How is the Allotment of Securities made?

This article titled ‘How is the Allotment of Securities made?’ is written by Mayank Shekhar and discusses how the allotment of securities is made.

I. The Concept of share allotment

Before delving into the subject of share allotment in detail, it is vital to grasp what the term “allotment” really implies. The allotment is the process through which a percentage of shares is allocated to an underwriter during an Initial Public Offering (IPO).

After the underwriting, the firm receives the shares, the remaining shares are distributed to other firms that participate in the offering. Allotment of shares refers to the procedure of appropriating a certain number of shares and distributing them to people who have filed share return applications.

The Companies Act 2013 incorporates the allocation of shares listed on the NSE, BSE, or any other Indian stock market. Additionally, the provisions of the SEBI Act, 1992, and the Securities Contract Regulation Act, 1956, apply to subsidiaries of listed corporations.

Allotment of shares is the process through which a corporation creates and issues a fresh number of shares to new or existing owners. Allotment of fresh shares is intended to attract new business partners.

II. General Provisions Regarding Share Allotment

The main rules of contract law regarding offers and acceptance apply to the application and allocation of shares. These are the following principles:

1. The allocation application must be submitted in accordance with established procedures. The Board of Directors must make the allocation by resolution. The Directors may not transfer this responsibility. A legitimate resolution of allocation must be adopted by the Board at a lawful meeting (Homes District Consolidated Gold Mines Re (1888) 39 Ch D 546 (CA)). A normal Board may ratify an allocation made by an irregularly constituted Board
   (Portuguese Consolidated Copper Mines, (1889) 42 Ch. D 160 (CA)).
2. The application for share allotment must be approved within a reasonable period (Section 6 of the Indian Contract Act, 1872). What constitutes a reasonable time is a factual determination in each situation. An applicant has the option of declining shares if the allocation occurs after a lengthy period of time. In the case of Ramsgate Victoria Hotel Company v. Montefiore ((1866) LR 1 EX 109)
   , the period of about six months between application and allocation was deemed excessive.
3. The allocation must be unconditional and absolute. Shares must be allocated on the same conditions as those mentioned in the application. Allotment of shares is contingent upon the fulfilment of specific legal requirements. If the number of shares allocated falls short of the quantity asked for, the allocation cannot be considered absolute.
4. Communication of the allocation is required. A legitimate communication is considered to be an allotment letter or allotment guidance. It makes no difference whether the letter is received or not, or if it is lost in route. Even if the applicant does not get the letter of allocation, he remains a shareholder of the business and is obligated to pay for the firm’s obligations as they arise ((1879) 4 E.D. 216). In
   Official Liquidator, Bellary Electric Supply Co. v. Kanni Ram Ramwoothmal (Household Fire And Carriage Accident Insurance Co. Ltd. v. GrantAIR 1933 Med 320), it was held that merely recording the shareholder’s name in the company’s register is insufficient to establish whether or not allotment occurred.
5. Allotments are made on a first-come, first-served basis. An oral request cannot result in a legal allocation. To become a member of the firm, an individual must agree in writing.
6. Allotment must not violate any other legislation. As a result, any shares awarded on the basis of a minor’s application are invalid.

III. The Allocation of Shares Procedure

1. A public corporation must submit a prospectus or a statement in place of a prospectus soliciting proposals to acquire the firm’s shares.
2. When the public makes a specified application for shares in the firm. The corporation may require payment of the share price in whole with the application or in instalments as share application money. The application fee must be at least 5% of the nominal value of the share.
3. No shares will be issued unless and until the Minimum Subscription (Section 39 of the Company Act, 2013) specified in the prospectus is subscribed for. The prospectus must mention the minimum subscription amount.
4. The money for the share application must be placed in a bank. It may be operated after the certificate of beginning is obtained.
5. If the firm does not meet the required subscription amount of 90% of the issue within 60 days of the issue’s closing date, the company is obligated to repay the whole subscription price. In the event of a delay of more than 78 days, the corporation is entitled to pay interest at the rate of 6% per year.

Following the allotment, the directors may require owners to settle the outstanding balance on their shares in the manner specified in the prospectus.

Typically, this is addressed in the company’s articles of incorporation. If the Articles have no such provision, the following provisions may apply:

1. No call shall exceed 25% of the nominal value of each share.
2. There should be a minimum of one month between the two calls.
3. Each member will get a 14-day notification indicating the amount, date, and location of payment.
4. Calls to be made uniformly for all shareholders belonging to the same class.

Spitzer v. Chinese Corpn ((1899) 80 L.T. 347), it was said that allotment is the allocation of a particular number of shares in a corporation in response to an application by resolution of the Board of Directors.

IV. Conclusion

As a result, we may infer that allocation of shares entails the corporation issuing new shares to the general public who are either new or current owners. The primary source of public misunderstanding is the distinction between share issuance and share allocation.

To summarise, the issue of shares refers to the offering of shares to shareholders, while the allotment of shares refers to the distribution of shares in the firm and the acceptance decision made by the corporation in this situation. The most critical operation in a corporation is share allotment, which entails expanding the organisation by providing shares to the general public.

---

1. Law Library: Notes and Study Material for LLB, LLM, Judiciary and Entrance Exams
2. Legal Bites Academy – Ultimate Test Prep Destination