Allotment of Shares of a Company

ALLOTMENT OF SHARES OF A COMPANY

We all must have heard at least once in our lives about shares and the share markets, but what actually are these shares and how does these shares are issued to general public and how does these shares are allotted to people. In accordance to the Companies Act 2013, the big-big companies generally generates funds or capitals for meeting their requirements not from the banks but from the normal public through issue of shares and debentures in stock markets.

Debentures are also called bonds and they are generally like a loan, for which the company pays certain amount of interests in the form of dividends to the people who invested in it, the company is liable to return the money it generated through from the debentures and pay the fixed amount of dividends which it promised to the investors.

The second method through which a company generated capitals is through issue of shares, they are very different from the debentures or bonds because issuing shares to the public makes them a share holder in the company or the owner of the company up to the amount of shares the person has invested in the shares of the company. For example A has 10% shares of ABC public limited, so A is 10% owner of ABC public limited. The process of issue of shares to the general public in the share markets is generally known as Initial Public Offerings (IPOs).

Issuing of shares in the share markets is not such an easy job, the company has to perform certain procedures before issuing its shares in the markets. The company has to file a prospectus, inviting offers for the purchase of shares in the company, making people aware about the IPO, all the functions that a company could perform first have to be mentioned in the memorandum of association of the company as the company could not perform any function which is not mentioned in the memorandum of association of the company.

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There are three cases when Initial Public Offerings happens either they get fully subscribed to the amount of issue, either they are oversubscribed, or they are undersubscribed.

9 out of 10 IPOs are generally oversubscribed that means the company receives more number of applications for the shares than the total number of available shares, in that case the company either returns the extra amount on the issue of shares back to the public or they allot all the shares to the people who applied for it on a PRO-RATA basis it simply means in the ratio of their applied and allotted shares. For example if application is received for 600000 shares and the total number of shares that could be allotted are 500000 then the amount of shares are allotted in the ratio 6:5, it means if a person applied for 6 shares, he receives a total of 5 shares. The companies often do both, they return some of the extra amount it received to the public and allot the rest to the people on PRO-RATA basis.

An Initial Public Offering is considered to be undersubscribed when the total number of applications received for the shares is less than 90% of the issue of shares in the share market the amount is set by Securities and Exchange Board of India (SEBI). According to section 69(5), if the minimum subscription amount has not been raised or the allotment cannot be made within 120 days from the date of the prospectus, the director has to return the money received from the applicants. If the minimum 90% applications requirement is not met then the amount of applications received from the general public, then the total amount of the issues is returned back to the public, no loss is faced by the investors in that case. According to section 69(1) of the companies act, no allotment can be made by the company until the minimum amount of subscription is received by the company.

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The companies do not call for the whole amount of the share at once, it distributes the amount according to their requirements. For example, the face value of a share is ₹10, the company does not calls and asks for the whole ₹10 at once, it divides the amount according to the requirement of the company over different period, like the company calls for ₹3 at the time of application of shares, 2 months later it calls for the requirement of ₹3 during the time of allotment of shares, after a month it calls for ₹2 at the time of its first call and after 1 month it calls for the remaining amount ₹2 at the time of second and final call. The company usually do this to meet the requirement of funds during that period and avoid any leading for the misuse of extra funds, because excess of funds when they are not required often lead to their misuse and to avoid any misuse the company divides it requirement and calls for it only when it is required.

If any person fails to pay the amount of allotment after paying of its application, or fails to pay first or second and final call, he is given certain amount of time to pay it and if he is unable to make the remaining payment because of any reasons, it leads to forfeiture of its shares by the company and the company does not refund any amount which has already been received by that person and the person no longer remains the share-holder of those shares, these shares are listed for reissue at discounted amounts. For example, if the face value of a share was ₹10 it is listed for reissue at ₹9 providing a discount of ₹1. The amount of forfeiture covers up for the discount which is provided for the reissue and the extra amount left after covering up the discount on reissue of those shares is added to the capital reserves. For example, forfeiture amount of a share was ₹5 whose face value was ₹10 and the shares are reissued at ₹9 providing a discount of ₹1. The amount of forfeiture would cover up the amount of discount provided on reissue and the ₹4 profit would be added to the Capital reserves of the company for future fund requirements.

Author: Harsh Chaudhary,
LLOYD LAW COLLEGE 1st year

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