Statutory provisions for allotment of shares

Allotment of shares means the company allots shares to the general public. It is the distribution of shares among the applicants.Statutory provisions of
Allotment of shares means the company allots shares to the general public. It is the distribution of shares among the applicants.Statutory provisions of
Statutory Provision for Allotment of Shares

Allotment of shares means the company allots shares to the general public. It is the distribution of shares among the applicants. Statutory provisions of allotment of shares has been enumerated under section 39 and 40 of Company Act 2013. Which are as follows:

  1. Registration of prospectus

The company has to file a copy of the prospectus with the registrar of the company (ROC) while raising its capital by issuing the shares to the general public.

2. Minimum subscription (Section 39)

Minimum subscription is the minimum amount raised by the company for obtaining a trading certificate and to start the work of allotment of shares. This amount is mentioned in prospectus. It must be collected within 30 days from the issued capital. SEBI has stated that minimum subscription should be 90% of the issue Usually, when a company does not collect minimum subscription, it means its issue has been undersubscribed – which means the number of shares applied for is less than the shares offered by the company. If a minimum subscription is not collected within specified time, the entire amount received as application money should be returned to the subscribers within 15 days of closer of the issue. To avoid such situation, the company may enter into an underwriting agreement with the underwriters.

If the minimum subscription has not been received within 30 days of the issue of the prospectus, or such other period as may be specified by SEBI, the amount received is to be returned within such time and manner as may be prescribed. [S. 39(3)].

3. Application money

The part of the face value of shares which are collected by the company along with share application, is known as Application Money, which should not be less than 5% of the face value of the shares.

SEBI has specified (for public companies) the application money should not be less than 5% of the nominal amount of shares

4. Depositing the application money

As per the condition, the company has to deposit the money into separate account known as share application money account, opened in a scheduled bank by the company. The company is not allowed to withdraw this money from the bank.

5. Over subscription

In the case of over subscription, the company has to refund the excess application money to the applicant. If it is failed to do so in the prescribed time then every officer of the company would be punishable. SEBI does not allow any allotment in excess of securities offered through offer document or prospectus. However, it may permit to allot not more than 10% of net offer.

6. Appointment of managers to the issue and various other agencies

The company has to appoint one or more merchant bankers to act as managers to the public issue.It also has to appoint a registrar to the issue, collecting bankers, underwriters to the issue and brokers t the issue, self-certified syndicate banks, advertising agents etc.

7. Permission to deal on stock exchange (section 40 )

Every company before making a public offer shall apply to one or more recognized stock exchange to seek permission for listing its shares with them. For this, the prospectus shall mention the name of the stock exchange. In addition, an application for permission to list that stock exchange has to be made by the company. If permission is not given by the stock exchange, the allotment made shall be considered void.

The object of the section has been explained by the Supreme Court in the case of Union of India vs Allied International Products Ltd. 1970 The object of the provision is to enable shareholders to find a ready market for their shares so that they can convert their investment into cash whenever they like. The Supreme Court held that even if one out of the several stock exchanges applied for and granted recognition it would be sufficient to validate the allotment; the facility of at least one stock exchange would thereby be available. The amendment of 1974 nullified this part of the judgment. The position after the amendment was that if, out of the stock exchanges applied for, a single stock exchange refused to grant listing, the allotment, if already made, become void.

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!”

A decision of the Supreme Court has been to the effect that the effect of the provisions of Section 73 of the 1956 Act is that listing is mandatory.

A default in this respect makes allotment violative of the provisions and therefore allottees’ money has to be refunded to them with interest at 15 per cent.

7. Closing of subscription list

There is no provision in the companies act regarding the closing of the subscription list. But as per the SEBI guidelines, the subscription list must be issued for a minimum of 3 and a maximum of 10 working days.

In case of the rights issue, the subscription list is open for not more than 60 days.


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