Allotment of shares is an appropriation of a certain number of shares to an applicant and distribution of shares among those who have submitted a written application. It is governed by the Companies Act, 2013 and rules & regulations incorporated therein. For listed companies whose shares are listed on the NSE and BSE or any other applicable stock exchanges in India and whose shares are freely tradable without any restrictions and subsidiary of listed companies, the provisions of SEBI Act, 1992 and the Securities Contracts ( Regulation) Act, 1956, are also applicable.
MODE OF ALLOTMENT OF SHARES:
- A public company may allot shares in the following ways:
- a. to the public through prospectus (public offer)
- b. through private placement
- c. through a rights issue or a bonus issue
- A private company may allot shares in the following ways:
- a. through a rights issue or a bonus issue
- b. through private placement/ preferential Allotment
PUBLIC OFFER:
An application is made to stock exchange(s) for the shares to be dealt through it/ them, before any offer of allotment to the public. Allotment of shares is always in de-materialized form and the offer for the allotment of shares is made through a red herring/ shelf prospectus, as the case may be. In a public offer, no allotment is made unless the minimum amount stated in the prospectus has been subscribed and consequently return of allotment is to be filed with the registrar.
PRIVATE PLACEMENT/ PREFERENTIAL ALLOTMENT:
A private placement offer letter is issued to such number of persons not exceeding 50 but limited to 200 in a financial year and the allotment of shares through private placement is to be approved by the shareholders through a special resolution only. A complete record of private placement offers is to be kept by the company and is to be filed with the registrar and to SEBI (for listed company).
RIGHTS ISSUE:
A letter of offer in the form of notice is issued to the existing equity shareholders for a rights issue which provides with the right of renunciation to the existing equity shareholders w.r.t. the offer for the allotment of shares.
Accordingly, the subscribed capital of the company is increased in a rights issue.
BONUS ISSUE:
Only fully paid-up bonus shares are issued to the members, out of:
- free reserves
- securities premium account; or
- capital redemption reserve account, maintained by the company in this regard
A bonus issue is to be authorized by the AOA of the company making the allotment of bonus shares and it is recommended by the board and then approved by the shareholders in the general meeting of the company.
Process
The process of share allotment encompasses multiple stages aimed at facilitating the seamless issuance and distribution of new shares to investors. Below is an overview of the various procedures involved:
Authorization and Resolution: The company's board of directors approves the issuance of new shares, typically through a formal resolution. This resolution outlines the quantity and type of shares (common or preferred) to be issued, as well as the proposed offering price. Preparation of the offer document: In instances where shares are made available to the public via an initial public offering (IPO) or a secondary issuance, the company compiles an offer document (referred to as a prospectus or offer circular). This document provides comprehensive details about the company, including its financial status, management structure, and terms of the offering. Regulatory Approvals: The offer document is sumbitted to the regulatory authority for approval and review.
Marketing and approaching investors: In the case of public share offerings, companies employ marketing strategies to draw in potential investors. These strategies may involve conducting road shows, delivering presentations, and engaging in meetings with institutional investors.
Subscription and Application:
Prospective investors express their interest by submitting applications to subscribe for new shares. These applications detail the desired quantity of shares to be acquired and the proposed purchase price. Allotment Decision: After the subscription period concludes, the company's board of directors evaluates the applications and determines the allocation of shares to each investor. Allotment Letters and Share Certificates: Successful applicants receive allotment letters, which confirm the number of shares allocated to them along with payment details. Depending on the regulatory framework and the method of shareholding, shareholders are provided with either physical share certificates or electronic records.
Unlisted public companies exclusively issue all their securities in dematerialized form. To enhance transparency in the ownership structure of private companies, the Ministry of Corporate Affairs has introduced comprehensive guidelines. These regulations mandate private companies, excluding small companies, to dematerialize their shares by September 2024. According to the recent notification from the MCA, every private company must issue securities solely in dematerialized form and facilitate the dematerialization of all its securities.
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