Allotment of Shares — Rules and Restrictions

Allotment is the act by which a company's Board (or a committee it authorises) appropriates a specific number of shares to a specific applicant, converting that person from a mere applicant into a shareholder of the company. Because allotment fixes legal rights and obligations on both sides — the company becomes bound to issue a share certificate and recognise the person as a member, and the allottee becomes liable for any amount still unpaid on the shares — the Companies Act, 2013 surrounds the act of allotment with a set of mandatory rules.

General legal rules of a valid allotment. For an allotment to be legally valid, it must be made by a person or body with actual authority to allot — ordinarily the Board of Directors, acting through a properly convened and quorate meeting or through a committee to which the power has been validly delegated — and it must be communicated to the applicant, since an allotment is, in essence, the company's acceptance of the applicant's offer to take shares, and like any contractual acceptance, it takes legal effect only once it is communicated. An allotment must also be made within a reasonable time of the application; an unreasonable delay entitles the applicant to treat the offer as having lapsed and to refuse to take the shares. Allotment must further be unconditional and exactly in accordance with the terms of the application — a company cannot validly allot a different class, or a different number, of shares than what the applicant actually applied for, and a purported allotment on materially different terms does not bind the applicant unless the applicant consents to the variation.

Statutory pre-conditions specific to a public issue. Layered on top of these general contract-law principles, Section 39 imposes conditions specific to a public issue, discussed already in the section on minimum subscription: no allotment can be made until the minimum subscription is actually received, and application money must be received through a mode the Act permits. Section 40 adds a further condition where the securities are to be dealt in on a stock exchange — the company must apply for and be granted permission for the securities to be dealt in on that exchange; if permission is refused, or is not applied for within the time prescribed, any allotment already made becomes void, and all money received from applicants must be repaid, again with interest for any delay beyond the prescribed time.

Filing return of allotment. Once shares are validly allotted, Section 39(4) requires the company to file with the Registrar of Companies a return of allotment, in the prescribed form, within thirty days of the allotment, giving full particulars of the shares allotted, the names, addresses, and occupations of the allottees, and the amount paid on each share — a filing that keeps the Registrar's public record of the company's membership and capital structure current and accurate. …