following must be clarified. (1) The nominal amount of the shares, the number of shares, the name, address and profession of the allotee, and the amount received and receivable on the shares. A new provision has been added in the Companies Amendment Act, 1965, under which a company cannot have a statement in its prospectus specifying the shares that have been alloted for cash, but the cash has not been received by the company. Each defaulting officer of the company in this case is punishable with a fine which might extend upto five thousand rupees. (2) If the allotment of shares has been made for a consideration other than cash, then the name and title of the allotee along with the copy of the contract between the company and the allotee must be delivered to the Registrar of Companies.

(3) In case of bonus shares, the return that is sent to the Registrar must state the number and nominal amount of such shares. According to the Companies Amendment Act, 1960. the return must also contain details of the allotees who have been given bonus shares. (4) In case of any shares being alloted at a discount, the return of allotment must include a copy of the resolution passed by the company and the permission of the Company Law board authorising the discount. If the shares have been alloted at a discount which is more than ten percent, then the copy of the directive of the Central Government must also be filed along with the return. If any default is made in complying with the above provisions, every officer of the company who is in default can be punishable with a fine which may extend to five hundred rupees for every day during which the default continues. Section 75

It must be noted that nothing in this section shall apply to the issue and allotment of shares by a company which, under the provisions of its articles, have been forfeited for nonpayment of calls. Further, there is no need of filing any 'return of allotment' in case of allotment of debentures.

Renunciation of Allotment An allotee can, at any time, renunciate all or some of his shares to another person nominated by him. This is called 'renunciation of allotment'. But renunciation of allotment can only be done by the allotee within a specified period after the company has prepared its register of members and the certificates of allotment of shares. The main object of renunciation of allotment is to make the transfer of shares easier.

Procedure of Renunciation The Indian Companies Act provides that, if an existing public company wants to issue new shares, it must first offer the new shares to its current shareholders. In addition to this, the current shareholders have the right to renunciate the new shares to any other person or party. As such, when the company sends its notice to the shareholders about the issue of new shares, it also sends with it a 'letter of renunciation' and a 'request for allotment'. In other words, if a shareholder does not want to buy the shares himself, he can fill in and sign the letter of

renunciation in favour of the person to whom he wants to transfer the shares. The application for allotment and the allotment letter are also sent along with the application. The receiver fills in the application form and sends it to the company with the allotment letter. On the receipt of these documents, the company issues the share-certificate to the person who deposits the documents, and makes a note that the original shareholder has renunciated his allotment. The main advantage of renunciation is that the shares can be transfered without having to fulfill the complicated procedures required by law.