For the sake of expanding the Business or to pay off the debt, Companies may need to issue shares of stock to the public. Company issue different types of shares such as preference shares, ordinary shares, etc. Share issued at the time of incorporation of the company is called fresh Issue while after incorporation issuance of share is called Private Issue. Here in this article, we will see the procedure of how companies allot securities to their shareholders.
What are the provisions of the Company Act relating to the Issue and Allotment of Shares?
There are specific laws that need to be followed for issuing the shares of the company. But it restricts to the Private Limited Companies. Private Limited companies cannot issue any prospectus inviting the general public to subscribe towards its share capital. But the public companies can issue the shares of their company to the public, which is to be followed in accordance with the Companies Act.
The three basic steps of the procedure of issuing the shares are:
Let us see the provisions of Companies Act related to the issue and allotment of securities –
1. Issue of Prospectus
The first step towards raising money for a company is done by issuing the shares. A Prospectus is an invitation to the public for the purchase of shares in the company. The company has to submit a copy of the prospectus to the SEBI whereas the private companies do not need to issue any prospectus. The prospectus of a company gives the information about the issuing company – names of Directors, terms of issue, opening and closing date of the share issue, application fees, bank details for deposit and minimum shares for application.
2. Receiving of Application
After going through the prospectus of the company, interested investors applies for shares along with the application fee. When the number of shares applied for is more than the number of shares issued, this is termed as Over-subscription while the number of application for the issue of share is less than expected then this is known as Under-Subscription. The amount paid for the application money must be at least 5 percent of the nominal amount of share.
3. Allotment of Shares
The decision of the allotment of shares is taken by the company. Allotment of shares to its shareholders is called Acceptance and is not possible until subscription. Minimum Subscription is the minimum amount stated in the prospectus that is required to run the Business. It is unlikely that all the applicants will receive the allotment letter. Some applicants receive regret letters and their application money is returned to them.
After Allotment of shares by the company, the shareholders have to pay the remaining amount due on shares according to the procedures mentioned in the prospectus.
The minimum subscription amount of 90 percent of the issue is to be achieved by the company in 60 days from the date of closure of the issue. In case if it is not met, the company will have to refund the entire subscription amount. There is a relaxation of 18 days. For any delay after 78 days, the company will have to pay an interest of 6 percent per annum as a penalty.
After the Acceptance of shares, the applicants become shareholders in the company.
In case there is no such provision in the prospectus the following rule applies–
- The company cannot ask for more than 25 percent of the nominal value of the share.
- The company can ask the shareholder to pay the next amount of share only after one month.
- A notice of 14 days is given to each member specifying the amount, and date of payment.
- Different shareholders fall under different classes, and hence the call for payment should be made on a regular basis on the particular body of the shareholder.
Applicable rule: Prospectus and allotment of securities Rules
Under Rule 13- A commission can be paid by the company to any person in relation with the subscription or procuring subscription to its securities, which is subject to the following conditions whether absolute or conditional:
- the company’s articles of association of shall approve the payment of such commission,
- the commission can be paid from the proceeds of the profit or the issue of the company
- The commission rate that is paid or agreed to be paid shall not go beyond 5% of the price at which the shares are issued or a rate that is permitted by the articles in the case of shares, whichever is less. In case of debentures it shall not exceed beyond 2.5% of the price at which the issuance of debentures are done, or as has been specified in the article of company whichever is less.
- The prospectus of the company shall reveal-(i) the underwriters name (ii) the amount of the commission that is paid to the underwriter and (iii) the total number of securities subscribed or underwritten by the underwriter either conditionally or absolutely.
- The underwriter shall not be paid any commission on securities which are not presented for the public subscription.
- A copy of the contract is delivered to the Registrar on the payment of commission during the time of prospectus delivery for registration.
Procedure for the Allotment of Shares after Company Incorporation
The issue of shares in a company is the process by which companies allot new shares to the shareholders. In accordance with the Companies Act, 2013, Companies issue shares to the shareholders.
Procedure for the Privately Placed Shares
- A notice is sent to all the shareholders for convening the Extra Ordinary General Meeting for the approval of the private placement offer letter.
- A private placement offer letter is being drafted.
- Resolution is passed in the Extra Ordinary General Meeting (EGM)
- Form MGT-14 is filed with ROC (Registrar of Companies) within 30 days of passing a special resolution in the meeting of shareholders.
- An offer letter is issued in Prospectus and Allotment of Securities ( PAS-4) within 30 days of passing Special resolution.
- After this, a complete record of Private placement is prepared in Prospectus and Allotment of Securities( PAS-5).
- Form PAS-4 and Form PAS-5 are filed with the ROC within 30 days of the issue of the offer letter in Form GNL-2.
- Allotment of shares is made within 60 days of receipt of Money from the persons to whom the right was given.
- A Board meeting for Allotment of shares is called.
- PAS 3 is filed with ROC within 30 days of Allotment.
What is the Restriction on the Allotment of Securities by the Public Listed Company?
There are certain restrictions on Allotment of shares as per the Companies Act  –
- Minimum Subscription
According to Section 69(1) of the Companies Act, no allotment can be made by the company until the minimum Subscription has been received.
- Application money
In accordance with Section 69(3), the amount payable on each share should not be less than 5 per cent of the Nominal Value of the shares.
- Money to be deposited in a Scheduled Bank
According to Section 69(4), the Money received from the applicants must be deposited in Schedule Banks until the certificate of commencement of Business has been obtained.
- Returns of Money
According to section 69(5), if the minimum Subscription has not been raised or the Allotment cannot be made within 120 days from the date of publication of the prospectus, the Director has to return the money received from the applicant.
- Opening of the Subscription List
According to Section 72, no allotment can be made until the beginning of the 5th day after the publication of the prospectus or any time later as mentioned in the prospectus.
- Rejection of Application
If any person gives public notice of withdrawal of the consent to the issue of the prospectus, any applicant can revoke this application.
Allotment of Securities is the issue of new shares by a company to the original or existing shareholders. The public generally gets confused between the issue of shares and Allotment of shares. Issuance of share is the offering of shares to the shareholders while Allotment of shares is the method of distribution of shares in the company and the Allotment or acceptance decision is taken by the company itself. So Allotment of shares is the most essential procedure in the company, which is mainly meant for expanding the Business by offering shares in the public.