LESSON 6

ALLOTMENT OF SECURITIES
6.1

LEGAL RULES AS TO ALLOTMENT

RULES UNDER THE CONTRACT ACT

Authority for allotment:
The proper authority for allotment of shares is the Board of directors.
The Board may also delegate such authority to such person as it deems fit.
Time for allotment: The allotment must be made within a reasonable time.
Unconditional: The allotment must be absolute and unconditional.
Communication of allotment :

The allotment is not complete until it is communicated to the applicant, i.e., letter
of allotment is duly posted.
However, receipt or non-receipt of letter of allotment by the applicant is
immaterial.
No contravention of any other Act : Allotment should not be in contravention of any
other law.
RULES UNDER COMPANIES ACT
Agreement in writing : No valid allotment can be made unless the person agrees in
writing to become a member (Sec. 41).
Filing of prospectus or statement in lieu of prospectus :

Before making an allotment, the company shall file with the registrar, a prospectus
or a statement in lieu of prospectus.
However, this requirement shall not apply
(a)
To a private company; and
(b)

In case of subsequent allotment of shares.

Other points : The provisions of Sec. 39 and 40 of the Companies Act, 2013 must be
complied with

6.2

ALLOTMENT OF SECURITIES BY A COMPANY

(Sec. 39 of 2013 Act)

May 2005 : State briefly the provisions relating to minimum subscription and consequence of
non-receipt of minimum subscription as per the Companies Act.
Nov. 2013 : What is meant By Minimum subscription? State the provisions of the Companies
Act, regarding the refund and deposit of minimum subscription.
1.

Condition w.r.t. minimum subscription: Where a company makes an offer to the public
for subscription of its securities, no allotment of any securities shall be made unless the
following 2 conditions are satisfied:

(i)

The amount stated in the prospectus as the minimum subscription is subscribed.

(ii)

The sum payable on application in respect of minimum subscription is received by

the company by cheque or other instrument.

2.

Amount of application money: The application money on every security shall not be less

than
(i)

5% of the nominal amount of the security; or

(ii)

Such other percentage or amount, as may be specified by the Securities and

Exchange Board by making regulations in this behalf.

3.

Time limit for minimum subscription: The amount stated in the prospectus as the
minimum subscription must be subscribed and the sum payable on application in respect
of minimum subscription must be received by the company within
(i)

30 days of issue of prospectus; or

(ii)

Such other period as may be specified by the Securities and Exchange Board.

Otherwise, all moneys received by the company shall be returned within such time and
manner as may be prescribed.
4.

Consequences of default: The company and every officer who is in default shall be liable
to a penalty, for each default, of Rs. 1,000 for each day during which such default
continues or Rs. 1 lakh, whichever is less.

6.3

RETURN OF ALLOTMENT [Sec. 39(4)]

Time limit

It is the duty of the company to file a return of allotment with the Registrar in form
PAS-3.
Return of allotment is to be filed with the Registrar within 30 days of allotment of
shares made by the company.
Contents, in case of shares allotted for cash
Number and nominal amount of the shares comprised in the allotment,
Names, addresses and occupations of the allottees,
Amount, if any, paid or due and payable on each share.
The company shall not show in such return any shares as having been allotted for cash if cash has
not actually been received in respect of such allotment.
Contents, in case of shares allotted for consideration other than cash
(a)

The company shall produce for the inspection and examination of the Registrar a contract
in writing constituting the title of the allottee to the allotment together with any contract
of sale, or a contract for services or other consideration in respect of which that allotment
was made.

(b)

Such contracts shall be duly stamped.

(c)

The company shall file with the Registrar copies verified in the prescribed manner of all
such contracts.

(d)

The company shall file with the Registrar a return stating

Number and nominal amount of shares so allotted

The extent to which the shares are to be treated as paid up

The consideration for which the shares have been allotted.

Contents, in case of bonus shares

Number and nominal amount of the shares comprised in the allotment
Names, addresses and occupations of the allottees .
A copy of the resolution authorising the issue of such shares.
Contents, in case of shares issued at a discount

Number and nominal amount of the shares comprised in the allotment

Names, addresses and occupations of the allottees
Amount, if any, paid or due and payable on each share
A copy of the resolution passed by the company authorising issue of shares at
discount
A copy of the order of CLB authorising issue of shares at discount.
Accompanying documents : The Return of Allotment must be accompanied by the
following documents:

Contract of sale or contract of service or other consideration in respect of which

allotment is made (in case, shares are allotted for consideration other than cash)
A copy of the Ordinary Resolution passed in GM authorising the issue of shares at
discount
A copy of the order of CLB authorising the issue of shares at discount.
Non-applicability : Nothing in this section shall apply to the issue and allotment by a
company of shares which under the provisions of its articles were forfeited fob nonpayment of calls.
Penalty for default
In case of any default, the company and its officer who is in default shall be liable to a
penalty, for each default, of one thousand rupees for each day during which such default
continues or one lakh rupees, whichever is less

CL-1

May 2006 Allotment of shares as consideration for cancellation of a debt - Whether

valid? (Sec. 39)

Mars India Ltd. owed to Sunil Rs. 1,000. On becoming this debt payable, the company offered
Sunil 10 shares of Rs. 100 each in full settlement of the debt. The said shares were fully paid and
were allotted to Sunil.
Examine the validity of this allotment in the light of the provisions of the Companies Act.
Ans.
Allotment may be made
for cash; or
for consideration other than cash.
The allotment of fully paid shares in full settlement of Sunils claim is valid

CL-2

since cancellation of a genuine debt by mutual consent is treated as payment in

cash;
since cash does not necessarily mean the current coin of the country; it means
such transaction as would support a plea for payment.
June 2009 Whether return of allotment is required to be filed for re-issue of forfeited
shares?

(Sec. 39)

Star Limited forfeited 80 equity shares and re-issued the same at a premium of Rs. 2,000 resulting
in a surplus earning of Rs. 2,000. The company did not file the return of allotment with the
Registrar of the companies in respect of re-issued shares. Explain with reasons whether the
company has contravened the provisions of the Companies Act.
Ans.
Star Limited has not contravened the provisions of Sec. 39 :

since reissue of forfeited shares does not amount to allotment of shares;

since return of allotment is not required to be filed in case of re-issue of shares.

6.4

SECURITIES TO BE DEALT WITH IN STOCK EXCHANGE (Sec. 40 of 2013 Act)

1.

Application for permission for listing: Every company making public offer shall, before
making such offer, make an application to one or more recognised stock exchange or
exchanges and obtain permission for the securities to be dealt with in such stock
exchange or exchanges.

2.

Disclosures in prospectus: The prospectus shall state the name or names of the stock
exchange in which the securities shall be dealt with.

3.

Application moneys to be kept in separate bank account: All monies received on

application from the public for subscription to the securities shall be kept in a separate
bank account in a scheduled bank and shall not be utilised for any purpose other than
(a)

for adjustment against allotment of securities where the securities have been
permitted to be dealt with in the stock exchange or stock exchanges specified in
the prospectus; or

(b)

for the repayment of monies within the time specified by the Securities and
Exchange Board, received from applicants in pursuance of the prospectus, where
the company is for any other reason unable to allot securities.

4.

No waiver: Any condition purporting to require or bind any applicant for securities to
waive compliance with any of the requirements of this section shall be void.

6.5

UNDERWRITING COMMISSION [Sec. Sec. 40(6)]

Nov. 2005 : In what way does the Companies Act regulate the payment of underwriting
commission? Explaining the provisions of the Act, state the conditions to be complied with
before payment of such commission can he made to underwriters of the company.
Meaning of underwriter : Underwriter means an intermediary who undertakes to
subscribe to the securities offered by the company in case these are not fully subscribed
by the public, in case of an underwritten issue.
Authorisation : Express authorisation in the articles is required for payment of
underwriting commission.
Public offer : Underwriting commission can be paid only in respect of those shares or
debentures which are offered to the public for subscription.
Rate of commission
On shares : Maximum 5% of the price at which the shares are issued
On debentures : Maximum 2.5% of the price at which the debentures are issued.
Articles : may prescribe a lower rate.
Disclosures in prospectus
(a)

Rate or amount of underwriting commission.

(b)

Number of shares or debentures for which the underwriting contract is made.

(c)

The name and address of the underwrites).

Filing requirements : A copy of the underwriting contract shall be filed with the Registrar
along with prospectus.

CL-3

May 2003 Whether underwriting commission of 5% can be paid if the articles authorise
maximum 3%?

(Sec. 40)

The Board of directors of a company decides to pay 5% of issue price as underwriting commission
to the underwriters. On the other hand the articles of association of the company permit only
3% commission. The Board of directors further decides to pay the commission out of the
proceeds of the share capital. Are the decisions taken by the Board of directors valid under the
Companies Act?
Ans.
The company cannot pay underwriting commission of 5%

since the rate of underwriting commission cannot be more than 5% of issue price
of shares or such lower rate. as prescribed under the articles (3% in the present
case);
since the maximum permissible underwriting commission in this case is 3%.
The company can pay underwriting commission out of the proceeds of the share capital : since
there is no provision in the Act restricting payment of underwriting commission out of the
proceeds of the issued share capital.
CL-4

Nov. 2008 Whether payment of underwriting commission @5% is permissible if the

articles authorise payment of (Sec. 40) underwriting commission @4%?

The Articles of Association of M5W Ltd. contained a provision that upto 4% of issue price of the
shares may be paid as underwriting commission to the underwriters. The Board of directors
decided to pay 5% underwriting commission. Can the Board of directors do so?
State the provisions of law in this regard as stated under the Indian Companies Act.
A ns.
The company cannot pay underwriting commission of 5%

CL-5

since the rate of underwriting commission cannot be more than 5% of issue price
of shares or such lower rate as prescribed under the articles (4% in the present
case);
since the maximum permissible underwriting commission in this case is 4%.

Nov. 2010 Whether payment of underwriting commission @2.5% is permissible if the

articles authorise payment of underwriting commission @2%?(Sec. 40)

Unique Builders Limited decides to pay 2.5 percent of the value of debentures as underwriting
commission to the underwriters but the Articles of the company authorize only 2.0 percent
underwriting commission on debentures.

The company further decides to pay underwriting commission in the form of flats. Examine the
validity of the above arrangements under the provisions of the Companies Act.
Ans.
The company cannot pay underwriting commission of 2.5%

since the rate of underwriting commission cannot be more than 2.5% of issue price
of debentures or such lower rate as prescribed under the articles (2% in the
present case);
since the maximum permissible underwriting commission in this case is 2%.
Payment of underwriting commission in the form of flats is permissible:

6.6

since underwriting commission may be paid in cash or in kind or in lump sum a

percentage [Booth v New Africander Sold Mining Co.] ;
since there is no prohibition on payment of underwriting commission in kind.
or by way of

BROKERAGE[Sec. 40(6)]

Brokerage to broker only

The brokerage can be paid only to a person who carries on the business as a broker
(i.e., a person whose business includes procuring subscription for shares or
debentures) [Andrew v Zinc Mines of Great Britain].
Brokerage cannot be paid to a person who directly applies for the shares.
On subscription brought by broker: The brokerage is paid only on those shares or debentures
for which subscription is procured i.e., which are subscribed through brokers, and not on the
entire issue.
Other points

6.7

No authorisation in the articles is required for the payment of brokerage.

The maximum rate of brokerage is not prescribed under the Companies Act.

CHOOSE THE CORRECT ANSWER

Pick out the correct answer from the following and give reasons (1 Mark each):
1.

Nov. 2008

If a company does not receive the minimum subscription, it should refund

ad money received from applicants for shares without interest
(1)

Within 30 days of issue of prospectus

(2)

Within 60 days of issue of prospectus

(3)

Within 90 days of issue of prospectus

(4)

Within 120 days of issue of prospectus.

Ans. (1).

Reason: As per Sec. 39 of the Companies Act, 2013, the minimum

subscription must be received within 30 days of issue of prospectus.
Otherwise, ad moneys received by the company shad be returned within
such time and manner as may be prescribed.
2.

May 2010

The underwriting commission on shares must not exceed:

(1)

2.0 percent of the issued price of shares

(2)

2.5 percent of the issued price of shares

(3)

5.0 percent of the issued price of shares

(4)

5.5 percent of the issued prices of shares.

Ans. (3).
Reason: As per Sec. 76, the underwriting commission shad not exceed in
the case of shares, 5% of the price at which the shares are issued or the
amount or rate authorised by the articles, whicheve