Question

Explain the statutory provisions for allotment of shares.

Answer 1

The statutory provisions for allotment of shares are as follows:

1. Registration of Prospectus:
   The Company has to file a copy of the prospectus with the Registrar of Companies (ROC) while raising its capital by issuing the shares to the general public.
   When the company raises the capital privately, it has to prepare 'Statement in lieu of Prospectus'.
2. Over Subscription:
   In the case of oversubscription, the company has to refund the excess application money to the applicants. If it is failed to do so in the prescribed time then every officer of the company would be punishable.
   SEBI does not allow any allotment in excess of securities offered through offer document or prospectus. However, it may permit to allot not more than 10% of the net offer.
3. Application Money: The part of the face values of shares which are collected by the company along with share application, is known as Application Money. Application money should not be less than 5% of the face value of the share. SEBI has specified (for public companies) the application money should not be less than 25% of the nominal amount of shares.
4. Depositing the Application Money: As per this condition, the company has to deposit the money into separate account known as Share Application Money Account' opened in a scheduled bank by the company. The company is not allowed to withdraw this amount.
5. Minimum Subscription: Minimum subscription is the minimum amount raised by the company for obtaining a trading certificate and to start the work of allotment of shares. This amount is mentioned in the prospectus. It must be collected within thirty (30) days from the issue of prospectus. The minimum subscription amount should be 90% of the issued capital.
   SEBI has stated minimum subscription should be 90% of the issue:
   (a) Usually, when a company does not collect minimum subscriptions, it means its issue has been undersubscribed i.e. the number of shares applied for is less than the shares offered by the company.
   (b) If a minimum subscription is not collected within the specified time, the entire amount received as application money should be returned to the subscribers within fifteen days of closure of the issue. To avoid such a situation, the company may enter into an underwriting agreement with the underwriters.
6. Appointment of Managers to the issue and various other agencies:
   The company has to appoint one or more Merchant Bankers to act as managers to the public issue.
   It also has to appoint Registrar to the issue, Collecting Bankers, Underwriters to the issue and Brokers to the issue, Self-certified syndicate banks, Advertising agents etc.
7. Permission to deal on Stock Exchange:
   Every company, before making a public offer shall apply to one or more recognized Stock Exchanges to seek permission for listing its shares with them. For this, the prospectus shall mention the name of the Stock Exchange. In addition, an application for permission to list in that stock exchange has to be made by the company. If permission is not given by the stock exchange, the allotment made shall be considered void.
8. Closing of the Subscription List:
   There is no provision in the Companies Act regarding the closing of the subscription list.
   But as per SEBI guidelines, the subscription list must be issued for a minimum of 3 and a maximum of 10 working days. In the case of the Rights issue, the subscription list is open for not more than 60 (sixty) days.
9. Beginning of allotment work:
   The company can start the work of allotment after 5 days of opening the issue (in case of filing of prospectus) and within 3 days (in case of filing statement in lieu of prospectus). This enables the member of the public to go through the prospectus thoroughly and decide.