ALLOTMENT OF SHARES

Submitted by Amit Kumar, R.No. 1007 (Sem.VII), B.B.A.LL.B. (H)

Submitted to :- Mrs. Nandita S. Jha (Faculty of Corporate Laws )

CHANAKYA NATIONAL LAW

UNIVERSITY
PATNA

Date of submission:- 14/11/2016

 DECLARATION

I hereby declare that the project work entitled CORPORATE

CRIMINAL LIABILITY IN INDIAN CONTEXT submitted to Chanakya
National Law University, Patna, is a record of an original work done by me
under the guidance of Mrs. Nandita S. Jha, Faculty-in-Charge (Corporate
Laws), CNLU, Patna, and this project work is submitted in the final
fulfillment of the requirements for the Project Work for Corporate Laws I
(Semester VII), CNLU, Patna. The results embodied in this project have
not been submitted to any other University or Institute for any purpose.

Date 14/11/2016 Amit Kumar

 TABLE OF CONTENTS

Introduction.................................................................................05
Object of the study......................................................................05
Hypothesis..................................................................................05
Research Methodology...............................................................05
Chapterisation
Importance of Shares and

Stock06
Allotment of Shares....07-09
General Rules and Restrictions on Allotment of
Shares10-13
Conclusion........................................................................14
Bibliography..............................................................................15

Table of Cases

Ramsgate Victoria Hotel Company v. Montefione (1866) LR 1 EX 109

Ramanbhai v. Ghasi Ram (1918) BOM. LR 595
Changa Mal v. Provisional Bank (1914) ILR 36 All 412]

ACKNOWLEDGEMENT
In making of this project many people helped me immensely directly or indirectly. It would
not have been possible without the kind support and help of many individuals. I would like
to extend my sincere thanks to all of them.

I am highly indebted to Mrs. Nandita S. Jha for her guidance and constant
supervision as well as for providing necessary information regarding the project & also for
her support in completing the project.

My sincere thanks and appreciations also go to my colleagues in developing the project and
the people who have willingly helped me out with their abilities.

Thanking you!

Amit Kumar

Introduction
Allotment, in business, is meant to describe a systematic distribution of resources across
different entities and over different time periods. In finance, allotment is normally related to
the distribution of shares during a public share issuance. The public offering is normally
underwritten by two or more financial institutions, of which each are given a specific number
of shares to sell. The distribution of shares is the act of allotting the pot of total equity
between the participating parties. Among other reasons the major reason a company issues
new shares for allotment is to raise money to finance business operations. Company directors
may issue new shares to fund an acquisition or takeover of another business. The new shares
can be allotted to existing shareholders of the acquired company, effectively exchanging their
shares for equity in the acquiring company. New shares can be issued and allotted as a form
of reward to existing shareholders and stakeholders. A scrip dividend, for example, is a
dividend that gives equity holders a number of new shares proportional to the value of what
they would have received if the dividend was cash. There are certain rules and guidelines laid
down through several legislations which are to be followed strictly in this regard.

Objectives of Study:
The objectives of the study are to know about the allotment of shares by a company.
To know the statutes which regulate the allotment of shares .

Hypothesis

The researcher hypothesizes that allotment of shares means an appropriation of a certain

number of shares to an applicant in response to his application for shares and the process of
allotment is subjected to rules laid down in several concerned statutes in this regard.

Research Methodology
The researcher has primarily relied on the Doctrinal Method. The research is based on
comprehensive study of sources which are primarily study of various books, other web
resources, news articles etc. Analytical, critical and Comparative methods are used as major
tools of study in support of the arguments.

Importance of Shares and Stock

The stock market is one of the most important sources for companies to raise money. This
allows businesses to be publicly traded, or raise additional capital for expansion by selling
shares of ownership of the company in a public market. An economy where the stock market
is on the rise is considered to be an up-and-coming economy. In fact, the stock market is
often considered the primary indicator of a countrys economic strength and development.
Rising share prices, for instance, tend to be associated with increased business investment
and vice versa.

The stock market is a public market for the trading of company stock (shares) at an agreed
price. The stocks are listed and traded on the stock exchange market. Participants in the stock
market can be based anywhere in the world. The purpose of a stock exchange is to facilitate
the exchange of securities between buyers and sellers. Stocks represent possession with the
right to transfer possession to others, they also entitle their owner to receive profits from the
company .

Capital appreciation and dividend income are two reasons why shares are important to
financial planning1. A typical balanced investment portfolio contains stocks, bonds and cash.
Conservative investors may favour bonds over stocks, while aggressive investors might
favour stocks. Shares are often a source of regular income because some companies distribute
quarterly dividends from their after-tax net income. In tax-sheltered investment portfolios, the
capital gains from stock trades and dividend distributions accumulate tax-free until they are
withdrawn.

Shareholders have the right to participate and vote in annual general meetings. Small
individual shareholders holding a few hundred shares may not be able to influence
companies. However, when these small investors join with mutual funds and other
institutional shareholders, they can influence corporate boards and senior management to
change strategic direction. Investors can influence corporate strategy by simply abandoning
the shares of under-performing companies, thus driving share prices down and forcing the
board to make the necessary changes. Healthy companies mean a healthy company, which
benefits everybody. Fully paid share can be converted into stock.

Allotment of Shares
1 Importance of stock market, Share Tips Info, available at http://www.sharetipsinfo.com/economy-stock-market.html, last
seen on 03/11/2016
To issue shares a company follows a definite procedure which is controlled and regulated by
the Companies Act and Securities Exchange Board of India (SEBI). There are different ways
of issue of shares which may be:
(A) For consideration other than cash

(B) For cash

Issue of shares for consideration other than cash:

e.g. Sometimes shares are issued to the promotors of the company in lieu of the services
provided by them during the incorporation of the company.

Issue of Shares for cash:

In general, shares are issued for cash. The company may call the share money either in one
instalment or in two or more instalments. But company always collects this money through
its bankers.

Generally instead of receiving payment in one instalment i.e. at the time of application the
company collects it in two or more instalments. The first, instalment which the appplicants
have to pay along with the applications for shares is known as application money. On the
allotment of shares the allottees are required to pay the second instalment which is termed as
allotment money. If the company decides to call the share money in more than two
instalments the other instalment is/are termed as call money (i.e. first-call, second call or final
call). After receiving the application for shares within the prescribed time, the Board of
Directors of the company proceed to allot shares. On allotment of shares the application
money is transferred to Share Capital A/c2.

Calls on shares:
After the receipt of application and allotment money the money that remains unpaid can be
called up by the company as and when required. Thus a call is a demand made by the
company asking the shareholders to remit the called up amount on shares allotted to them.

2 Allotment of Shares as Per Companies Act 2013 , Tax Guru , available at http://taxguru.in/company-law/allotment-shares-companies-
act-2013.html last seen on 03/11/2016
A company decides to issue number of shares to raise capital. It invites public to buy these
shares. Now there may be three situations :
Full Subscription:
Company may receive applications equal to the number of shares company has offered to
people. It is called full subscription.
Under subscription:
The issue is said to have been under subscribed when the company receives applications for
less number of shares than offered to the public for subscription. In this case company is not
to face any problem regarding allotment since every applicant will be alloted all the shares
applied for. But the company can proceed with allotment provided the subscription for shares
is at least equal to the minimum required number of shares termed as minimum subscription.
Over Subscription:
When company receives applications for more number of shares than the number of shares
offered to the public for subscription it is a case of over subscription. A company cannot allot
more shares than what it has offered. In case of over subscription, company has the following
options :
(i) Rejection of Excess Applications and Money Returned:
The company may reject the applications for shares in excess of the shares offered for issue
and a letter of rejection is sent to such applicants. In this case the application money received
from these applicants is refunded to them in full.
(ii) Excess application money adjusted towards sums due on allotment:
If the application money received on partially accepted applications is more than the amount
required for adjustment towards allotment money, the excess money is refunded. However, if
the Articles of the company so authorise, the directors may retain the excess money as calls in
advance to be adjusted against the call/calls falling due later on.

Pro-rata allotment3:
In some cases the company accepts the applications for subscription partially. It means that
the company does not allot the full number of shares applied for. For example if an applicant
has applied for 5000 shares and is allotted only 2000 shares, then the applications is said to
have been partially accepted. The company may evolve some formula of accepting
applications partially or making proportionate allotment/ the Pro-rata allotment which means

3 Pro-rata Allotment, Investopedia, available at http://www.investopedia.com/terms/p/pro-rata.asp last seen on 03/11/2016

that the applicants are allotted shares proportionately. In such a case the company adjusts the
excess share money received on application towards share allotment money due on partially
accepted applications.

The prices at which shares are issued may be at its:

Par value that is the face value of the shares.
Premium - When shares are issued at more than their face value these are said to
be issued at premium.
Application of premiums received on issue of shares4:
a in paying up unissued shares of the company to be issued to members of the company
as fully paid bonus shares;
b in writing off the preliminary expenses of the company;
c in writing off the expenses of, or the commission paid or discount allowed on, any
issue of shares or debentures of the company; or
d in providing for the premium payable on the redemption of any redeemable
preference shares or of any debentures of the company.
Discount - When issue price of a share is less than its nominal value, it is said to
be issued at discount. Subject to certain conditions under Section 79 shares at discount can be
issued.

4 S. 78, Companies Act, 1956

 General Rules and Restrictions on Allotment of Shares

Rules Regarding Allotment of Shares:

The following rules regarding allotment of shares are noted5:
(a) Application Form:
A prospectus is an invitation to the public to purchase shares. Naturally, the intending
purchaser has to apply in a prescribed form (given in the prospectus) for the purpose which is
known as application form.
The prospectus fixes the time when the application will be opened and the allotment will be
made. Letter of allotment should be sent to the applicant of shares after the allotment is made.
(b) Offer and Acceptance:
We know that membership of a company after purchasing shares is nothing but a contract.
The application form which is given by the members is the offer and allotment by directors
is the acceptance of that offer and, similarly, the notice of acceptance which is sent is the
acceptance of the offer.
(c) Conditional offer and Acceptance for Offer:
Usually, the conditions are printed in the application form, e.g., in case of over-subscription
of shares, shares will be allotted on pro-rata basis etc. Conditions for acceptance is practically
invalid. where an applicant applied for shares on the condition that he will be appointed as
branch manager of company but later on the condition was breached, it was held that he is not
bound by the allotment of shares6.
(d) Proper Authority:
It should be remembered that allotment of shares should always be made by the proper
authority e.g., by the board of directors, and allotment made without proper authority is void.
Although allotment can be delegated to some persons if the Articles so provide. Allotment of
shares made by an irregularly constituted Board of directors shall be invalid7.
(e) Reasonable Time:

5 Priyali Sharma, Allotment of Shares: Rules, Restrictions and Effects, Your Article Library, available at
http://www.yourarticlelibrary.com/accounting/share/allotment-of-shares-rules-restrictions-and-effects-company-accounts/70420/ last seen
on 04/11/2016

6 Ramanbhai v. Ghasi Ram (1918) BOM. LR 595

7 Changa Mal v. Provisional Bank (1914) ILR 36 All 412]

After receiving the application form allotment should be made as soon as possible by the
directors i.e., within a reasonable time. Otherwise, applications for offer will be revoked if
such reasonable time expires. The interval of about 6 months between application and
allotment was held unreasonable8.
(f) Fictitious Name:
Sec. 68A states that any person who
(i) Makes in a fictitious name for acquiring or subscribing for any share; or,
(ii) induces a company to allot, register any transfer of shares to him or any other person in a
fictitious name shall be punishable by imprisonment up to 5 years.

Restrictions on Allotment of Shares:

The following restrictions have been prescribed by the Companies Act regarding allotment of
shares:
(a) Minimum Subscription:
Sec. 69(1) states that no allotment can be made by the company until the minimum
subscription has been received9.
(b) Application Money:
Sec. 69(3), however, lays down that the amount payable on each share with the application
form must not be less than 5% of the nominal value of the shares10.
(c) Money to be Deposited in a Scheduled Bank:
Sec. 69(4) states that money received from the applicants must be deposited in a Scheduled
Bank until the certificate to commence business has been obtained or until the entire amount
payable on applications for shares in respect of the minimum subscription has been received
by the company11.
(d) Returns of Money:

8 Ramsgate Victoria Hotel Company v. Montefione (1866) LR 1 EX 109

9 statutory provisions regarding allotment shares, Tax Management India, available at

https://www.taxmanagementindia.com/search/tmi_search.asp?text=statutory+provisions+regarding+allotment+shares last seen on
04/11/2016

10 ibid

11 ibid
Sec. 69(5) states that if the minimum subscription has not been raised or if the allotment
could not be made within 120 days from the date of publication of the prospectus, the
directors must return the money received from the applicants. If the money is refunded within
130 days no interest is payable, beyond which the directors are liable to pay interest @ 6%
p.a. from the 130th day to the day of repayment12.
(e) Statement in lieu of Prospectus:
Sec. 70 of the Companies Act states that a public company which has not issued any
prospectus must deliver to the Registrar for registration a statement in lieu of prospectus
signed by every director or proposed director or his agent in the form prescribed in Schedule
III of the Act, at least 3 days before the first allotment of shares13.
(f) Opening of the Subscription List:
Sec. 72 lays down that no allotment can be made until the beginning of the 5th day after the
publication of the prospectus or such later time as may be prescribed for the purposes in the
prospectus14.
(g) Revocation of Application:
Application for shares cannot be revoked until after the expiration of the 5th day after the
time of opening of the subscription list except in one case, i.e. if any responsible person gives
public notice of withdrawal of the consent to the issue of the prospectus, any applicant can
revoke his application.
Effects of an Irregular Allotment of Shares:
The following consequences are to be made if the allotment is made in contravention of
Section 69, 70 and 73, stated earlier:
(i) Option:
71(1) and (2) states that the allotment becomes voidable at the option of the shareholders. The
option to avoid the contract must be exercised within 2 months of holding the statutory
meeting or where no statutory meeting is held or where the allotment is made after the
holding of the statutory meeting, within 2 months after the date of allotment. The same can be
exercised even if the company is in course of liquidation15.
(ii) Compensation:
12 ibid

13 Ibid, at 07

14 Ibid, at 07
Sec. 71(3) lays down that if any director knowingly or wilfully contravenes the rules or
authorizes the contravention, he is liable to pay compensation to the shareholders concerned
for any loss or damage suffered by him. But the suit for compensation must be filed within 2
years from the date of allotment.
(iii) Fine:
Sec. 72(3) states that the validity of an allotment shall not be affected by any contravention of
the foregoing provisions of this section, but,, in the event of any such contravention, the
company, a fid every officer of the company who is in default, shall be punishable with fine
which may extend to Rs. 5,00016.

Returns as to Allotment of Shares:

According to Sec. 75 of the Companies Act, a company having a share capital (whether
public or private) must file with the Registrar a return of the allotment within 30 days after
making such allotment of shares giving full particulars of allotment made, such as17:
(i) The number and the nominal amount of the shares allotted;
(ii) The names, addresses and occupations of the allottees; and
(iii) The amount paid or payable on each share.
If any shares (other than bonus shares) are allotted as partly paid-up or fully paid-up
(other than cash) the company must produce for the inspection of the registrar:
(i) A contract in writing constituting the title of the allottee to the shares;
(ii) The contract of sale or for services or other consideration for which the allotment was
made; and
(iii) file with the Registrar(a) copies or the contract (mentioned above) and (b) a return
stating the number and nominal amount of the share so allotted.
While allotting bonus shares, the return should state the names, addresses and occupations of
the allottee, in addition to the number and nominal amount of the shares constituted in
allotment together with a copy of the resolution authorising the issues of such shares.

15 Effects of irregular allotment of shares, Business Law, available at http://accountlearning.com/effects-of-irregular-allotment-of-shares/

last seen on 04/11/2016

16 Ibid, at 08

17 Forms & Declarations To be submitted to Registrar of Companies, Quick Books, available at http://www.quickbooks.in/r/legal/forms-
declarations-to-be-submitted-to-registrar-of-companies/ last seen on 06/011/2016
It should be remembered that no return need be filed relating to the issues and allotment of
shares which the company had forfeited for non-payment of calls. Re-issue of forfeited shares
is not an allotment within the meaning of Sec. 75(1)18.

Conclusion
When someone buys a share, he is buying a small part of a company and a share in any profit
the company makes. One can make money from shares through capital gains, where we sell a
share for more than we paid for it, and from earning income called dividends.
A significant portion of household net worth is linked to the market value of stocks and
mutual funds. This creates a wealth effect. During bull markets, people feel wealthier and
businesses feel more confident. They spend and invest, which benefits the overall economy in
terms of increased employment, sales and corporate profits. Conversely, during falling
markets, individuals feel less wealthy and slow down their spending. This affects business
confidence and individual spending, which can drive down stock prices.
Stock market is an important part of the economy of a country. The stock market plays a play
a pivotal role in the growth of the industry and commerce of the country that eventually
affects the economy of the country to a great extent. That is reason that the government,
industry and even the central banks of the country keep a close watch on the happenings of
the stock market. The stock market is important from both the industrys point of view as
well as the investors point of view. So the stock market is not only providing the much
required funds for boosting the business, but also providing a common place for stock
trading. It is the stock market that makes the stocks a liquid asset unlike the real estate
investment. It is the stock market that makes it possible to sell the stocks at any point of time
and get back the investment along with the profit. This makes the stocks much more liquid in
nature and thereby attracting investors to invest in the stock market.

18 Mr. Pathan Apser Hussen, Forfeiture of Shares, manupatra, available at http://www.manupatrafast.com/articles/PopOpenArticle.aspx?

ID=77e42045-aacc-4e08-9292-1038efe8c9fc&txtsearch=Subject:%20Finance/Banking last seen on 07/11/2016
 Corresponding Provision

The Companies Act, 1956 The Companies Act, 2013

Section 68A.................................................................................Section 38

Section 69...................................................................................Section 39

Section 70.................................................................................... **

Section 71..................................................................................... **

Section 72..................................................................................... **

Section 73.................................................................................Section 40

Section 75.................................................................................Section 39

Section 78.................................................................................Section 52

Section79.................................................................................Section 53
 Bibliography

Company Law , Dr. G.K. Kapoor & Sanjay Dhamija, 19 th edition 2016,
Taxmanns

Corporate Law, 5th edition 2016, Lexis Nexis

http://taxguru.in/company-law/allotment-shares-companies-act-2013.html
http://taxguru.in/company-law/allotment-shares-companies-act-2013.html
http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=77e42045-
aacc-4e08-9292-1038efe8c9fc&txtsearch=Subject:%20Finance/Banking
http://www.sharetipsinfo.com/economy-stock-market.html
http://www.yourarticlelibrary.com
https://anno1777tutorials.wordpress.com/2010/09/20/why-are-shares-important/