A share is a share or a unit of ownership in a corporation, which confers on the shareholder voting rights in matters pertaining to the corporation and allows for the sharing of profits through proportionate dividends. The sale of shares helps raise capital to meet various operational needs of a company as well as to meet finance needs in the process of expanding business operations. An acquirer of share stocks becomes a shareholder, exercising some form of influence over the company.
Section 2(84) of the Companies Act 2013 states that “share means a share in the share capital of a company and includes a stock”.
Share capital refers to the total money raised by a company while selling shares to investors. It is divided into two types: authorised share capital, which is how much a company can raise, and issued share capital, denoting the amount raised through the selling of shares in practice. Share capital is a fundamental component of an equity structure in a company because it forms the financial base for the organisation, thereby financing its operations and promoting growth over the long term.
What is Allotment Of Shares?
Allotment of shares refers to the procedure whereby a company shall extend the right to a member to take shares after he has applied for them on a subscription offer. This procedure signifies that the company has accepted the application made for the shares and thus creates a binding contract between the company and the applicant. Section 42 of the Companies Act of 2013 governs the allotment of shares relating to capital formation. On allotment of shares, the applicant becomes a member and acquires property rights based on shares’ nature and conditions.
Modes of Share Allotment Under the Companies Act, 2013:
- Public Offer: Public issuance of shares can be through an initial public offering or a follow-on public offering. Here, all the requirements regarding the public issue must strictly be followed according to the provisions of SEBI. A company issues a prospectus to let the public know that a particular date will be announced for subscribing shares.
- Private Placement: It will issue shares to relatively fewer investors like institutional investors and high-net-worth individuals. Private placement means that you’ll have to give an offer letter in Form PAS-4 while adhering to Section 42 of the Companies Act 2013. This is a creative method of raising capital that does not involve an issue through a public offer.
- Rights Issue: Current shareholders are granted the option to subscribe to additional shares proportionate to their existing ownership position. This method enables an organization to raise capital while at the same time ensuring that the current ownership by its members is preserved. The method is regulated under Section 62 of the Companies Act of 2013.
- Bonus Issue: This is an issue of bonus shares to the existing shareholders without paying any price for the investment made by them. Such shares are issued from the company’s treasury and governed under section 63 of the Companies Act, 2013.
- Preferential Allotment: The allotment carries a specific price for the reserved allotment to the limited shareholders, mainly the promoters.
- Employee Stock Option Plan (ESOP): The issuance of shares to employees as part of their compensation or perk. As aligned with the Companies Act 2013, under section 62(1)(b), along with corresponding regulations, ESOPs are valid. Section 62(1)(c) and Rule 13 of Companies (Share Capital and Debentures) Rules 2014 apply. It raises the company’s quick funds.
It is important to note that the Board and shareholder approvals are mandatory. In case of such an allotment, a company would be interested in filing its allotment returns in Form PAS-3 with the ROC within 30 days of such an allotment. In particular types of issues, like private placement or preferential allotment, valuation reports become inevitable for ascertaining fair pricing. These provisions help the companies easily raise funds in a legal and regulatory environment.
Section 39 of the Companies Act 2013
Section 39 of the Companies Act 2013 deals with the allotment of companies’ securities. Therefore, under this law, public companies, as well as the process of public offering shares, are in its impact. The seriousness of this law lies on the ground that it speaks about the allotment procedure of shares in public companies with a view to attaining standard regulation for all the allotment procedures. On the other hand, it also deals with transparency, investor protection and regulatory compliance.
The first subsection has addressed the minimum subscription requirement. It indicates that a company cannot indulge in the allotment of shares except against receipt of the minimum amount of subscription as provided within the prospectus of such a company. Such a minimum amount of subscription would, on its part, provide to finance the relevant expenses including project costs as well as debt obligation. Where the minimum subscription is not raised within 30 days from the date of issue of the prospectus, the application money from the applicants shall be returned. This clause ensures that a company has funds for what it intends to do and protects investors from premature allotment in an otherwise illiquid venture.
The application money threshold is described in subsection (2). It provides that all applications for shares shall bear 5% of the nominal value of shares, or such other amount as the Securities and Exchange Board of India may determine from time to time, as application money in order to make applicants serious and deter all ‘applications with no money in the game’. The application money is, therefore, held in trust and cannot be used by the company until shares have been allotted.
Subsection (3) of section 39 specifically deals with the refund of application money. A company is liable to refund the application money in the following circumstances, inter alia: where shares are not allotted on account of insufficient subscription or for any other reason. The refund must be made within a given period, that is, within 15 days from the date of cause. If the refund is not made within this period, an obligation falls upon the corporation to pay interests at the rate of 15% per annum, reckoning from the end of the fifteen-day period until such refund is made. The provision is thus able to guarantee prompt payments and safeguard the applicants against financial losses.
Section 39(4) speaks to the Return of Allotment. The return of allotment in the prescribed format to ROC is filed by the company after the allotment of the shares. This is in compliance with the said company’s laws. The filing shall be made within a timeframe of 30 days following the allotment. Information required includes names of the allottees, number of allotted shares, and consideration so received against such shares. The legal requirement being breached will naturally attract fines on the entity as well as its officials.
Section 39(5) carrying Penalties for Breaches, any corporation and an officer dealing with the said provisions violating the same section would entail an infirm or defective corporation and may be liable towards punishment which comprises of fines along with various other regulatory activities as listed in the same act which means accountability towards strict compliances.
Section 39 of the Act leads to a systematic approach to share allotment in order to safeguard the interest of investors and protect a company’s legal and financial obligations. This section provides full disclosure and accountability over shares by offering a minimum subscription, regulating application fees, and providing immediate refunds. It is the return of allotments that keeps the regulatory actors informed about accurate data on shareholder trends.
In short, Section 39 of the Corporations Act 2013 is an important provision that keeps the process of share allotment intact by balancing the interests of both corporations and shareholders and thus gaining the public’s trust in capital markets.
Landmark Judgments or Case Laws
Judicial Interventions have seen the allotment of shares scrutinised many times, laying down certain jurisprudential principles governing corporate law while safeguarding investors’ interests. These are important judgments, such as accidents and accusations of truth and honesty in the share allocation process. The courts have noticed that the nature of share allocation needs to be statutorily regulated and given priority to shareholder rights in consonance with the purposes of the company. It declares any form of abuse or oppressive measure in share allotment illegal and provides for legal intervention. One of the landmark judgments, along with its facts, issue and judgement regarding share allotment, are as follows:
Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. (1963 AIR 248)
Facts: In Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. (1963), the Calcutta Stock Exchange Association issued the shares in favour of a specific group of people, out of whom one was Sri Gopal Jalan & Co. The case arose when the company issued shares retrospectively. The contention put forward by Shree Gopal Jalan was that the allotment was invalid because it was made after the issuance of shares by the company and was even backdated to meet some statutory requirements.
Issue: In such a case, the issue at the centre was retrospective allotment of shares, which was permissible under the Companies Act 1956, wherein the Companies Act 2013 superseded it. This concern was merely about the validity of such backdated allotment of shares and whether such act would amount to a statutory obligation’s violation and corporate governance principles as well.
Judgement: The court held that allotment of shares must follow proper procedures and cannot be made retroactive. The allotment will have effect only after the application form is received by the company as duly accepted and the applicant is given intimation of the allotment. Retrospective share allotments cannot be permitted because such procedures are against the principles of transparency and equity in corporate practices. Consequently, the retrospective allotment of shares was deemed invalid, reinforcing the necessity for adherence to proper procedural standards in share allotment practices.
Conclusion
The share allotment mechanism under the Companies Act 2013 is a well-arranged and legally governed process which guarantees transparency, fairness, and statutory compliance. The process begins with the company issuing a prospectus or offer document in the case of a public offering or an offer letter for private placements or rights issues. Thereafter, applications are collected along with the necessary application fees. The minimum subscription requirement will be fulfilled, proper valuation will be made where applicable, and necessary approvals will be obtained from the board and shareholders. The application receipt is what triggers the allotment process, whereupon the allotment is recorded in the company registers of members, and a return of allotment is filed with the Registrar of Companies in the prescribed Form PAS-3 at the required period.
Therefore, the structure secures respect for corporate governance standards as well as investor protection from arbitrary and fraudulent issues of shares. Defaults of individual entities to comply with regulation attract legal action along with monetary fines against the organisation and the officers managing those. So, share allotment is not only a monetary transaction but becomes an annexed regulatory process in its impact on the capital structure of the company, giving investors confidence and lending to general stability in capital markets.
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