Wednesday, September 23, 2015

Allotment of shares

Allotment of shares
Allotment of shares not defined in the Act. Offer of shares made on an application form issued by the Company when accepted is the allotment of shares.

Statutory provision regarding allotment:-
§  Amount of minimum subscription and application money-

Amount of minimum subscription

ü  To be specified in the prospectus
ü  To provide for purchase of property, pre expenses, working capital and other expenditure
ü  If amount not received within 120 days of issue of prospectus, moneys received from applicants be repaid forthwith without interest.
Application money paid to and received by the Company and deposited in a scheduled bank.
§  When no  prospectus issued- S. 70. Shall not proceed to allot the shares or debentures unless filed a statement in lieu of prospectus with registrar atleast 3 days before first allotment failing which directors punishable with fine up to rs. 10,000
§  Effect of irregular allotment- s. 71 (1) An allotment made by a company to an applicant in contravention of the provisions of section 69 or 70 shall be voidable at the instance of the applicant-(a) within two months after the holding of the statutory meeting of the company, and not later, or(b) in any case where the company is not required to hold a statutory meeting or where the allotment is made after the holding of the statutory meeting, within two months after the date of the allotment, If any director of a company knowingly contravenes, or wilfully authorizes or permits the contravention of, any of the provisions of section 69 or 70 with respect to allotment, he shall be liable to compensate the company and the allottee respectively for any loss, damages or costs which the company or the allottee may have sustained or incurred thereby: provided that proceedings to recover any such loss, damages or costs shall not be commenced after the expiration of two years from the date of the allotment.
§  Time for opening the subscription list- S. 72 No allotment shall be made of any shares in or debentures of a company in pursuance of a prospectus issued generally until the beginning of the fifth day after that on which the prospectus is first so issued or such later time, if any, as may be specified in the prospectus. It can be extended but not curtailed. 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, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty thousand rupees.
§  Allotment of shares to be dealt in stock exchange S. 73.  Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognized stock exchange for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange.
ü  Prospectus must State the name of such stock exchange.
ü  Allotment void, if permission not granted by SE within 10 weeks from closing of subscription list.
ü  Otherwise money repaid with interest within 8 days
ü  After 8 days, interest between 4 to 15 % as prescribed.
General Principles regarding Allotment
1.       The allotment should be made by proper authority, i.e. the Board Directors of the company, or a committee authorized to allot shares on behalf of the Board. Allotment made without proper authority will be invalid. Allotment of shares made by an irregularly constituted Board of directors shall be invalid [Changa Mal v. Provisional Bank (1914) ILR 36 All 412].

It is necessary that the Board should be duly constituted and should pass a valid resolution of allotment at a valid meeting [Homes District Consolidated Gold Mines Re (1888) 39 Ch D 546 (CA)].

2.       Allotment of shares must be made within a reasonable time (As per Section 6 of the Indian Contract Act, 1872, an offer must be accepted within a reasonable time). What is reasonable time is a question of fact in each case. An applicant may refuse to take shares if the allotment is made after a long time.
The interval of about 6 months between application and allotment was held unreasonable [Ramsgate Victoria Hotel Company v. Montefione (1866) LR 1 EX 109].

3.       The allotment should be absolute and unconditional. Shares must be alloted on same terms on which they were applied for and as they are stated in the application for shares. Allotment of shares subject to certain conditions is also not be valid one. For example 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 shares [Ramanbhai v. Ghasi Ram (1918) BOM. LR 595].  Similarly, if the number of shares alloted are less than those applied for, it cannot be termed as absolute allotment.

4.       The allotment must be communicated. To the applicant- may adopt usual and ordinary course of communication. Duly and properly stamped allotment letter is sufficient communication.

5.       Allotment against application only — No valid allotment can be made on an oral request. Section 41 requires that a person should agree in writing to become a member.

6.       Allotment should not be in contravention of any other law — If shares are allotted on an application of a minor, the allotment will be void.

Share certificate S. 113: Every company, shall, within three months after the allotment of any of its shares, debentures or debenture stock, and within two months after the application for the registration of the transfer of any such shares, debentures or debenture stock, deliver, in accordance with the procedure laid down in section 53, the certificates of all shares, debentures and certificates of debenture stocks allotted or transferred.  The share certificate must bear the common seal of the company and also must be stamped under the relevant stamp act. One or more directors must sign it .It should state the name as well as occupation of the holder and number of shares , their distinctive number and the amount paid up.
Kinds of shares
Types of shares : Shares in the company may be similar i.e they may carry the same rights and liabilities and confer on their holders the same rights, liabilities and duties. There are two types of shares under Indian Company Law :-
1.            Equity shares S. 85 (2) means that part of the share capital of the company which are not preference shares.
2.            Preference Shares S. 85 (1) means shares which fulfill the following 2 conditions.
a.       It carries Preferential rights in respect of Dividend at fixed amount or at fixed rate and this dividend must paid before the holders of the equity shares can be paid dividend.
b.      It also carries preferential right in regard to payment of capital on winding up or otherwise.
Types of Preference Shares

1.            Cumulative or Non-cumulative : A non-cumulative share gives right to fixed percentage dividend of profit of each year. In case no dividend thereon is declared in any year because of absence of profit, the holders of preference shares get nothing nor can they claim unpaid dividend in the subsequent year or years in respect of that year. Cumulative preference shares however give the right to the preference shareholders to demand the unpaid dividend in any year during the subsequent year or years when the profits are available for distribution. In this case dividends which are not paid in any year are accumulated and are paid out when the profits are available.
2.            Redeemable and Non- Redeemable : Redeemable Preference shares are preference shares which have to be repaid by the company after the term of which for which the preference shares have been issued. Irredeemable Preference shares means preference shares need not repaid by the company except on winding up of the company. However, under the Indian Companies Act, a company cannot issue irredeemable preference shares. In fact, a company limited by shares cannot issue preference shares which are redeemable after more than 10 years from the date of issue. In other words the maximum tenure of preference shares is 10 years. If a company is unable to redeem any preference shares within the specified period, it may, with consent of the Company Law Board, issue further redeemable preference shares equal to redeem the old preference shares including dividend thereon. A company can issue the preference shares which from the very beginning are redeemable on a fixed date or after certain period of time not exceeding 10 years provided it comprises of following conditions :-
1.       It must be authorized by the articles of association to make such an issue.
2.       The shares will be only redeemable if they are fully paid up.
3.       The shares may be redeemed out of profits of the company which otherwise would be available for dividends or out of proceeds of new issue of shares made for the purpose of redeem shares.
4.       If there is premium payable on redemption it must have provided out of profits or out of shares premium account before the shares are redeemed.
5.       When shares are redeemed out of profits a sum equal to nominal amount of shares redeemed is to be transferred out of profits to the capital redemption reserve account. This amount should then be utilized for the purpose of redemption of redeemable preference shares. This reserve can be used to issue of fully paid bonus shares to the members of the company.
3.            Participating Preference Share or non-participating preference shares : Participating Preference shares are entitled to a preferential dividend at a fixed rate with the right to participate further in the profits either along with or after payment of certain rate of dividend on equity shares. A non-participating share is one which does not such right to participate in the profits of the company after the dividend and capital have been paid to the preference shareholders.
Rights Issue of Shares

If, at any time after the expiry of 2 Years from the date of incorporation of the company or after one year from the date of first allotment of shares, whichever is earlier, a public company limited by shares issues further shares within the limit of authorized capital, its directors must first offer such shares to the existing holders of equity shares in proportion to the capital paid up on their shares at the time of further issue. This is commonly known as "Rights Issue of shares". The company must give notice each of the equity shareholders giving him the option to buy the shares offered to him. The shareholders must be informed of the number of shares he has the option to buy. He must be given at least 15 days to decide for exercising his option. The directors must state in the notice of the offer the fact that the shareholders also has the right to renounce the offer in whole or part in favor of some other person. This is commonly known as "Renunciation of Rights".
Object of rights issue , section 81
ü  Equal distribution of shares among existing shareholders.
ü  Prevent directors from offering shares to outsiders before being offered to existing shareholders.
The provisions of rights issue do not apply in the following cases :-
1.       Increase in share capital by a private company.
2.       Increase in share capital by a deemed public company.
Issue of bonus shares

Bonus shares are issued by converting the reserves of the company into share capital. It is nothing but capitalization of the reserves of the company. Bonus shares can be issued by a company only if the Articles of Association of the company authorises a bonus issue. Where there is no provision in this regard in the articles, they must be amended by passing special resolution act at the general meeting of the company.

Care must be taken that issue of bonus shares does not lead to total share capital in excess of the authorised share capital. Otherwise, the authorised capital must be increased by amending the capital clause of the Memorandum of association.
If the company has availed of any loan from the financial institutions, prior permission is to be obtained from the institutions for issue of bonus shares.
If the company is listed on the stock exchange, the stock exchange must be informed of the decision of the board to issue bonus shares immediately after the board meeting.
Where the bonus shares are to be issued to the non-resident members, prior consent of the Reserve Bank should be obtained.
Only fully paid up bonus share can be issued. Partly paid up bonus shares cannot be issued since the shareholders become liable to pay the uncalled amount on those shares.
Buy-back of shares :
Buy back of its own shares by a company is nothing but reduction of share capital. After the recent amendments in the Companies Act, 1956 buy back of its own shares by a company is allowed without sanction of the Court.
It is nothing but a process which enables a company to go back to the holders of its shares and offer to purchase from them the shares that they hold.
A company may purchase its own shares or other specified securities out of :-
         i.            its free reserves; or
       ii.            the securities premium account; or
      iii.            the proceeds of any shares or other specified securities:
No company can purchase its own shares or other specified securities unless :-

a.       the buy-back is authorized by its articles;
b.      a special resolution has been passed in general meeting of the company authorizing the buy-back;
c.       the buy-back is of less than twenty five per cent of the total paid-up capital and free reserves of the company:
d.      the buy-back of equity shares in any financial year shall not exceed twenty five per cent of its total paid-up equity capital in that financial year
e.      the ratio of the debt owned by the company is not more than twice the capital and its free reserves after such buy-back. However, the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies.
f.        all the shares or other specified securities for buy-back are fully paid-up;
g.       the buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India in this behalf;
h.      the buy-back in respect of shares or other specified securities other than those specified in clause (g) is in accordance with the guidelines as may be prescribed


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