When a company needs to alter its organisational structure, it invites new shareholders or changes the current proportion of shares between them. A firm’s creation and distribution of new shares is known as the allotment of shares.
Here is an article that talks about the process of allotment of shares by a company as per the Companies Act of 2013.
Meaning of Shares
Shares symbolise units of ownership in a company or the guaranteed portion of earnings that an individual investor is entitled to. According to the Companies Act 2013, share means “a share in the company’s share capital, and includes stock except where a distinction between stock and shares is expressed or implied“. A share represents the right to share in the company’s profits.
Meaning of Allotment of Shares
The allotment is distributing a portion of the shares to an underwriting participant (any party who is a member of a company’s financial organisation) during the initial public offering. Both new and existing owners are entitled to receive new shares. Offers for shares are made on application forms the company provides. Once the company accepts the application, the allotment of shares occurs.
A public company often releases a prospectus to invite the public to submit an offer to buy its shares from the company. People submit applications to the company for its shares based on this invitation. An application for shares is the applicant’s offer to buy the company’s shares. When the company accepts this application, it is called an allotment. Allotment of shares is a process through which a company creates and distributes a new number of shares to new or existing shareholders.
As defined by the Companies Act, allotment is appropriating a specific number of shares to a particular person or individuals from the company’s unappropriated share capital.
Procedure for Allotment of Shares as Per Companies Act
The procedure for the allotment of shares is contained under the Companies Act of 2013. Accordingly, the following steps are to be followed by a company for allotting shares to its shareholders.
Firstly, a public company must issue a prospectus or declaration instead of a prospectus requesting offers to purchase shares from the general public. The public then applies for the purchase of shares of the companies after going through the prospectus. The company has the right to either demand the payment of the issue price in whole, along with the application fee or in instalments in the form of share application money, share first call, share second call, etc. A minimum of 5% of the nominal value of the share must be paid as application fees.
Further, a notice is sent to all the shareholders for convening the Extra Ordinary General Meeting to approve the private placement offer letter. And the board of directors must pass a resolution before the allotment of shares. Also, within 30 days after a special resolution is passed in a meeting, Form MGT-14 must be submitted to the ROC (Registrar of Companies).
Subsequently, if the minimum amount, which is the minimum subscription mentioned in the prospectus, is not subscribed or applied, the allotment of shares cannot be made. And, within 60 days of receiving payment from the individuals to whom the shares are to be allotted, allotment of shares occurs.
And finally, a board meeting for the Allotment of shares is called up.
It is to be noted that the share application amount needs to be deposited in a bank, and it can only be used by the company after receiving the commencement certificate.
Furthermore, if the company does not reach 90% of the issue amount within 60 days, it must immediately return and refund the entire subscription amount. A further delay of 78 days or more requires the company to pay 6% interest annually.
Conclusion
Shares symbolise units of ownership in a company or the guaranteed portion of earnings that an individual investor is entitled to. The creation and distribution of new shares by a firm is known as the allotment of shares. A public company must issue a prospectus or declaration requesting offers to purchase shares from the general public.
A minimum of 5% of the nominal value of the share must be paid as application fees. If the minimum amount, the minimum subscription mentioned in the prospectus is not subscribed or applied, the allotment of shares cannot be made.
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