Detailed Process and Legal Requirements for Share Allotment

Every time a company sells new shares, two things need to happen. First, someone has to apply for those shares. Second, the company has to formally accept that application. That second step is called allotment of shares, and it is the moment a mere applicant turns into a legal shareholder. It sounds like a small administrative formality, but it is actually one of the most tightly regulated processes in company law, because it decides who owns a piece of the company and how much capital actually lands in its bank account.

What allotment actually means 🔗

When a company invites people to buy its shares, whether through a prospectus, a rights issue, or a private placement, that invitation is not an offer in the legal sense. It is only an invitation to make an offer. The applicant who fills out the form and deposits money is the one making the actual offer. The company’s board of directors then decides whether to accept that offer, in full or in part. This acceptance is the allotment. Once it happens, a binding contract exists between the applicant and the company, and the applicant becomes a member entitled to a share certificate, voting rights, and dividends.

This distinction between issue and allotment matters because it explains why a company can reject an application, allot fewer shares than applied for, or allot none at all if it fails to meet legal conditions. Nobody has a right to shares merely by applying.

General rules borrowed from contract law 🔗

Because allotment is essentially the acceptance of an offer, ordinary principles of the Indian Contract Act, 1872 apply on top of company law. Courts have consistently tested allotments against these basic rules.

Allotment by proper authority 🔗

Only the board of directors, or a committee it has properly authorised, can allot shares. This power cannot be casually delegated to a single officer unless the articles of association permit it. An allotment passed without a valid board resolution can be challenged and set aside.

Allotment within a reasonable time 🔗

An application does not stay open forever. If a company sits on an application for too long, the applicant is free to treat the offer as lapsed. What counts as “reasonable” depends on the facts of each case, but the classic English precedent still cited in Indian textbooks is Ramsgate Victoria Hotel Co. v. Montefiore, where a six-month gap between application and allotment was held to be unreasonable, letting the applicant walk away.

Allotment must be communicated 🔗

A board resolution alone does not create a contract. The decision to allot must actually reach the applicant. Indian courts have accepted that posting a properly addressed and stamped letter of allotment counts as valid communication, even if that letter is delayed or lost in the post. The applicant becomes a shareholder the moment the letter is posted, not when it is received.

Allotment must be absolute and unconditional 🔗

Shares must be allotted strictly on the terms that were applied for. If a company tries to attach new conditions, or allots a different class or number of shares than what was requested, the applicant is not bound to accept it. Allotting fewer shares than applied for is generally acceptable, since it is treated as a partial acceptance of the offer, but the terms themselves cannot be altered.

Other conditions 🔗

A valid allotment must also be made against a written application, since oral requests carry no legal weight, and it cannot violate any other law in force. Allotting shares to a minor, for instance, is void regardless of how properly the internal process was followed, as courts have reiterated in cases dealing with improper or invalid allotments.

Statutory requirements under the Companies Act, 2013 🔗

On top of these contract-law basics, the Companies Act, 2013 lays down its own conditions, mainly to protect investors when a company raises money from the general public. These are strict, and non-compliance can make an allotment void or attract penalties on directors personally.

Registration of the prospectus 🔗

A public company cannot invite applications for shares without first issuing a prospectus, and that prospectus must be filed with the Registrar of Companies before it is circulated. This filing requirement exists so that the terms of the offer, the company’s financials, and the risks involved are on public record before anyone parts with their money.

Minimum subscription 🔗

This is one of the most important safeguards in the entire process. Section 39 of the Companies Act, 2013 states that no allotment can be made to the public unless the minimum amount stated in the prospectus has actually been subscribed and received by the company. In practice, market regulation requires this minimum subscription to be at least 90 percent of the total issue size. If that threshold is not reached within the prescribed period, the company cannot go ahead with the allotment at all.

Every application must also be accompanied by at least 5 percent of the nominal value of the shares as application money, paid through a banking channel rather than cash. If the minimum subscription is not achieved, the full application money has to be refunded, and delays in refunding attract interest at 15 percent per annum, with officers in default becoming personally liable to repay it.

Permission from stock exchanges 🔗

Section 40 of the Act requires every company making a public offer to apply to one or more recognised stock exchanges and obtain permission for its securities to be dealt with there, before the offer is made. The prospectus must name the stock exchanges where the shares will be listed. If permission is refused, the company cannot proceed with the allotment, and any application money collected has to be returned. All application money, in the meantime, must sit in a separate bank account and cannot be touched for any purpose other than allotment or refund.

Filing the return of allotment 🔗

Once shares are actually allotted, the company’s job is not done. It must file a return of allotment with the Registrar within 30 days, disclosing the names of allottees and the number of shares given to each. Missing this deadline invites monetary penalties on the company and its officers.

General rules versus statutory rules, at a glance 🔗

What happens when allotment goes wrong 🔗

An allotment that breaches any of these conditions is not automatically valid just because shares were physically issued. Allotments made without proper board authority, made after unreasonable delay, made on altered terms, or made without meeting minimum subscription can all be challenged. Courts have also struck down allotments made for an improper motive, such as diluting an existing shareholder’s control rather than genuinely raising capital, as seen in disputes over allotments used defensively during ownership battles. This is why company secretaries and boards treat allotment as a compliance-heavy process rather than a routine paperwork exercise, drawing on frameworks explained in resources like this overview of the allotment process.

Why this matters beyond the exam 🔗

For a commerce student, allotment of shares is not just a set of sections to memorise. It reflects a real tension in corporate finance: companies need capital quickly, but investors need protection from companies that overpromise or mismanage funds. The rules on minimum subscription, stock exchange permission, and timely communication exist because history is full of companies that collected public money without ever having a credible business plan to back it up.

What do you think? If a company misses its minimum subscription target by a small margin, should regulators allow some flexibility, or does strict enforcement protect investors better in the long run? And when a board delays allotment for months without a clear reason, should applicants automatically be free to walk away, or should there be a formal notice requirement first?

References

1. https://ibclaw.in/section-40-of-the-companies-act-2013-securities-to-be-dealt-with-in-stock-exchanges/
2. https://www.khuranaandkhurana.com/2023/10/09/subscription-and-allotment-of-shares
3. https://lawtimesjournal.in/shares-and-general-principle-of-allotment-of-shares/
4. https://www.legalbites.in/public-company-and-allotment-of-shares
5. https://corporatelawreporter.com/companies_act/section-39-of-companies-act-2013-allotment-of-securities-by-company/
6. https://indiankanoon.org/doc/41947892/
7. https://www.equitylist.co/blog-post/allotment-of-shares