APPLICATION AND ALLOTMENT OF SHARES
An application for shares is an offer by a prospective shareholder of
company to take shares. 'Allotment' is the acceptance by the company of that
ffer. Allotment results in a binding contract between the
and
company
pplicant.
the
The term 'allotment' is not defined in the Act. Broadly speaking, allotment
is the appropriation to an applicant by a resolution of the Board of Directors of
a
company of a certain number of shares in the company in response to an
application [Spitzel v. Chinese Corpn., (1899) 80 L.T. 347].
In Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Assn. Ltd., (1963) 33
Comp. Cas. 802, the Supreme Court explained allotment of shares as "the
appropriation out of the previously unappropriated capital of the company, of a
certain number of shares to a person. Till such allotment the shares do not
exist. It is on allotment that shares come into existence."
General provisions regarding allotment of shares and debentures
The general principles as to offer and acceptance in the law of contract
apply to a contract involving an application for and allotment of shares in a
company. These principles are as follows
1.
Proper authority.
An allotment must be made
by
a
resolution
or
tae
Board of directors of the company. This duty cannot be delegated by tne
directors except in accordance with the provisions of the Articles.
2. Reasonable time. The allotment must be made within a reasonable t
an
otherwise the applicant is not bound to accept it. But if in spite
ol
ted
unreasonable delay, shares are accepted by the applicant (or are not
repuad
delay
by him), he cannot plead that his offer had
because
[S.T.M.R.V.R. Murugappa Chettiar
Comp. Cas. 78 (Mad.)].
v.
lapsed
or tn
25
Puddhukotai Ceramics Ltd.. (1959) 25
Ramsgate Victoria Hotel Co. v. Montefiore, (1866) L.R.1. Ex. 109. M
applied for shares on June 28. He heard nothing further until November,
ake
of the same year when he received a letter of
refused to
He
eptance.
accep
ed to
the shares and pay the sums due on allotment.
Held, he was n
refuse as his olfer had lapsed due to undue delay in
allotment
3. Communication. The allotment must be
communicated to t ad as
making the applicatíon so that it is legally complete. Where the post 1sacS,4
a means of communication between the
parties (as is generally the case),
as
and 5 of the Indian Contract Act, 1872 apply. Thus allotment is coupa
plete as
195
Shares
sufficiently stamped and
company posts the letter of acceptance,
in postal transit, the
lost
is
addressed. If the letter of acceptance
On 8
as soon as the letter
him
as against
correctly
able as the contract is complete
ottee is liab
the
s
0
0
tance is posted.
Co. Ltd. v. Grant, (1879) 4 Ex. D.
Household Fire Ins.
letter of allotment was posted but it
o fa c c e p t a n
of
shares in H. Co. A
216. G
applied for
never
reached G.
shareholder in the company.
was a
and
Held, G
The allotment must be absolute
unconditional.
is
Absolute and
conditional and the condition
an application for shares is
If
nditional.
shares.
is not bound to take
nlfilled, the aPplicant
400
Bom. L.R. 595. A applied for
v. Ghasi Ram, (1918)
m
anbranch
Ramanbhai
that he w a s appointed a
the
condition
a company on
he was not appointed
h a r e s in
allotted to him
u n c
n o t
the
branch
the
ger of
company.
the
was
not bound
by
the allotment.
this
contract for
to take 300 shares if the
Hotel Co. offering him. The Hotel Co. before entering
Hotel Co., Re, Simpson's Case,
a
S wrote to
the
renovation of
case
but
were
he
manager. Held,
Aldborough
into
hares
Hotel
with S
was
given
(1896)
4 Ch. 184. In
to
went into liquidation.
contract
conditional.
was
as his ofter
contributory
Held, S
the
was
not
of
liable
an
as
a
offer to
offeT
by the
acceptance
attached to
condition should be
will be a n e w
Likewise, "no
i n t r o d u c e s a n e w term, it
the
acceptance
If
nurchase shares.
effective' unless it is accepted
and it shall not be
a company
(1869) L.R.4 H.L. 305].
hy
applicant." Jackson
v.
Turquand,
allotment must
Further the
of the
be made according to the provisions
Articles.
be
withdrawn
offer to take shares (i.e., application) may
is comnplete as
5. Revocation. An
its aceptance (i.e., allotment)
of
communication
before
is posted). That is, a n
any time
before the letter of allotment
(i.e.,
before his offer has been
against the applicant
withdraw his offer any time
c
a
n
shares
for
applicant
accepted.
H applied for
Re (1867) L.R. 4 Eq. 9.
Bank
Assn.,
Savings
but the letter of
Shares w e r e allotted to him,
a
in
company.
After
shares
for delivery by hand to H.
agent
the
company's
to
sent
was
H
allotment
was delivered to him,
before the letter of allotment
but
allotment
the
shareholder in the company.
withdrew his application. Held, H was not a
any time before itss
Likewise, allotment may be withdrawn by the company before
the letter of
(i.e.,
as against the company
is
complete
unication
al
lotment is received by the applicant).
ALLOTMENT
PECIAL PROVISIONS RELATING TO APPLICATION AND
regarding the
ne Companies Act, 1956 prescribes certain restrictions
of
companies. These restrictions
National
shares and debentures by public
hnent
4y be discussed under the following two neads
.
When no public offer is made;
.When public offer is made.
L.
h
Capitaln
no
public offer
offer
Progpeesnot
s . In such a
and
public company having
debentures to the public, it need not
is made. Where
shares
a
share
issue a
a
or
case it shall not proceed to allot shares or d e b e n t u s
196
unless
for
least
3
registration
a
at
days before the
statement in lieu
Shares and Dividend.
nd
first allotment it has filed with the
of
prospectus.
The statement
by every person who is named therein as a director
company or by his agent authorised in writing [Sec.
in
contravention of this rule, the allotment
or
70
shall lstra
proposed direct.gned
(1)J. If the com of th
shall
irregular and it anyy acacta
of the allottee. Further the
option
company, and every d b
the company who
wilfully authorises or permits the contravention.
oCtop
punishable with fine which may extend to Rs.10,000 [Sec. 70 (4)].
hail
voidable
of
be
at the
1. When public offer is
made. In tho case of a public company which o
shares and debentures to the public for
subscription, the provisions
sions relatin
allotment may be studied under the
heads
1.
2.
oferst
following
First allotment of shares.
Subsequent allotment of shares.
Allotment of debentures.
1. First allotment of
shares
A public company which offers
shares
first
3.
to the
public for subscription for th,
comply
e
following restrictions
(1) Registration of prospectus [Sec. 60 (1)]
A copy of the
prospectus signed by every person who is named
director or proposed
therein as.
as a
director of the company or by his
agent
shall
be
writing
authorised
in
filed with the Registrar for
duly
registration on or before the
date of its publication.
time must
with the
(2) Initial offer of securities
68-B
as
inserted by the
Notwithstanding
to
be in
dematerialised form in certain
Companies (Amendment) Act, 2000)
cases
[Sec.
anything contained in any other provisions of the
every listed public company,
making initial public offer of any security forAct,a
sum of
rupees 10 crores or more, shall issue the same
in dematerialized
form by
the requisite provisions of the only
with
and
Depositories Act, 1996
complying
regulations
made thereunder.
(3) Minimum subscription [Sec. 69 (1)]
No allotment shall be made of
share capital of
public for subscription unless any
(a) the amount stated in the
as the
prospectus
subscribed, and
a
company offered
to
the
minimum amount has been
(b) the
sum payable on
for such amount has been
paid to and
received by the company. application
A company
making any rights or public issue of shares, debentures, etc.,
must receive a minimum of 90
per cent subscription against the entire issue
before making an allotment of shares or debentures
to the public. If minimum
amount of 90 per cent is not
received, the entire amount collected with
applications shall be refunded to the
at the end of 90 days from the
closure of issue. If there is a delay inapplicants
refund of such amount
by annumthan
10
days, the company will pay interest at the rate of 15 per cent per
for the
more
delayed period.
4) Application money (Sec.
(3) to (6)]
The amount payable on application on each share shall not be less than 5
69
per cent of the nominal amount of the share.
197
Shares
should be
capital issued
Guideline
The capital issu
(SEBI
date o f
made
dated 11-6-92. paid up
of issue
AlI
the
within 12 months from
moneys
received from applicants for shares shall be deposited and kept
Scheduled
in
1an Osited
dep
ntil
(a)
Bank
a
the certificate to commence business is obtained: or
Awhere such Certiticate has already been obtained, until the entire
navable on applications for shares in respect of the
minimum of 90 pe
has been
amo
(b)
cription
cent subs
complie
with
ith
all
aid
received
by the company. If these
moneys received from applicants for conditions are nopt
shares
them
shallDe
to
without interest. If
such money is not repaia
afte
ter
the
days
issue of the prospectus, the directors
in 130
of the
ll be jointly and severally liable to repay it with
interest
at
the rate of 6 perT
per annum om the expiry of the 130th day.
any
company
cent
the event of any contravention of the above provisions,
n
other person who is knowingly responsible for suchevery promoter,
contravention
he Dunishable with fine which may extend to Rs. 50,000.
sh
ny c o n d i t i o n
requiring
or
binding
any
applicant for
with any requirement of Sec. 69 shall be void.
shares
to waive
compli-
ance
irregular allotment
(Sec.
71).
5) Effect of
Allatment of shares is irregular when it has been made by a company in vioSec. 69
lation of
or
70. Thus
(al where the company has issued a prospectus, the allotment is irregular if
il
(n has not been able to raise the amount of minimum subscription
(in has not collected
money
Cent of the nominal amount of the share) ; and
application
(which
shall not be less than
5 per
li) has not kept the money so received in a Scheduled Bank.
(b) where the company has not issued a prospectus, the allotment is
lar if it does not file with the Registrar for
registration, a statement in
prospectus at least 3 days before the first allotment of shares.
The effects
of an irregular
allotment
follows
(a) Allotment is voidable. An
irregular allotment is voidable
ne
applicant. The option must be exercised
irregu-
lieu of
are as
at
the
option
o
)within 2 months after the holding of the statutory meeting of the
ompany, or
where
the company is not
or
required to hold a statutorymeeting,
meeting, within
where2
lOtment is made after the holding of the statutory
0nths after the
date of the
will
acquiesces
will ottee
be
allotment.
in
any way
the irregularity, after its discovery.
debarred
the
allotment
[Finance &Issue Ltd. v.
avoiding
Anadian Produce Co., from
adian
2 Ch.even
Re (1908)
515).if the company is being wound up.
(bhe irregular allotment
is voidable
in
The
Compensation.
ar allotment of Any director, who has knowledge of the fact of the
eTegulshareho
shares, shall be liable to compensate the company and
a n y loss, damages or costs which the company or the
Shares nnd Dividends
198
have
sustained or
inCurred thereby.
Proco
ceedings2 to recover
year
any
allottee
may
such
loss,
damages or costs can only be commenced withir
date of the allotment.
An irregular allotment of shares made by the directores
be subsequently ratifi
excess of their powers may
by 8the
v. Bamford, (1970) Ch. 2121.
meeting [Bamford
general
irom the
of a
shareholders
company
ny inin
shareholny
(6) Opening of the subscription list (Sec. 72)
ata
shares or debentures of a company are offered in pursua
prospectus issued generally, these cannot be allotted at once. Accord
ofa
ling to Sec,
72,
allotment
can be made only after the beginning of the 5th day from
of the issue of the prospectus or on such later day as
may be specifiedthe date
The
5th
is
to
be
prospectus.
day
counted from the date when the n in the
was published in a newspaper or was
otherwise notified to
beginning of the 5th day or the later day is known as 'the the puhliug
openina e This
subscription list'.
the
Example. Grace Ltd. issued a prospectus to the
general public invitina
subscription for its shares in the form of a
newspaper advertisement o
Friday, the 22nd January, 1999. The earliest date
on which the
list of the company can
subscription
open is Saturday, the 29th
January 1999. The
following days have been excluded as they are
public holidays under the
Negotiable Instruments Act, 1881
Sunday, the 24th January, 1999 Public
holiday.
Monday, the 26th January, 1999; National
holiday.
When after issuing a
a
prospectus
public notice is given by some
person, excluding or
his
When
diminishing
responsible
no allotment
responsibility,
of the 5th
shall be made
beginning
after
day
the
date of such
reference to the day on
public notice. The
which the
construed as referring
is first issued
prospectus
to the
day on which it is first issued as generally is
advertisement. The object of these
a
newspaper
sufficient time to
is to give
provisions
the
study
for shares
applicants
they are not satisfied with theprospectus and to withdraw their
applications if
prospectus.
The subscription list for public
working days and this fact must be issues should be kept open for at least 3
issued on 11-6-1992].
disclosed in the
prospectus [SEBI Guidelin
The validity of an
allotment, however, is not
of the provisions relating
any contravention
default, the company, andto the opening of the affected bylist.
In the
subscription
every
punishable with fine which may extend
event Deor
defaulting officer of the
until the
of
a
Further
for shares of
prospectusapplication
issued
generally,
time of
company shall
to Rs.
an
a
50,000.
company, which
is
made in
pursuanc
until after the
the openingrevocable
of the
expiration
subscription list. The object oo
takes an
speculators
from
unfavourable turn.
withdrawing their applications
(7) Shares and
debentures
to be listed
in on a stock
The
Companies
exchange (Sec. 73)
all
Amendment Act, 1988
public issues with
provides for compulsory
recognised
Company,
stock
to
listing ot
intending
offer shares or
exchanges.
by the issue of a
to
According
it, every
debentures to the public for
prospectus, shall, before
such issue, make
subscription
the
day from the
this
provision is to prevent
the issue
5th
is not
an
application
to
recognise
stock
exchan ges for
This
permission for the listing
sthares
to the
to
the shares or provision has been
made to lend
debentures
issued
af the
to the
liquidity and
stock exchange or, as the
ha narn
public.
t
be
exchanges
the prospectus. case may be, of each of the
be stated
void ifinthe
pros
pectus shall
stock
Any allotment made
ed by the
stock
for
permission
under
rosed by
exchange
listing of shares has not the
of
each
ry of 10
such
stock
weeks or
from the date of
exchanges, as the been
more
os
or
es.
debenture
199
r k e t a b i l i t y
betor
the
closing
case
of the
be,
le The
Example.
The
subscription
list
subscription
of
999. Any allotment
Cheerful Ltd. closed for
31st ay,efore
made
shall be void if
public on
the nr
9th August.10oid if the
Thursday,
the
is not
permission
August,
the
1999, i.e., before the
from
ate of the
closing of the subscription
expiry of 10
list.
appeal
an
Where
again the decision of
any recognised stock
for the
ormission
or
shares
debentures
to
Dentures
to ha
refusin has
be dealt in on that exchange
e been
S
been preferred
preferred under
22 of
stock ex
under
change
Sec.
ecurities Contracts
such allotment shall not be voidthe Securities
Contracts
1956,
Act. the purposes of:Sec.
(Regulation)
until the dismissal of(Regulation)
the appeal.
it
73,
shall
be
For
that
deemed
has
not been
permission
if the application for permission, where
grante
made, has
i s t s ,
granted
weeks
refusing p e r m :
Act, 195
not been
within 10 weeks.
of money
disposed
refusal of permission. Where the
permission has
under Sec. 73, or such permission
been applied for, has
having
Lan oranted, the company shall forthwith repay without interest all
Return
of
on
anDlied
not
not
moneys
aceived from applicants in pursuance of the prospectus. If any such money
is
not repaid within 8 days after the company becomes liable to repay it, the
company and every director of the company who is an officer in default shall,
on and from the expiry of the 8th day, be jointly and severally liable to repay
that money with interest at such rate (a) not less than 4 per cent and not more
than 15 per cent as may be prescribed; (b) having regard to the length of the
period of delay in making the repayment of such money.
grant an application or
Right of appeal. Where a stock exchange refuses to will
be deemed to have
(in which case it
fails to dispose it of within 10 weeksunder
Sec. 22 of the Securities Contracts
been rejected), the company may,
Government against the refusal.
Kegulation) Act, 1956, appeal to the Central
The appeal shall be filedwithin 15
i) within
rders of
15
from the date
of the refusal; or
of the 10 weeks.
from the date of the expiry
the Central
n e stock
vary
days
days
exchange
an
Government.
The
opportunity of being
decision
or set aside the
Government
stock exchange
conformity
the
heard
or
failed to dispose
the permission.
or
the
sets 'aside
the
may after
decision
of the appli-
of the recognised
shall act in
stock exchange
permission,
grants
1ge or
the
with the orders of
Government.
Central
permission
Return of exce money where
exchange
recognised stock
en
Een granted
by
the recognist
by the
any shar edor debentur all
granted.
received
moneys
Where
permission
from
applicants
has
for dealing
1ares
exchanges
or stock
for
grantodXCess
O d e b e n t u r e s ,
Government
of the stock exchange,
omitted
stock exchange ha_
the
where
or refuse
the specified time, grant
wthin
e r e the Central
Central
shares
in
or
or
Shares ond Dividends
200
debentures in excess of the application money on sharess or
or doi
shallbe repaid forthwith without interest. If such money is not
debentures allotte
repaid withoted
days from the day the company becomes liable to pay it, tha
every directoi of the company who is an officer in default shall pany a
and
the expiry of the Bth day, be
liable
with interest at such rate, not less than 4 per cent and
jointly
severally
to repa
nd from
and not more y the money
may be prescribed. The rate of interest shall be
15 per
prescribed havthan 15
per
to the length of the period
in
regard
of delay making the repayment of suchhaving
Raymonds Synthetics Ltd. v. Union of India, Writ Petition mogard
Na 2.
1991 decided on July 17/18,
issue of the sha08 of
1991.
The
public
oversubscribed by several times. The refund of oversubscribed nares was
Was
investors could not be made within the
amount
stipulated period. Another
for delay in refunding the
was that the
money
parcels of refund orders
destroyed by fire in transit. The company was advised
were
payment of all refund vouchers to avoid their misuse. by its bankers to st
Held,
of Sec. 73
provision
(2-A) (regarding refund) were absolute in nature the
and
onCe
to
failed
company
repay the excess amount within the
grace period of A
days, there was no escape from
of interest
payment
irrespective
of the
circumstances. The company in this case
that
argued
the
forthwith' and 'the company becomes liable to
expression
pay' in Sec. 73 (2-A) should
not be taken to mean at once. It
only meant 'within a
time'. The
legislature was fully conscious that the expression reasonable
'forthwith' might be
taken as 'within a reasonable time' and not at
therefore, permitted grace period of 8 days beforeonce. It hadthein its wisdom,
requiring
the directors to repay the amount with
company and
interest.
If
Penalty. default is made in complying with the above
provision, the
company, and every officer of the company who is in
shall be
default,
punishable with fine which may extend to Rs. 50,000 and where
not made within 6 months from
repayment is
the expiry of the 8th
also with
day,
imprisonment for a term which may extend to 1 year.
All moneys to be kept in a
separate bank account. All moneys received
from applicants for shares shall be
in a separate bank account maintained
with a scheduled bank until the kept
of shares has been
permission for
granted. Where an appeal has been preferred againstlisting
the refusal to grant such
permission, the money shall be so kept until the disposal of the appeal. Where
the permission has not been
applied for as aforesaid or has not been granted, the
money standing in the separate account shall be repaid within the time and in
specified in Sec. 73. If default is made in complying with this
the manner
provision, the company, and every officer of the company who is in default,
shall be punishable with fine which
may extend to Rs. 50,000.
Utilisation of money. Moneys standing to the credit of the separate bank
account (application money)) shall be utilised only for the tollowing purposes,
namely
a
adjustment against allotment of shares (where permission has been
granted); or
(b) repayment of moneys (where permission has not been granted), or where
the company is for any other reason unable to make the allotment of shares.
This provision is intended to provide against misuse of the moneys for other
(1979) 49 Comp. Cas.
purposes [Deccan Farms & Distilleries Ltd. v. V.L. Bhanji,
321).
avoíded.
sthates
be
cannot
d e b e n t u r e s to
or
73
with Sec. shares
2 .
c
1ianCe
Any
condition
which purports
waive compliance
with any of
cant for
73 is void.
of Sec.
icant
for
In reckoning
73 (Sec. 74). another day, the
Secs. 72 and
8th day in
day after Act, 1881 shall
5th o r
5th o r the 8th
the
of
I
n
struments
and
73,
heT ning
Secs. 72
Negotiable
the
public holiday
of
s
under
is itself a
holidays
reckoned)
theReCk
purpo
so
lic
o r 8th day (as
be
the 5th
If
holiday shall
ervenled.
a public
not
w h i c h is
C o m p
requireme
to
bin
the
substituted.
disday
llotments (Sec.
(Sec. 75)
the nextt
as
8 )R e t u r n
s)
of
Return
shares by
of
allotment
Within 30
da
30 days
.shin
Registrar
known
statement
a
company,
a
as
w
i
t
for cash,
on
h
r e t u r ns h a l l c o n t a i n
allotted
shares
and the
about the
at
ri
tc
ic
u
ar s
e t u DP
ar
u
lla
allottees,
ns of the
for
aS allotted
(a
QCcupa
respect
of
(b) Particulars ab
A)Particulars
for a n y
contract
when
11n
writing.
paid
n
El rith
ch
such
the
a
actually
been
shares)
not in
bonus
not tbeing
h a n cash may
other
within
case,
Registrar
the
company
shall,
with
the
days
30
stamped
reduced
to be
had been
cnfract has
shares
if the
bonus
payable
a b o u t the
the
and
contract
to
as
allotment.
The pro forma
have been
contract.
stamp duty
same
writing
to
reduced
cases
some
of the
particulars
the prescribed
be
the
after
partly
or
fully
allotted as
or
fully
allotted a s
bonus shares)
shares
for
a d d r e s s e s and
the n a m e s ,
should
Shares
each share.
r e c e i v e d in
than
than cash.
r a t i o n other
The
to
consideration
consideration
for
paid
cash has
(not being
shares
the
up
nartly paid
The
only
cash
them.
about
amount
shall
company
allotments'.
as
'return
the
f i l e
the
a l l o t m e n t s
to
would
and
addresses
names,
authorising
of such
issue
the
resolution
Particulars
(c)
OCcupations
of t h e
shares.
(d)
A
allottees
copy
a
and
issue
of
authorising
of the
discount,
passed by
resolution
and
a
copy
of the
the c o m p a n y
NCLT's
order
satisfied
sanctioning
the
issue.
is
of 30 days
that the period seeking this
For
is
thinks fit.
Registrar
to the
the
a s he
If
application
time.
period
that
an
E x t e n s i o n of
extend
to make
30 days.
he may
will have
expiry of
inadequate,
the
after
before o r
the
orWas
officer of the
of time
be made
every
xtension
may
75,
Sec.
e x t e n d to
application
shares at a
,
company
AgIstrar.
The
enalty.
complying
who
co
Dany
Rs.
with
which
in
with fine
is made
punishable
If d e f a u l t
be
continues.
d e f a u l t shall
the detault
been
is in
which
having
the
o f f i c e r of
officer
shares as
day during
allotments
may
It
compan
the
cash
tor is
who is
who
allotted
company
any
very
a s to
of
of the
every
r
e
c
e
i
v
e
d , every
return
been received,
w
h o is guilty
e
who
cash has o t actually
ifif cash
c o m pany
any
Rs. 5,000.
of the
e x t e n d to
an
p
r
o
m
o
t
e
r
efault
not apply
default and very
which may
75 do
showsi
punishable
with fine
The
provisions
of
of forfeited shares.
non-payment
for
Sissue
u e of
forfeited
of shares
In
of
c o n t r a v e n o n
c
calls.
shares.
by
of shares
a
ns
otPply
payable
apnlie.Le
public
for
'first
Plcable to
p
r
o
pplicatio
on a
applicatic
v
i
s
i
allotment
relating
of
public
o
n
s
t
r
a
as
as
the
commpany,
c o n t a i n e d
minimum
to
n
v
e
n
t
i
o
n
to the
allotment
subsequent
in
subscription
Ovoffered
o
of Sec.
case
allotment
in
n
amount
special
Sec. 69
(5
of
shall
per cent)