Under the Companies Act, 2013, the allotment of shares refers to an act of appropriating a specific number of unissued shares of a company to an applicant who has applied for them.
The Act provides a highly structured framework, dividing allotments based on who the shares are being issued to and how they are being offered.
1. Primary Capital Raising Provisions
A company can allot shares primarily through four routes under Section 23 of the Act. The specific rules for each route are detailed below:
A. Right Issue of Shares — Section 62(1)(a)
This is a formal invitation to existing shareholders to purchase additional shares in proportion to their current holdings, helping them avoid equity dilution.
Applicability: Both public and private companies.
Key Requirements:
- Must be authorized by a Board Resolution.
- A Letter of Offer must be sent to all existing shareholders.
- The offer must remain open for a minimum of 7 days
- Unless the Articles of Association (AoA) say otherwise, shareholders have the right of renunciation (they can pass the offer to an outsider).
B. Private Placement — Section 42
When a company intends to raise capital by issuing shares to a select group of identified persons rather than the general public.
Key Requirements:
- Requires a Special Resolution (75% majority) from shareholders.
- The offer cannot be made to more than 200 persons in a financial year per security type (excluding Qualified Institutional Buyers and ESOPs).
- Share application money must be kept in a separate bank account and cannot be used until allotment.
- No public advertisements or media channels can be used to announce it.
C. Preferential Allotment — Section 62(1)(c)
This involves bulk allotments of shares to a specific person or targeted group (like promoters, venture capitalists, or strategic financial institutions).
Key Requirements:
- Must comply with both Section 62(1)(c) and the private placement rules under Section 42.
- Requires AoA authorization and a Special Resolution.
- The price must be justified by a Valuation Report from a Registered Valuer.
- Shares must be made fully paid up at the time of allotment.
D. Public Offer — Section 23(1)(a) & Chapter III
Applicable only to Public Companies looking to raise funds from the general public.
Key Requirements:
- Governed heavily by Section 39 (Allotment of Securities) and SEBI regulations.
- Minimum Subscription Rule: No allotment can be made unless the minimum subscription amount stated in the Prospectus (usually 90% of the issue size) is fully subscribed and received within 30 days.
2. Special Types of Share Allotments
Employee Stock Option Plan (ESOP) — Section 62(1)(b)
Allotting shares to directors, officers, or employees of the company or its subsidiaries at a future date at a pre-determined price.
Requirement: Requires approval via a Special Resolution and compliance with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014.
Sweat Equity Shares — Section 54
Shares issued to directors or employees at a discount or for consideration other than cash, rewarding them for providing know-how or intellectual property rights.
Requirement: Requires a Special Resolution specifying the number of shares, current market price, and the class of directors/employees. Cannot exceed 15% of the existing paid-up equity share capital in a year.
Bonus Shares — Section 63
Allotting fully paid-up shares to existing members for free, capitalizing on the company's undistributed reserves (Free Reserves, Securities Premium A/c, or Capital Redemption Reserve A/c).
Requirement: Must be authorized by the AOA, recommended by the Board, and approved via an Ordinary Resolution by shareholders. No bonus issue can be made out of revaluation reserves.
3. General Legal Timelines & Post-Allotment Compliances
- Regardless of which provision you use to allot shares, the Ministry of Corporate Affairs (MCA) enforces strict procedural timelines:
60-Day Allotment Window: For Private Placements and Preferential Allotments, the company must allot the shares within 60 days of receiving the application money. If it fails to do so, it must refund the money within the next 15 days.
Form PAS-3 (Return of Allotment): Whenever a company with share capital makes an allotment, it must file a Return of Allotment in Form PAS-3 with the ROC.
Timeline: Within 15 days for Private Placements/Preferential issues, and 30 days for Rights Issues.
Share Certificates (Section 56): The physical or demat share certificates must be delivered to the allottees within 2 months from the date of allotment.
Stamp Duty: The company must pay the applicable stamp duty on the newly issued share certificates within 30 days of issuance as per the Indian Stamp Act.