The Concept of Share allotment
To put it simply, share allotment refers to the allocation of a certain number of shares to individuals or entities. This process usually occurs during an Initial Public Offering (IPO), where a percentage of shares is given to an underwriter. Once the underwriting is complete, the remaining shares are distributed to other firms participating in the IPO.
The Companies Act 2013 in India governs the allotment of shares listed on stock markets such as the NSE and BSE. Additionally, regulations from the SEBI Act, 1992, and the Securities Contract Regulation Act, 1956, are applied to subsidiaries of listed companies.
Allotment of shares is crucial for a corporation as it allows them to create and issue new shares to attract new business partners. This can help raise capital and expand the company’s operations.
General Provisions Regarding Share Allotment
In simpler terms, these are the main rules for applying and allocating shares:
1. The application for shares must be done following the established procedures, and the Board of Directors is responsible for making the allocation through a resolution. The Board cannot transfer this responsibility to anyone else. The resolution must be adopted during a lawful meeting of the Board. If the Board is not properly constituted, a regular Board can still ratify the allocation. A legitimate resolution of allocation must be adopted by the Board at a lawful meeting (Homes District Consolidated Gold Mines Re (1888) 39 Ch D 546 (CA)). A normal Board may ratify an allocation made by an irregularly constituted Board. (Portuguese Consolidated Copper Mines, (1889) 42 Ch. D 160 (CA)).
2. The approval of the share allocation must happen within a reasonable period of time. What is considered reasonable depends on each situation. If the allocation takes too long, the applicant has the option to decline the shares. In the case of Ramsgate Victoria Hotel Company v. Montefiore ((1866) LR 1 EX 109), the period of about six months between application and allocation was deemed excessive.
3. The allocation must be unconditional and on the same terms as stated in the application. Specific legal requirements must be met for the allocation to be valid. If the number of shares allocated is less than what was asked for, it is not considered a complete allocation.
4. The allocation must be communicated to the applicant. This communication can be in the form of an allotment letter or guidance. It doesn’t matter if the letter is received or lost in transit. In Official Liquidator, Bellary Electric Supply Co. v. Kanni Ram Ramwoothmal (Household Fire And Carriage Accident Insurance Co. Ltd. v. GrantAIR 1933 Med 320), it was held that even if the applicant doesn’t receive the letter, they are still a shareholder and responsible for the financial obligations of the company.
5. Allotments are made on a first-come, first-served basis. A verbal request cannot result in a legal allocation. To become a member of the company, an individual must agree in writing.
6. The allocation must not violate any other laws. For example, if a minor applies for shares, the allocation would be considered invalid.
The Allocation of Shares Procedure
1. A public corporation must provide a prospectus or a statement similar to a prospectus to invite proposals for acquiring the company’s shares.
2. The public can apply for shares in the company by making a specified application and paying the share price either in full or in installments as share application money. The application fee should be at least 5% of the nominal value of the share.
3. The company cannot issue shares unless the minimum subscription amount mentioned in the prospectus is met. The prospectus must specify this minimum subscription amount.
4. The money received as share application must be deposited in a bank and can only be operated after obtaining the certificate of commencement.
5. If the company fails to reach a subscription amount of 90% within 60 days of the closing date, it must refund the entire subscription price. If the delay exceeds 78 days, the company is liable to pay interest at a rate of 6% per year.
After shares are allotted, the company directors may ask shareholders to pay the remaining balance on their shares as specified in the prospectus. If the company’s articles of incorporation do not have provisions regarding this, there are certain provisions that may apply:
1. The call for payment should not exceed 25% of the nominal value of each share.
2. There should be a gap of at least one month between two such calls.
3. Shareholders should be given a 14-day notice specifying the amount, date, and location of payment.
4. Calls for payment should be uniform for shareholders belonging to the same class.
As per Spitzer v. Chinese Corp., allotment refers to the allocation of a specific number of shares in a corporation based on a resolution made by the Board of Directors in response to shareholders’ applications.
In conclusion, share allocation involves the issuance of new shares by a corporation to the general public, whether they are new or existing shareholders. The confusion often arises from the difference between share issuance and share allocation.
To summarize, share issuance refers to offering shares to shareholders, while share allotment refers to the distribution of shares within the company based on the acceptance decisions made by the corporation. Share allotment is a crucial process in expanding a corporation by providing shares to the public.