Allotment of Securities under the Companies Act

Introduction 

When a company invites the public to subscribe to its securities, the law imposes strict preconditions before any allotment can validly take place. Sections 39 and 40 of the Companies Act, 2013 lay down the foundational requirements — from minimum subscription to listing approval — ensuring that companies do not allot securities unless adequate public interest and financial commitment have been demonstrated.

Minimum Subscription — Section 39(1) and 39(3) 

Meaning: 

Minimum subscription refers to the minimum amount stated in the prospectus which, in the opinion of the Directors, must be raised through the issue of securities for the company to proceed with allotment. 

Conditions for Allotment: 

No allotment shall be made unless both of the following conditions are fulfilled: 

• The amount stated in the prospectus as the minimum subscription has been subscribed by the public. 
• The sum payable on application in respect of such minimum subscription has been received by the company in cheques or other instruments. 

Time Limit: 

The minimum subscription must be received within: 

• 30 days from the date of issue of the prospectus, or 
• Such other period as may be specified by SEBI. 

Consequences of non-receipt: 

• If the minimum subscription is not received within the prescribed time, the issue fails entirely and the entire application money must be repaid within 15 days from the date of closure of the issue.  
• If repayment is not made within this period, the directors who are officers in default become personally liable to repay the money along with interest at 15% per annum.

Application Money — Section 39(2) 

Minimum Requirement: 

The amount payable on application for every security shall not be less than 5% of the nominal value of the security, or such other percentage — currently 25% of the issue price — as may be specified by SEBI. 

Separate Bank Account: 

All application money received from the public must be deposited and maintained in a separate bank account with a scheduled bank. This amount may only be utilised for: 

• Adjustment towards allotment of securities, or 
• Refund of money in case allotment does not take place.

Listing of Securities — Section 40(1) and 40(2) 

Pre-Offer Application: 

• Before making a public offer, every company is required to make an application to one or more Recognised Stock Exchange(s) and obtain prior permission for its securities to be dealt with on such exchange(s). 

Disclosure in Prospectus: 

• The prospectus must clearly state the name(s) of the Recognised Stock Exchange(s) on which the securities are proposed to be listed and traded.

Return of Allotment — Section 39(4) 

Meaning: 

Return of allotment is essentially a report about the allotment of securities, required to be filed with the Registrar of Companies (ROC). 

Time Limit: 

The company must file the return of allotment with the ROC within 30 days of the date of allotment, in e-Form No. PAS-3. 

Contents: 

The return must contain: 

• A list of allottees with their names, addresses, occupations, and the number of securities allotted to each. 
• Contracts in writing under which securities have been allotted for non-cash consideration, produced for the Registrar's examination; if oral, their particulars must be recorded in e-Form PAS-3, along with a registered valuer's report on the valuation of such consideration. 
• Where bonus securities have been allotted, a copy of the shareholders' resolution authorising such issue must be attached.

Conclusion 

Sections 39 and 40 of the Companies Act, 2013 form the backbone of investor protection in public offerings. By mandating minimum subscription, ring-fencing application money, requiring stock exchange approvals, and ensuring timely reporting of allotments, the law strikes a balance between enabling companies to access public capital and safeguarding the interests of ordinary investors who respond to such offers.