GENERAL PRINCIPLES OF ALLOTMENT

SUBMITTED TO:- SUBMITTED BY:-

AZAD KHAN ABHINAV MALIK

LAW DEPARTMENT BBALLB (VI SEM)

45415210002
 ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to my professor Mr.AZAD KHAN for
giving me golden opportunity to do this assignment on the topic “GENERAL PRINCIPLES OF
ALLOTMENT” which was completed by lot of research which in turn helped me gain
knowledge about many facts.

Secondly i would like to thank my friends who helped me a lot in complition of my assignment
within the time period.

ABHINAV MALIK (BBA LLB VI SEMESTER)

What is a Share?

A share can be described as an intangible accumulation of rights, interests and obligations. The
reason companies issue shares is to allow the company raise funds to carry out its activities and
make a return for its members. It also allows the ownership to change in a company.

Different share classes may have different rights so it is very important to review the articles of
association to understand the rights attached to the shares. Ordinary shares usually (but never
assume!!) have the following rights:

A right to attend and vote at general meetings

A right to a proportion of the profits of a company – dividend

A right to the capital surplus on winding up

A right to notice & information from Company

Allotment of Shares
The allotment of shares is the issuing of new shares to the existing shareholders or to third
parties. The Directors of a Company may allot shares in the capital of the Company, if they have
the authority to do so. Some examples where allotment of shares may be used are as follows:

To raise money for the Company

To introduce new investors such as BES investors

To convert loans to share capital

To introduce a golden share

To put in place a group structure

To fund a redemption of shares

To implement a bonus issue of shares

Directors may not allot shares unless they have the power to do so. The Directors power to allot
shares expires 5 years from the date of incorporation or 5 years from the last renewal of the
power to allot. If the authority to allot shares has not been renewed in the last 5 years then it
should be renewed prior to any proposed allotment. This can be renewed by the Members
passing an Ordinary Resolution prior to the allotment.

A company must have sufficient unissued authorised share capital before new shares may be
allotted by the Directors. If the Company does not have sufficient unissued share capital or is
setting up a new share class this must be approved by the members passing a special resolution.

The Memorandum and Articles of Association and any shareholder agreements should be
reviewed for regulations on pre-emption rights, unissued share capital and other provisions that
may affect the allotment of shares. The shares may be allotted for cash, non-cash and may be
allotted at a premium.
The new shareholders must apply for shares to be allotted to them, the Directors must approve
the allotment of shares, write up the Register of Allotments and Register of Members and file the
form B5 with the CRO. New share certificates should be issued to the new shareholders.
 Rules Regarding Allotment of Shares:
The following rules regarding allotment of shares are noted:

(a) Application Form:

A prospectus is an invitation to the public to purchase shares. Naturally, the intending purchaser
has to apply in a prescribed form (given in the prospectus) for the purpose which is known as
‘application form’.

Needless to mention that the prospectus fixes the time when the application will be opened and
the allotment will be made. Letter of allotment should be sent to the applicant of shares after the
allotment is made.

(b) Offer and Acceptance:

We know that membership of a company after purchasing shares is nothing but a contract. The
application form which is given by the members is the ‘offer’ and allotment by directors is the
‘acceptance’ of that ‘offer’ and, similarly, the notice of acceptance which is sent is the
‘acceptance of the offer.’

(c) Conditional offer and Acceptance for ‘Offer’:

Usually, the conditions are printed in the application form, e.g., in case of over-subscription of
shares, shares will be allotted on pro-rata basis etc. Conditions for acceptance is practically
invalid.

(d) Proper Authority:

It should be remembered that allotment of shares should always be made by the proper authority
e.g., by the board of directors, and allotment made without proper authority is void. Although
allotment can be delegated to some persons if the Articles so provide.
(e) Reasonable Time:

After receiving the application form allotment should be made as soon as possible by the
directors i.e., within a reasonable time. Otherwise, applications for ‘offer’ will be revoked if such
reasonable time expires.

(f) Fictitious Name:

Sec. 68A states that any person who

(i) Makes in a fictitious name for acquiring or subscribing for any share; or,

(ii) induces a company to allot, register any transfer of shares to him or any other person in a
fictitious name shall be punishable by imprisonment up to 5 years.

Restrictions on Allotment of Shares:

Sec. 69(1) states that no allotment can be made by the company until the minimum subscription
has been received.

(b) Application Money:

Sec. 69(3), however, lays down that the amount payable on each share with the application form
must not be less than 5% of the nominal value of the shares.

(c) Money to be Deposited in a Scheduled Bank:

Sec. 69(4) states that money received from the applicants must be deposited in a Scheduled Bank
until the certificate to commence business has been obtained or until the entire amount payable
on applications for shares in respect of the minimum subscription has been received by the
company.

(d) Returns of Money:

Sec. 69(5) states that if the minimum subscription has not been raised or if the allotment could
not be made within 120 days from the date of publication of the prospectus, the directors must
return the money received from the applicants. If the money is refunded within 130 days no
interest is payable, beyond which the directors are liable to pay interest @ 6% p.a. from the
130th day to the day of repayment.

(e) Statement in lieu of Prospectus:

Sec. 70 of the Companies Act states that a public company which has not issued any prospectus
must deliver to the Registrar for registration a statement in lieu of prospectus signed by every
director or proposed director or his agent in the form prescribed in Schedule III of the Act, at
least 3 days before the first allotment of shares.
(f) Opening of the Subscription List:

Sec. 72 lays down that no allotment can be made until the beginning of the 5th day after the
publication of the prospectus or such later time as may be prescribed for the purposes in the
prospectus.

(g) Revocation of Application:

Application for shares cannot be revoked until after the expiration of the 5th day after the time of
opening of the subscription list except in one case, i.e. if any responsible person gives public
notice of withdrawal of the consent to the issue of the prospectus, any applicant can revoke his
application.
 Effects of an Irregular Allotment of Shares:
The following consequences are to be made if the allotment is made in contravention of Sees. 69,
70 and 73, stated earlier:

(i) Option:

See. 71(1) and (2) states that the allotment becomes voidable at the option of the shareholders.
The option to avoid the contract must be exercised within 2 months of holding the statutory
meeting or where no statutory meeting is held or where the allotment is made after the holding of
the statutory meeting, within 2 months after the date of allotment.

The same can be exercised even if the company is in course of liquidation.

(ii) Compensation:

Sec. 71(3) lays down that if any director knowingly or wilfully contravenes the rules or
authorizes the contravention, he is liable to pay compensation to the shareholders concerned for
any loss or damage suffered by him. But the suit for compensation must be filed within 2 years
from the date of allotment.

(iii) Fine:

Sec. 72(3) states that the validity of an allotment shall not be affected by any contravention of the
foregoing provisions of this section, but,, in the event of any such contravention, the company, a
fid every officer of the company who is in default, shall be punishable with fine which may
extend to Rs. 5,000.

(iv) Void:

If any allotment is made in violation of Sec. 73, the same is treated as void.
 Returns as to Allotment of Shares:
According to Sec. 75 of the Companies Act, a company having a share capital (whether public or
private) must file with the Registrar a return of the allotment within 30 days after making such
allotment of shares giving full particulars of allotment made, such as:

(i) The number and the nominal amount of the shares allotted;

(ii) The names, addresses and occupations of the allottees; and

(iii) The amount paid or payable on each share.

If any shares (other than bonus shares) are allotted as partly paid-up or fully paid-up (other than
cash) the company must produce for the inspection of the registrar:

(i) A contract in writing constituting the title of the allottee to the shares;

(ii) The contract of sale or for services or other consideration for which the allotment was made;
and

(iii) file with the Registrar—(a) copies or the contract (mentioned above) and (b) a return stating
the number and nominal amount of the share so allotted.

While allotting bonus shares, the return should state the names, addresses and occupations of the
allottee, in addition to the number and nominal amount of the shares constituted in allotment
together with a copy of the resolution authorising the issues of such shares.

It should be remembered that no return need be filed relating to the issues and allotment of
shares which the company had forfeited for non-payment of calls. Re-issue of forfeited shares is
not an allotment within the meaning of Sec. 75(1).