Allotment Of Shares - Under Companies Act, 2013 | Complete Guide

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    Table of Contents

    Allotment of shares

    Overview: Allotment Of Shares

    In some circumstances, you may need to alter your firm’s structure. You can fulfill this task either by introducing a new stakeholder or by modifying the existing ratio of shares amongst the stakeholders. 

    To sum up, in one line, when a firm distributes and forms new shares, it is known as the allotment of shares. The new shares are filed to the existing or the new stakeholders. The request for new shares can be put by filling out the application forms offered by the firm. Once your application is approved, it’s known as an allotment. 

    To check that your allotment is legitimate, see that it goes with all the guidelines, instructions, and requirements mentioned in the Indian Companies Act 2013. The allotment should also do justice to the rules mentioned in the Law of Contract, concerning the approval of offers.

    Concept Of Allotment

    Before getting deeper into the details, we must help you in understanding the actual meaning of allotment. So, to put it simply, during the IPO; Initial Public Offering, a small section of shares is given to an underwriting structure. This is termed allocation. After some shares are given to the underwriting structure, the rest of the shares are given to other structures that take part in it.

    Return Of Allotment Of Shares

    Return of allotment of shares, is the process of adding new shares into a company. Technically, with a SH01 form, which contains the whereabouts of the shareholders and the details of the share and is filed with the registrar of companies within 30 days.

    Allocation of shares is the procedure of appropriating a specified amount of shares as well as distributing them among persons who have filed share return requests. It is nothing but a firm filing and developing new shares to submit them to its existing or new stakeholders. By allotment of shares, a firm can easily attract new corporate partners.

    Types Of Allotment Of Shares

    Four ways a company can allot its shares

    As per sections 42 and 62 of The Companies Act, 2013, a company can proceed with the process of share allotment in a few ways,

    1. Right issue– with the boards’ permission, a company can allot shares to the existing shareholders about their previous shareholdings. However, the offer to the shareholders shall remain open for more than 15 days but less than 30 days. Apart from this, they must also get an option for renunciation, i.e., to offer it to someone else. In the case of allotment of shares in private company, this time limit can be reduced if more than 90% of the shareholders agree.
    2. Private placement– private placement means the allotment of shares to a specific set of people instead of the general public. Unlike the right issue, they do not carry any right for renunciation of shares. For a company to allot shares via private placement, they must pass an SR in a general meeting and get the assent of shareholders.
    3. Public placement– public placement is one where the general public applies for shares, and out of them, shares are allotted to the public as per the company’s preference. Public placement is an option available with only public companies and not private companies.
    4. The preferential allotment is a scheme of allotting shares in a company to the existing shareholders or the outsiders at a price that is lower than the market price. This quota of a company can be allotted to its existing shareholders for cash or some other consideration like shares in other companies, debentures, etc. The preferential allotment is also known as reservation issue and bonus issue.

    These were the few types of allotment of shares. After securing how a company wants its shares allotment to be done, the next step is the process of allocating shares.

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      Process Of Allotment of Shares

      The next step in the ladder is the process of allotment of shares.

      Here’s a complete guide as to how a company can start the process of allotment of shares.

      Step 1– Before you begin the process of onboarding new shareholders, it is important to take note of your existing shareholders and their shareholdings. Now move on to the next step of finding out how many new shares you want to introduce, how they will be introduced, and the resulting capital structure.

      Step 2– Next step is to discuss the same in a board meeting with all the existing shareholders and get their opinions and assent. Also, as per the Companies Act, 2013, you are required to keep a detailed note of the meeting. After the discussion and finalization of shares. You should get the details of all the prospects that have applied for.

      Step 3- after the second step, the company is required to file the form MGT- 14 with the registrar of companies along with the SR passed. The details of the meeting held and the SR passed by the shareholders regarding the new issue must be registered with the registrar of companies in the form MGT- 14 to initiate the process.

      Step 4– Registering the new certificates of new shareholders or existing shareholders for the new capital structure the shareholders have agreed for. And with this step, the new shareholders are finally a part of the company.

      With this, you’ve finally completed the procedure for the allotment of new shares.

      Later on, Calls are made by the company to its shareholders either in full or in installments, depending on the terms of allotment. The calls are made by the company at times when it requires funds for any special purpose or wants to raise additional capital for further growth.

      Called-up shares can be paid in cash, or otherwise partly in cash and partly in any other form.

      So there also can be a clause of call where all the shares of a participant are called for redemption, either wholly or partly before the due date, if he is unable to pay all the installments due on them or fails to pay any installment with interest.

       As we are done with the process, there are certain provisions in respect to the allotment that the company should take care of-

      Provisions Regarding Allotment Of Shares

      1. In case a public company is issuing shares through public allotment, then it must issue a prospectus before registering it with the registrar.
      2. After the prospectus is released, the interested public then applies for the shares. The company can set its terms of money, such as asking for the full money at the time of application, or can later ask it in installments. However, the application money should be more than 5% of the nominal value in order to proceed with the application process.
      3. The minimum subscription that is there in the prospectus should be received if the company wants to move further with the application.
      4. All the money should be deposited in a separate bank which should not be used for any other purpose other than that for shares.
      5. If the company has not received 90% of the issued amount within 60 days, then the company has to refund all of the money back to its shareholders. If the company delays it for 78 days, then it has to pay an interest of 6% per annum.
      6. As far as the calls are concerned, no calls should be made beyond 25% of the total value.
      7. There should be a minimum gap of 1 month between two calls.

      Calls should be made in the same manner for everyone, and no preferential treatment should be given to any shareholder of the same class.

      Why is the allotment of shares crucial for companies?

      1. When a company offers new shares, it does so to increase the capital. The most common method is to offer its stock for sale to the public through an initial public offering (IPO). A company thinks of issuing new shares when it wishes to increase its capital structure for business expansion or to finance its operations. A company that chooses this option will issue new shares to investors, and then the investors can buy and sell those shares on a stock exchange.
      2. A company can also offer new shares to repay its existing loans. When a company releases down its debts using funds received from shares, it can significantly enhance various financial ratios like the debt-to-asset ratio and the debt-to-equity ratio.
      3.  If a company is burdened with too much debt, it needs fresh capital to keep operating because companies rely on fresh capital as well as assets and equity to fund their operations. However, issuing more debt may be counter-productive if the company’s credit rating has been negatively affected by its previous level of debt.
      4. The process of issuing new shares is called equity financing stock financing or just plain equity. Equity refers to ownership of the business in question, so issuing new shares represents an increase in ownership of the business by existing shareholders and/or by new investors.
      5. The function of issuing shares is not just to fund the company. It is also to raise capital from the public and to reward stakeholders in the company.
      6. A company can issue new shares to investors or existing stakeholders. In most cases, investors are given the option of purchasing new shares in proportion to the value of cash they would receive as dividends in a certain time frame. Investors who purchase more new shares at this stage will have a higher stake in the company.
      7. Shareholders may choose not to purchase new shares when they are issued by the company. If a shareholder chooses not to purchase any new shares, then his or her stake in the company will be diluted. This occurs in two ways: first, there will be more shareholders, increasing the number of people sharing profits; second, each shareholder’s investment will be divided by the number of new shares issued during that period, thus reducing their share in the profits.

      Usually, companies may choose to issue new shares to existing shareholders as a reward or a token of gratitude for their support and loyalty for their services rendered to the company.

      Certain principles to note during allotment of shares

      1. The allotment of shares must be communicated within a stipulated time.
      2. Allotment of shares must be done with the requirements such as minimum subscription, board resolution, etc.
      3. As per the law, the reasonable time is 6 months which means there should not be more than a duration of 6 months between application and allotment of shares.
      4. The allotment of shares should not contain any condition precedent to it. It should be absolute and unconditional.

      The bank account used for application money should not be used for any other purpose.

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        Conclusion

        The company raises money and expands its business. When a company raises money by issuing new shares to the public, the company and the shareholders are in a win-win situation. The shareholders derive maximum benefits because they have more avenues to earn profits from the investment. In this process, the company has achieved its immediate target of expansion and is also able to establish a stronghold over the market. This is because when there is an increase in demand for the share, it will naturally rise in value. Thus, both parties have much to gain from this process or issue shares.

        Thus, a company that is planning to raise funds through the allotment of shares must take into account all the aspects mentioned above to ensure a successful share allotment.

        FAQ’s

        In the case of a public company, it can do so by public allotment, private placement, right issue, or bonus shares. In the case of a private company, it can do so only by private placement, right issue, or bonus issue.

        There should be a time gap of not more than 6 months between application and allotment of shares.

        The major benefits derived from the allotment of shares to a company are that it can increase its capital requirements, clear out debts, get more shareholders in the company.

        No, as per the Companies Act, 2013, the bank account should be dedicated only towards shares, its procedures, and no other thing. The company would have to pay a fine or penalty in case it does so otherwise.

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