Allotment of Shares in Indian Company: Process under Companies Act, 2013

Allotment of shares means appropriation of shares to an applicant and distribution of shares among those individuals who have given 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:

The allotment of shared by a public company could be done in the below mentioned ways:

1. To the public through prospectus (public offer)
2. Through private placement
3. Through a rights issue or a bonus issue

The allotment of shared by a private company could be done in the below mentioned ways:

1. Through a rights issue or a bonus issue
2. Through private placement/ preferential Allotment

PUBLIC OFFER:

Prior to offering allotment to the public, an application is made to stock exchange for the shares to be dealt through it. Offer for the allotment of shares is made through a shelf prospectus or red herring and allotment of shares in de-materialised form. 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 people not exceeding 50 but limited to 200 in a financial year. The allotment of shares through private placement must 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 provided for the allotment of shares.

Consequently, the subscribed capital of the company is increased in a rights issue.

BONUS ISSUE:

Members are issued only fully paid-up bonus shares, out of:

1. Free reserves
2. Securities premium account; or
3. Capital redemption reserve account, maintained by the company in this regard

AOA of the company plays a role in authorising a bonus issue by making the allotment of bonus shares. It is recommended by the board and then approved by the shareholders in the general meeting of the company.

Process

There are multiple stages involved in the process of allotment of shares and the process focuses at facilitating the seamless issuance and distribution of new shares to investors.

An overview of the procedures involved is mentioned as follows:

• Authorization and Resolution: Issuance of new shares is approved by company's board of directors primarily through a formal resolution. This resolution briefs the quantity and type of shares to be issued along with the proposed offering price.

• Preparation of the offer document: In cases where shares are made available to the public through a secondary issuance or IPO, the company makes an offer document (referred to as a prospectus or offer circular). Comprehensive details about the company are provided in this document, including its management structure, financial status and terms of the offering. Regulatory Approvals: The offer document is submitted to the regulatory authority for review and approval.

• Marketing and approaching investors: Companies employ marketing strategies to draw in potential investors in case of public share offerings. These strategies comprise of delivering presentations, conducting road shows, and engaging in meetings with investors.

Subscription and Application:

By submitting applications to subscribe for new shares, prospective investors show their interest. These applications mention the quantity of shares to be acquired and the proposed purchase price. Once the subscription period ends, the company's board of directors  examine the submitted applications and determines the allocation of shares to each investor. Successful applicants then receive allotment letters, which mentions the number of shares allocated to them along with the payment details. Based on the regulatory framework and shareholding method, shareholders are given either physical share certificates or electronic records.

Unlisted public companies wholly issue all their securities in dematerialized form. The Ministry of Corporate Affairs has outlined comprehensive guidelines to strengthen the transparency in ownership structure of private companies. These regulations make it mandatory for the private companies (small companies excluded), to dematerialize their shares by Sep 2024. As per the recent notification from the MCA, every private company must make sure to issue securities exclusively in dematerialized form and expediate the dematerialization of all its securities.