Allotment of Shares
The allotment of shares is a fundamental process in a company’s capital structure, allowing it to raise funds, bring in new investors, or reward employees. However, share allotment must comply with the Companies Act, 2013, SEBI regulations (for listed companies), and other legal provisions to avoid penalties and disputes.
The Government of India has set down certain Law regarding the company’s Prospectus and Allotment of securities in India. The allotment of shares is governed by the Companies Act, 2013, and the related rules and regulations. Changes in capital may be required for various reasons, such as expansion, restructuring, or compliance with regulatory requirements. It is essential to understand the process, legal requirements, forms, and compliance involved in allotment of shares.
1. What is Share Allotment?
The ‘Allotment of shares’ is crucial for raising capital and determining the company’s ownership structure & refers to the process whereby a company formally allocates its shares to applicants, creating a legal relationship between the company and its shareholders. In involves the process of issuing shares, by accepting the application for Shares made by Share applicant. It results in the issuance of share certificates to the allottees.
Share allotment refers to the process where a company issues and allocates shares to applicants, confirming their ownership stake in the company. It takes place:
- At the time of incorporation (Promoter subscribing to Memorandum)
- When Subsequently Capital is raised (rights issue, private placement, public issue, ESOPs)
2. Types of Share Allotment
✅ Private Placement
✅ Preferential Allotment
✅ Rights Issue
✅ Bonus Issue
✅ ESOPs (Employee Stock Ownership Plans)
3. Governing Provisions
The primary sections of Companies Act, 2013 and rules covering share allotment are:
- Section 39 – Allotment of securities by company.
- Section 42 – Private placement of Shares.
- Section 56 – Transfer & Transmission of Shares
- Section 62 – Further issue of share capital (Rights/ESOP/Preferential issue).
- Section 23, 24, 26 – Public offer (for listed/public companies).
- Companies (Prospectus and Allotment of Securities) Rules, 2014.
- Companies (Share Capital and Debentures) Rules, 2014.
- SEBI (ICDR) Regulations – Applicable to listed companies
4. Types of Share Allotment
4.1 Allotment at Incorporation
- To subscribers of the Memorandum.
No ‘Return of allotment’ (PAS-3) required.
4.2 Rights Issue
- Offering shares to existing shareholders in proportion to their current holding
- Existing shareholders are given right to purchase additional shares at discounted price.
- Used to raise capital from existing shareholders without diluting their ownership.
- Letter of Offer (PAS-3) must be filed
- Applicable Provision: Section 62 of the Companies Act, 2013
4.3 Private Placement
- Allotment to select group of investors i.e., Institutional investors, High-net-worth individuals, or existing shareholders
- Offering shares to a select group (not exceeding 200 persons in a financial year)
- PAS-4 (Offer Letter) must be filed
- Record of private placement offer in Form PAS-5
- No public advertisement allowed
- Minimum investment of ₹20,000 per person
- Funds to be received in a separate bank account
- Requires compliance with private placement provisions
- File Form GNL-2 for PAS-4 and PAS-5 (if required)
- Applicable Provision: Section 42 of the Companies Act, 2013
4.4 Preferential Allotment
- Issuing shares to a specific group (promoters, investors) at a predetermined price
- Valuation Report from a Registered Valuer.
- Shareholder Approval via Special Resolution.
- Lock-in Period (1 year for promoters).
4.5 Bonus Shares
- Issuing free shares to existing shareholders from reserves
- Allotment from reserves without fresh inflow of funds
- Must have sufficient reserves
- Re-requisite: –
- No defaults in payment of interest or principal of the fixed deposit or debt security issued by the company.
- No defaults in payment of statutory dues to the employees like gratuity, bonus, or contribution to the provident fund.
- All the shares are fully paid
- Articles of Association authorizes the Bonus Issue
- Authorized capital is sufficient for the issue of Bonus shares
Applicable Provision: Section 63 of the Companies Act, 2013
4.6 ESOPs (Employee Stock Ownership Plans)
- Issuing shares to employees under an approved scheme
- Shareholder Approval required
- SEBI (Share-Based Employee Benefits) Regulations apply for listed companies
5. Pre-Allotment Actions
- Check Articles of Association (AOA): Ensure AOA permits proposed issue
- Hold Board Meeting: –
- Approve offer and terms.
- Decide mode of issue: rights, private placement, preferential
- Obtain Shareholder Approval (if required):-
- Special resolution for private placement / preferential allotment
- File Form MGT-14 within 30 days (if applicable).
6. Step-by-Step Procedure for Allotment of Shares
| S. No. | Step | Action Required | Key Compliance / Notes |
|---|---|---|---|
| 1 | Board Resolution | Approve terms of allotment (price, number of shares, allottees) | Draft Board Minutes |
| 2 | Shareholder Approval (if required) | Pass Special Resolution (SR) for preferential allotment / Private placement. | File MGT-14 within 30 days |
| 3 | Issue Offer Letter (PAS-4 for private placement) | Disclose terms of allotment | Maintain records for 3 years |
| 4 | Receive Application Money | Ensure funds are deposited in a separate bank account. | Minimum 25% payment required. |
| 5 | Allot Shares | Issue shares within 60 days of receiving funds | Update Register of Members (ROM). |
| 6 | File ROC Forms | Submit :-PAS-3 (Rights Issue)PAS-4 (Private Placement)SH-7 (Capital Increase) | Deadline: 15-30 days post-allotment.Attachments :-List of allottees,Board resolution,Special resolution (if any) |
| 7 | Issue Share Certificates (if applicable) | Physical/Demat form as per SEBI norms. | Timeline: 2 months from allotmentPay Stamp duty on share certificates as per state law |
| 8 | Update Registers | Make necessary entries in share certificate book | Update Register of Members (Section 88) |
7. Important ROC Forms and Timelines
Form | Purpose | Timeline |
PAS-3 | Return of Allotment | Within 30 days of allotment |
MGT-14 | Filing of special resolution | Within 30 days |
SH-7 | Notice of Increase in Share Capital (if applicable). | Within 30 days |
PAS-4 | Private Placement Offer Letter. | Before issuing shares. |
GNL-2 | Filing of PAS-4/PAS-5 (if applicable) | As per rules |
8. Consequences of Non-Compliance
- Penalty under Section 42: ₹1,000 per day of default (up to ₹25 lakh for company and ₹5 lakh for officers).
- Officers in default can also face fines, potentially ranging from Rs. 10,000 to Rs. 1,00,000.
- Allotment Void: Non-compliant allotments can be declared invalid.
- Allotment may be voidable at the option of allottees.
- Legal Action: Directors may face disqualification.
- SEBI Actions (for listed companies): Suspension, fines, or delisting.
9. Conclusion
The allotment of shares is a regulated process requiring careful compliance with the Companies Act, 2013, SEBI guidelines (for listed companies), FEMA (for foreign investors), and other applicable laws. A Chartered Accountant’s expertise ensures seamless handling of documentation, filing, and compliance, thereby avoiding legal complications.
