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Allotment of Securities By Company

The Companies Act, 2013 provides a comprehensive framework for the allotment of securities by a company. The Act contains provisions for issuing securities through a prospectus or a private placement and for creating debentures by a company. The Act also lays down the conditions for the authorisation of the issuance of securities, the creation of a charge on assets, the redemption of securities, and the disclosure requirements.


What is Allotment of Securities

Allotment of Securities refers to allotting newly issued shares or debentures by a company to investors. Offers for securities are made in the company’s application forms. Allotment will be made once the application is accepted. When a firm decides to raise capital by issuing new shares or debentures, it sells these securities either to the public or a specific group of investors. To make an allotment, a company determines the number of securities to be offered and issues the price as well as other terms and conditions governing such issuance.


The interested investors in these securities make an application and pay the required amount. Thereafter the company reviews them and allocates securities to successful applicants. A specific period for allotment of securities is prescribed within which the company issues share certificates to the allottees. Companies rely on this mechanism as part of efforts to generate funds from investors who are bought into it.


Types of Securities Allotment


Initial Public Offering (IPO)

Follow-on Public Offerings (FPOs)
Bonus Issues

Stock Splits


Procedure for Allotment of Securities

Issuing new shares or debentures to investors by a company is the meaning of allotment of securities in terms of the Companies Act, 2013. The procedures governing the allotment of securities in terms of the said Act are as follows:

Authorized Capital: The company must have sufficient authorized share capital to issue new shares or debentures to the company. The Memorandum of Association of a company determines how much share capital can be issued as authorized share capital.

Issue of securities: The issue of securities must comply with the Companies Act, 2013 and SEBI regulations.

Board Resolution: The board of directors of the company must pass a resolution authorizing the issue of new shares or debentures. The resolution must specify the number of securities to be issued, the issue price, and the terms and conditions of the issue.

Filing of Prospectus or Statement instead of Prospectus: When issuing its shares to the public, a company must file a prospectus with ROC. Nevertheless, in case a firm is offering its stocks via a private placement route then such filing will take place through submission made as against the prospectus.

Allotment within 60 days: Securities must be allotted within sixty days from when application money is received by the company. In case securities are not allotted within this period, then monies received on application shall be returned within 15 days after the expiry of 60 days.

Issue of Share Certificates: Share certificates shall be issued by the company within two months from the date of allotment to allotees. These certificates have to be signed by two directors or one director and a secretary of the company.

Return of Allotment: A return of allotment containing details such as names and addresses, amounts received, etc., should be filed with ROC 30 days after allotment. name and address of every allotee along with security allotted to them should also be mentioned in the return.

Utilization of Application Money: The application money received from investors must be utilized for the specific purpose for which it was raised. The company must maintain a separate bank account for this purpose.

Payment of Stamp Duty: The firm should pay stamp duty on the issue of securities under applicable stamp duty laws in the state where its registered office is situated.

To ensure that the securities allocation is transparent and fair, and to protect investors, these terms must be observed. Companies that do not comply with them may suffer from legal penalties.


Provisions Related to Allotment of Securities

The provisions related to the issue of securities by a company can be found in Chapter III of the Companies Act, 2013, which includes Sections 23 to 42. Some of the key provisions related to the issue of securities are as follows:


Prohibition on Issue of Shares at a Discount (Section 23):

Companies are prohibited from issuing shares at a price lower than their face value or the value determined by a registered valuer. The objective of this provision is to protect shareholders by guaranteeing fair value for their investments. Any shares issued in contravention of this provision are considered void, and both the company and responsible officers may be liable to pay penalties of up to five times the amount of the discount or the gain.


Section 26: Matters to be stated in the prospectus or statement instead of the prospectus

Before making a public offer of securities, companies are required to file a prospectus or a statement instead of a prospectus with the Registrar of Companies (ROC). The prospectus should contain essential information, including:

  1. Company's name and registered office address.
  2. Objectives and project details for which the securities are being issued.
  3. Description of the securities, including their nature, number, and price.
  4. Terms and conditions related to the issue of securities.
  5. Minimum subscription amount.
  6. Details of lead managers, underwriters, brokers, auditors, bankers, and legal advisors connected to the issue.
  7. Information about directors, promoters, and key managerial personnel.
  8. Shareholding pattern and names of significant shareholders.
  9. Financial performance, including profits, losses, assets, and liabilities.
  10. Pending litigation or regulatory proceedings against the company or its directors.
  11. Any material changes in the company's affairs since the last audited financial statements.
  12. Other relevant information for investors to make informed decisions.


Shelf Prospectus (Section 31):

A shelf prospectus allows companies to offer securities to the public on an ongoing basis without filing a new prospectus for each issue. According to Section 31, a company can file a shelf prospectus with the ROC, valid for one year from the filing date. If the company plans to make a public offer during this period, it must file a prospectus supplement containing specific details of the new offer.


Red Herring Prospectus (Section 32):

A red herring prospectus, filed before the public offer of securities, provides preliminary information about the company and the securities being offered. Although it lacks pricing and the number of securities, it aims to generate investor interest. A final prospectus is later filed with complete details, including the issue price and the number of securities offered.


Issue of Securities through Prospectus (Section 33):

Companies cannot issue securities to the public without submitting a prospectus to the ROC and the Securities and Exchange Board of India (SEBI). The prospectus must comply with Section 26, containing all the required information about the company and the securities. It should be dated, signed by the company's directors, filed at least three days before the public offer, and published in at least one English and one regional language newspaper.


Private Placement of Securities (Section 42):

Section 42 governs the private placement of securities, whereby companies offer securities to a select group instead of the public. Key conditions for private placement include:

  1. Offer made to persons identified by the company's board of directors.
  2. The number of persons offered securities cannot exceed 200 in a financial year.
  3. Offer only to individuals capable of assessing risks and merits unrelated to the promoter or director.
  4. A private placement offer letter with all relevant details, including the number, price, terms, conditions, and associated risks.
  5. Prior approval of shareholders through a special resolution at a general meeting.
  6. Filing a return of allotment with the ROC within 15 days.
  7. No public announcement of the private placement offer.
  8. Minimum investment amount and mode of payment specified in the offer, which cannot be withdrawn after being made.


Further Issue of Capital (Section 62):

Section 62 covers the issuance of additional shares by a company after its initial offering. Companies can conduct a further issue of capital through rights issues or preferential allotments. Key provisions include:

  1. Approval of shareholders through a special resolution.
  2. Rights issue to existing shareholders and preferential allotment to specific persons or groups.
  3. The price per share should not be lower than the registered valuer's determined price.
  4. Possibility to issue shares to employees under employee stock options or employee stock purchase schemes.
  5. Approval from the company's board of directors.
  6. Allotment of shares within 60 days from the receipt of application money.
  7. Filing a return of allotment with the ROC within 30 days.


Debentures (Section 71):

Section 71 regulates the issuance of debentures, which are debt instruments enabling companies to raise funds. These instruments make the debenture holders creditors of the company, with the right to receive interest and principal.


End of Line:

Understanding the provisions related to the allotment of shares and Section 42 of the Companies Act 2013 is vital for both companies and investors. From prohibition on issuing shares at a discount to the detailed information required in prospectuses, these regulations ensure transparency, fair value, and informed investment decisions. By adhering to these provisions, companies can safeguard the interests of their shareholders while attracting potential investors.

Frequently Asked Questions

 No allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company by cheque or other instrument.

eForm PAS-3 is required to be filed under Section 39(4) and 42(9) of the Companies Act, 2013 and rules 12 and 14 Companies (Prospectus and Allotment of Securities) Rules, 2014 which are reproduced for your reference.

The purpose of the Securities Allotment Committee is to issue and allot all kinds of securities that may be issued by the Company, from time to time subject to the provisions of the Companies Act, 2013 and subject to the Memorandum and Articles of Association of the Company and per the Companies (Issue of Share Certificate) Rules, 1960.


Share allotment is the creation and issuing of new shares, by a company. New shares can be issued to either new or existing shareholders. Share allotment can have implications for any existing shareholder's share proportion. Typically, new shares are allotted to bring on new business partners.


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