Allotment of Securities

One way in which a company can raise funds for its business operations is by issuing securities to the public in exchange for funds collected from them in the form of capital. Persons who invest in a company’s capital are benefitted by gaining returns on their investments either in the form of dividends or by way of interest. In India listed and unlisted public companies can issue securities. For the purpose of issuing securities, an unlisted company has to comply with the company law of India and the relevant rules made on that behalf whereas a listed company has to comply with the SEBI (Issue of Capital and Disclosure Requirements) Regulations.

For investing in the securities issued by a company, a person has to first make an application by paying the required amount, and later these securities are allotted to the person by such company.  Any company issuing securities to the public shall do so only in a dematerialized form.

Before knowing about the allotment of securities, we shall first understand what the word ‘securities’ mean.

The term securities not only includes shares but also debentures, bonds, and other instruments as stated under the Securities Contract (Regulation) Act.

Allotment means the appropriation of a certain number of shares to the applicant out of the previously unappropriated capital of the company by its Board of Directors. To put it simply, it means distributing a company’s capital in the form of shares to the persons who applied for them out of the company’s undistributed capital (newly raised capital).      

Allotment of Securities -The General Principles:   

(i) Allotment of securities shall only be done by proper authority in a company. The Directors on the Board of a company or a specific Committee of the Board as formed by the company are the only ones who are authorized to allot securities to the applicants.

(ii) Securities must be allotted to the applicants in a reasonable time. An applicant may not accept the allotment if such securities are allotted after an unreasonable delay of time.

(iii) Allotment of securities must be absolute and not subject to any condition. It means that the allotment of securities must be on the same conditions as agreed upon while applying for them. Any variation in the conditions for allotment shall not be valid.

(iv) A communication shall be made regarding the allotment of securities. Posting a letter informing about the allotment shall be considered as a valid communication even though the letter is in transit.

(v) Allotment shall be made against application only.

(vi) Allotment should not be in contravention of any other existing law. Allotment of securities made to a minor shall be a void allotment.

Allotment of securities - The relevant provisions:

(i) No allotment of securities offered to the public for subscription shall be made unless the minimum amount as specified in the prospectus has been subscribed and the application money for the same has been received by the company either by cheque or any other instrument.

(ii) The minimum amount payable on an application shall be at least 5% of the nominal value or face value of a security. SEBI may make changes in the above percentage by making a regulation to that effect.

(iii) If the minimum application money is not received by the company within 30 days of the issue of prospectus concerning the public issue of securities, then the money received on an application shall be refunded to the respective persons within 15 days from the closure of the issue.

If the company fails to make such refund, a liability of the Board of Directors, that is joint and several shall be created to repay that amount along with an interest of 15% p.a

(iv) A return shall be filed for allotment of securities by the company whenever it makes any allotment of securities in Form PAS-3 with the Registrar of Companies (ROC).

Such return shall be filed by the company within 30 days from the date of allotment along with the fees as prescribed. The list of allottees consisting of their names, the number of securities allotted to each one of them, and their personal details shall also be attached to the form. Further stating that such list is complete and correct as per the records of the company, it shall be certified by an authorized signatory

In case of securities allotted for consideration other than cash, a copy of such contract entered with the allottee relating to any asset or property or contract of service with the company shall also be attached with the said form.

In case of bonus issue of shares, a copy of the resolution authorizing such bonus issue shall be attached with the aforesaid form.

In the case of a company other than a listed company, a registered valuer shall provide a valuation which must be attached along with Form PAS-3.   

The penalty in case of default:

If there is a failure on the part of the company to comply with any of the provisions given above, then both, the company and its officer in default shall be liable to a penalty of:

(i) 1000/- for each day of default OR

(ii) 1 lakh.

(whichever is lower from the above)

Conclusion:

Since raising money from the public to build capital is a delicate task, it is always important that the company shall stay informed about the compliances associated with it and not fail to comply with the same.

This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.