Procedure for Allotment of Shares in a Company

Share allotment involves opening new doors for the market by allowing shareholders to become company owners to the degree of shares they hold and allocated to them. When a company offers new shares, it seeks applications from present shareholders or the public, receives and processes them, and determines the allocation of shares.

Administered by the Companies Act, 2013, the procedure for share allotment is paramount for building a company’s capital structure and share transfer to the shareholders to create a legally acceptable agreement between the shareholder and the organization. This complex process involves detailed scrutiny of share prices, choosing an approach to allocation in various issues, rules governing minimum subscription requirements, and pre-emption rights.

This article walks you through the legal framework, modes of allotment, and the processes incorporated in share allotment to present valuable insights into the principle behind a company’s capital raising.

Core Concepts of Share Allotment under Company Law

Complying with the legislative provisions of contract law connected with the acceptance of an offer is necessary for an adequate allotment.

1. Share Distribution by the Legitimate Authority: The Board of Directors must declare an assignment of shares, and this is their primary duty. It cannot be delegated to anyone else except as per the articles’ norms.
2. Necessary Stipulated Time: Share allotment must occur within a stipulated time, notwithstanding the fact that the application is denied. Stipulated time is a question of fact in every individual case. An arbitrarily maintained six-month interval between application and allotment applies. If the specified time runs out, Section 6 of the Indian Contract Act is imposed, and the application is revoked.
3. Proper Communication with the Applicant: The allotment must be stated explicitly to the applicant. Posting a duly considered and stamped allotment letter pertains to clear communication, even if the letter is lost, missing, or waiting.
4. Absolute and Direct: Allotment should be unquestionable and absolute, and as per the specific conditions and outlined terms within the application, if any. An allotment can take place in written form only through an application. No verbal request can receive approval from the applicant. As per Section 2 (55) of the Act, an individual should write an application to become a member.
5. No Violation of Law: The allotment process should not infringe any other law. Allotment of shares to a minor is considered null and void.

Modes of Share Allotment as Per Company Law

The modes of allocation of shares define the method wherein shares are assigned to investors or shareholders by a company. The share allocation is executed by the different kinds of companies using varied means, namely

• A public company allocates shares to the public using a public offer by way of private placement and means of right or bonus issue.
•  A private company may float the shares through a right or bonus issue as well as by means of private or preferential placement.

 Method of Private Placement

The private placement method ensures share allotment to specific investor groups, individuals with substantial net worth, recognized venture capital firms, and accredited investors ascertained by the company. There is limited public participation and offerings within the private enterprise; instead, the company employs the means of raising capital by avoiding complexities and expenses, which can be a matter in question where there is public involvement.

Method of Initial Public Offering

A company issues shares to the public using the initial public offering (IPO) method. A private company offers its shares via the stock exchange, through which prospective investors subscribe to the shares using the application method and receive the allotted shares subject to specific conditions such as increasing demand, current market price, and adhering to the regulatory observances and review of the company.

Method of Rights Issues

Rights issues permit present shareholders to accept new shares in proportion to their current holdings, generally at a nominal or reduced price. They carry a renunciation clause allowing for the relinquishment of rights.

Method of Preferential Allotment

This method enables the priority allotment of shares to investors such as directors, industry partners, and financial institutions at a definite price. It helps raise capital quickly and adds business value to a vital shareholder.

Method of Secondary Offering

The process of secondary offering lists a company in the public with an additional floating of shares to raise funds. The underlying motive behind such offering is to expand, repay debt or fulfil business objectives. It can also be helpful in equity dilution and limit the ownership percentage of current shareholders.

Share Allotment Procedure in a Company

Share allotment constitutes a significant part of raising capital or ownership distribution and needs the following procedure to be subscribed as given:

1. Specifications related to the Shareholdings and Shareholders

Specifications pertaining to the Shareholdings and Shareholders

The main step is to confirm the total number of existing share owners and provide details regarding the number of shares to be introduced. Further information pertaining to new shareholders with regard to their name, birthday, nationality, home address, proof of identity, and interrelation with various shareholders.

2. Naming of Allotment Committee

• After the subscription list is closed, the Board of Directors prepares for share allotment. If the issue subscription is at the expected level or under-subscribed, the Board can proceed with the allocation of shares.
• In case of oversubscription, the Board shall authorize an Allotment Committee to manage the work of allotments.
• The allotment committee is made up of directors and a secretary who decide the reasons for allotment and submit a report to the Board. This committee formulates the mechanism for the allotment of shares.

3. Convening a Board Meeting to Determine the Allotment Basis

• The Secretary prepares the mandatory procedures for the Board Meeting to handle the allocation of shares.
• A Board Meeting is convened to ratify the allotment plan put forward by the Allotment Committee.
• After the allotment plan is approved, the allotment and application list are formulated.
• This list includes the names of the applicants who will receive the allocated shares. It must bear the signatures of the Chairman and the Secretary.

4. Adopting Board Resolution for Allocation

• The agreement for the allocation of shares is consented to by the Board, and a resolution is adopted at the board meeting for share allotment.
• The resolution also sanctions the Secretary from granting letters of allotment and letters of regret.

5. Raising of Allotment Money

• The Secretary is supposed to make the requisite arrangements with the company’s bank to pile the allotment money.
• The letter of allotment declares the payment money of the applicant for the shares allotted.
• The money needs to be remitted to the bank mentioned by the company within the prescribed time. Regarding public issues and Rights Issues, ASBA is compulsory.

6. Letters of Renunciation Provisions

• An applicant with allotted shares can renounce them in support of another individual.
• The applicant needs to fill out the renunciation form and tender it with the copy of the original letter of allotment to the company.
• After receiving acceptance from the Board, the Secretary submits the names of the new assignees to the allotment and application list.

7. System Regarding Splitting of Allotment Letters

• Splitting implies placing the shares under one or more names. At times, the applicant granted shares can demand the splitting of allotment letters.
• After obtaining the Board approval regarding the splitting, the Secretary fills in the information about the split in the split allocation list. Besides, the Secretary must also release divided letters.

8. Filing of Allotment Details

• A statement encompassing allotment details is known as ‘Return of Allotment which requires filing by the Secretary with the Registrar of Companies within 30 days of share allotment.
• The return of allotment includes share allotment specifics regarding the allottee name and address, the value of allocated shares and the amount paid or due on every share.
• Arrange Register of Members and Provide Share Certificate
• The secretary compiles the register of members on the grounds of shared application allocation lists and submits the names of every applicant who has remitted the allotment money.
• The Secretary also has to prepare the Share Certificates and assign them to all the members in no less than two months of share allotment.
• A share certificate is granted in return for a letter of allotment and acceptance of allotment money. 

Final Reflections

The procedure of share allotment plays a decisive part in funding capital growth and spurring up the company’s business. It is helpful for both the shareholders and the company in the long run. Shareholders earn more money and make more significant investments. In turn, the company emerges more potent in the market and reaches its expansion target. Overall, the distribution of shares within the company through share allotment is a significant procedure that results in business expansion and investor confidence by offering shares to the public at large.

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