Allotment of Shares

The Companies (Share Capital and Debentures) Rules, 2014

Allotment of securities by a Company (section 39)

1. Condition of minimum subscription – Where a company makes a public offer of securities,

no allotment of securities shall be made unless the following 2 conditions are satisfied:
a. The amount stated in the prospectus as the minimum subscription is subscribed.
b. The sum payable on application in respect of minimum subscription is received by
the company by cheque or other instrument.
2. Amount of application money – The application money on every security shall not be less
than –
a. 5% of the nominal amount of the security, or
b. Such other percentage or amount specified by Securities and Exchange Board of
India.
3. Time limit for minimum subscription – The amount stated in prospectus as the minimum
subscription must be subscribed and the sum payable on application in respect of
minimum subscription must be received by the company within –
a. 30 days of issue of prospectus, or
b. Such other period as may be specified by Securities and Exchange Board of India.

Otherwise all the money received by the company shall be returned within such time and manner
as may be prescribed.

4. Impact of default – The company and every officer who is in default shall be liable to a
penalty for each default of Rs. 1,000 for each day during which such default continues or
Rs. 100,000, whichever is less.

Underwriting Commission (Section 40)

Meaning of Underwriter – Underwriter means an intermediary who undertakes to subscribe

to the securities offered by the company in case these are not fully subscribed by the public,
in case of an underwritten issue. (Rule 13 of Prospectus and Allotment of securities Rules
2014)

Authorization – Express authorization in the articles is required for payment of underwriting

commission.

Rate of commission – ON shares – Maximum 5% of the price at which shares are issued.

ON Debentures – Maximum 2.5% of the price at which the debentures are issued.

Note – Articles may prescribe a lower rate.

Other Aspects –

 Underwriting commission can be paid only in respect of those shares or debentures

which are offered to the public for subscription.
 In prospectus the following needs to be disclosed

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 o Rate or amount of underwriting commission.
o Number of shares or debentures for which the underwriting contract is made
o The name and address of underwriter(s)

Note – A copy of underwriting contract shall be filed with the Registrar along with the
Prospectus.

Securities to be dealt within stock exchange (section 40)

1. Application for permission for listing – Every company before making public offer shall,
make an application to one or more recognized stock exchange(s) and obtain permission
for securities to be dealt within such stock exchange(s).
2. Disclosure in prospectus – The prospectus shall state the name(s) of the stock exchange in
which the securities shall be dealt with.
3. Application money to be kept in separate bank account – All money received on
application form the public for subscription to securities shall be kept in a separate bank
account in a scheduled bank and shall not be utilized other than –
a. For adjustment against allotment of securities where securities have been
permitted to be dealt within the stock exchange(s) specified in the prospectus, or
b. For the repayment of money within the time specified by Securities and Exchange
Board of India, received from applicants in pursuance of the prospectus, where the
company is for any other reason unable to allot securities.

Shares and Share Capital

The Companies (Share Capital and Debentures) Rules, 2014

Definition of Share section 2 (84) - "Share" means share in the share capital of a company, and
includes stock.

Kinds of shares (Section 43) –

1. Preference Shares– A preference shareholder has the 2 rights namely, preferential rights as
to payment of dividend and preferential right as to repayment of capital in the event of
winding up of company.
2. Equity shares – Shares other than preference shares are called as equity shares.
3. Restrictions on Kinds of Shares– A company limited by shares shall be of two kinds only,
A. Equity Share Capital –
i. With voting rights, or
ii. With differential rights with respect to dividend, voting rights or in accordance
with such rules and subject to such conditions as may be prescribed.
B. Preference share capital:
i. Cumulative preference shares
ii. Non cumulative preference shares
iii. Participating preference shares

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 iv. Non participating preference shares
v. Convertible preference shares
vi. Non convertible preference shares
vii. Redeemable preference shares
viii. Cumulative convertible preference shares (CCP)

Voting Rights of Shareholders (Section 47)

Voting rights of Equity Shareholders – An equity shareholder can vote on every resolution. Where
the resolution is to be decided by way of show of hands, every equity shareholder shall have one
vote irrespective of share capital held by him.

If any resolution is to be decided by way of Poll then every shareholder shall have as many votes
as the number of shares held by him.

Voting rights of Preference shareholders –

a. A preference shareholder can vote on resolutions which directly affect their rights. Every
resolution for winding up or reduction of share capital shall be deemed to be resolutions
affecting the rights of preference shareholders.
b. If dividend on any class of preference shares is not paid for a total period of 2 years or more,
before the date of meeting.

Redeemable Preference Shares (Section 55 read with Rule 9)

1. The articles of the company must authorize for the issue and redemption of Preference
Shares.
2. The term of preference shares shall not exceed 20 years and issue of irredeemable
preference shares is not permissible. However, infrastructure company may issue
preference shares for a period exceeding 20 years but not exceeding 30 years with a
condition of redemption of 10% of shares on a annual basis.
3. The preference shares must be fully paid up for redemption and such redemption shall be
made out of the profits or out of fresh issue of shares.
4. Premium payable on redemption can be from either profits of the company or from
securities premium account.
5. A Capital Redemption Reserve (CRR) must be created equivalent to the nominal value of
the preference shares redeemed.
6. Capital Redemption Reserve can be utilized for issuing fully paid bonus shares to the
existing shareholders.
7. The company shall give notice to the Registrar within 30 days of redemption of Preference
shares.

Issue of Equity Shares with differential voting rights (Rule 4) – A public company may issue
equity shares with differential voting rights if the following conditions are satisfied –

1. The company must have distributable profits for 3 financial years preceding the relevant
financial year.

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 2. The company must have not defaulted in filing of annual accounts and annual returns for
3 financial years preceding the relevant financial year.
3. The company must not have defaulted in –
a. Repayment of matured deposits or interest thereon, or
b. Redemption of debentures or preference shares
c. Payment of dividend
d. Payments on interest on deposits or debentures or dividends
e. Payment of dividend on preference shares
f. Repayment of term loan from public financial institution or state financial
institution or scheduled bank
g. Interest on above
h. Dues towards statutory payments relating to employees
i. Default in crediting the amount to Investors Education Protection Fund (IEPF)
4. The company is not convicted by court or Tribunal during 3 years for any offence under:
a. Securities and Exchange Board of India Act, 1992
b. Securities (contract) Regulation Act, 1956
c. Foreign Exchange Management Act, 1999
d. Reserve bank of India act,1934
5. To issue equity shares with differential rights, specific powers from Articles is required.
Also, the members must approve by passing an ordinary resolution. If the company is
listed company then the ordinary resolution shall be passed through postal ballot.
6. The notice of the meeting shall be accompanied with an explanatory statement containing
the rate of voting rights of such shares and the proportion to which the voting rights of
such shares shall vary.
7. Conversion of equity shares with differential voting rights into equity shares without
differential voting rights or vice versa is not permissible.
8. The shares with differential voting rights shall not exceed 26% of the total share capital
issued (post issue paid up capital).
9. The members holding shares with differential voting rights shall be entitled to bonus and
rights shares of same class. Also, they will enjoy all other rights where other members are
entitled to.
10. The register of members shall contain particulars of differential rights to which the holder
of such shares is entitled to.

Publication of authorized, subscribed and paid-up capital (Section 60)

Where any notice, advertisement or other official publication or any business letter, billhead or
letter paper of company contains a statement of the amount of the authorized capital of the
company, such document shall also contain a statement in a equally prominent position and in
equally prominent position and in equally conspicuous characters, of the amount of subscribed
capital and the amount of paid up capital.

In case of any default, the company shall be liable to pay a penalty of Rs. 10,000 for each default
and every officer of the company who is in default shall be liable to pay a penalty of Rs. 5,000 for
each default.

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Issue of Securities at Premium (Section 52) – No provision in the articles is required for issue of
securities at premium. The Act does not prescribe any restriction or condition regarding the issue
of securities at Premium.

The premium shall be transferred to ‘Securities Premium account’ and this account can be used
only for the following purposes:

1. Issuing fully paid bonus shares.

2. Writing off the preliminary expenses.
3. Writing off the commission paid on issue of shares or debentures of the company.
4. Writing off the discount allowed on issue of shares or debentures of the company.
5. Providing for the premium payable on redemption of Preference shares or debentures of
the company.
6. For buy back of shares.

Note – Transfer of premium on issue of shares shall be made on issue of shares for consideration
other than cash.

Prohibition on issue of shares at Discount (Section 53)

1. Issue of shares at a discount is prohibited and such prohibition applies to both public or
private company.
2. Any issue of shares at a discount shall be void.
3. For any contravention fine on company is, Minimum Rs 1 lakh and maximum is Rs 5 lakhs.
Every officer in default, imprisonment up to 6 months or fine minimum Rs 1 lakh,
maximum Rs 5 lakh or both.
4. However, sweat equity shares can be issued at discount and the same does not fall within
the purview of this section.

Issue of Sweat Equity Shares – Conditions (Section 2(88) and Section 54)

Meaning – Sweat equity shares means equity shares issued by the company to the employees or
directors at a discount or for consideration other than cash for providing know-how or making
available rights in the nature of intellectual property rights or value additions by whatever name
called.

1. Sweat equity shares must belong to the same class of shares already issued by the
company.
2. A Special Resolution is to be passed in the General Meeting specifying number of shares,
current market price, consideration, class of directors or employees to whom such equity
shares are issued.
3. The company must have completed one year from the entitlement of commencement of
business.
4. Listed companies shall companies shall comply with the regulations of Securities and
Exchange Board of India rules and the unlisted companies shall comply rules prescribed by
the Central Government.

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Reserve Capital

1. That portion of capital which has not been called up by the company and would be
capable of being called up only in the event of winding up of the company.
2. A Special Resolution is required for creation of reserve capital.

Unlimited company to provide for reserve capital on conversion into limited company (Section
65)

An unlimited company having a share capital may, by a resolution for registration as a limited
company under this Act, do either or both the following things, namely –

(a) Increase the nominal amount of its share capital by increasing the nominal amount of
each of its shares, subject to the condition that no part of the increased capital shall be
capable of being called up except in the event and for the purposes of the company being
wound up
(b) Provide that a specified portion of its uncalled capital shall not be capable of being called
up except in the event and for the purposes of the company being wound up.

Buy-Back of Shares (Section 68(1)) – Conditions for buy back is as below

1. The buy-back must be authorized by articles of the company.

2. Generally, for buy-back the company must pass a Special Resolution. However, the Special
Resolution is not required if the following conditions are satisfied:
a. The buy-back is authorized by Board in a resolution passed at a Board Meeting
only.
b. The buy-back does not exceed 10% of the aggregate of paid-up equity capital and
free reserves. (Free reserves shall include security premium).
3. Similar buy-back shall not be made in the next 365 days.
4. The buy-back shall not exceed 25% of the aggregate paid up capital and free reserves.
5. The ratio of debt should not be more than twice of paid up capital after such buy-back.
6. All shares for buy-back must be fully paid up.
7. The buy-back shall be completed within 1 Year from the date of passing the Special
Resolution or Board Resolution as the case may be.
8. The company shall file with the registrar a declaration of solvency stating that it will not
be rendered insolvent within next one year.
9. The company shall extinguish and physically destroy the shares bought back within 7 days
of completion of buy-back.
10. The company shall not make further issue of the same kind of shares within next 6
months.
11. The buy-back may be –
a. From the existing shareholders on a proportionate basis; or
b. From the open market; or
c. From odd lots;
d. By purchasing the shares issued to employees by way of stock option or sweat
equity.

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 11. After completion of Buy Back the company shall within 30 days file a return containing
such particulars relating to buy back as may be prescribed in Form No SH-11.

Transfer of certain sums to Capital Redemption Reserve Account (Section 69)

1. It is mandatory to create capital redemption reserve when buy back is made out of free
reserves or securities premium account.
2. Capital Redemption Reserve must be created equal to nominal value of shares bought back.
3. The details of transfer to capital redemption reserve shall be disclosed in the balance sheet.
4. The capital redemption reserve can only be used to issue fully paid bonus shares.

Prohibition of buy-back in certain circumstances (Sec 70(1))

A. No company shall directly or indirectly purchase its own shares or other specified
securities, if default is made by the company in – (section 70(1))

1. Repayment of deposits or interest payable thereon.

2. Redemption of debentures.
3. Redemption of preference shares.
4. Payment of dividend to any shareholder.
5. Repayment of any term loan or interest payable thereon to any financial institution or
bank.

However, buy back is not prohibited, if the default is remedied and a period of 3 years has lapsed
after such default ceased to subsist.

B. No company shall directly or indirectly buy back its own shares or other specified
securities – (Section 70(1))

1. Through any subsidiary company including its own subsidiary companies, or

2. Through any investment company or group of investment companies.

C. No company shall, directly or indirectly buy back its own shares or other specified
securities if it has not complied with the provisions of -

1. Filing of annual returns.

2. Payment of dividend within 30 days
3. Annual accounts to present a true and fair view

Share Certificate –(Section 46 read with rule 5) - It is mandatory to issue a share certificate for
every company having share capital, weather Private or Public. It shall be signed by 2 directors
and the secretary.
Share certificate shall be delivered either 3 months from the date of allotment or 2 months from
the date of receipt of valid transfer deed, as the case may be.

Note – It is not mandatory to issue share certificate if shares are held in depository system.

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Share Warrants – A Share warrant is a document which states that the bearer of the share
warrant shall be entitled to the shares specified in the share warrant. The company cannot make
an original issue of share warrants. It is optional for a company to issue share warrants.

Conditions for issue of share warrants

1. Only a Public Company can issue share warrants.

2. Approval of Central Government must be obtained.
3. The articles must authorize issue of share warrants.
4. The shares must be fully paid up.

The bearer of share warrant is entitled to receive the share certificate on surrendering the share
warrant and by paying the prescribed fees.

Note: Bearer of share warrant is not a member

Calls on shares of same class to be made on uniform basis (Section 49) – A call shall be made
uniformly on all the shares falling under the same class.

Note: The shares on which different amounts have been paid up shall not be deemed to be the
shares falling under the same class.

Calls In Advance – (Section 50 and 51)

1. Specific powers in articles is required to accept the uncalled amount on shares.

2. A company shall pay interest on calls in advance, whether or not the company has profits.
3. The rate of interest shall be as specified in the articles.
4. The interest shall be paid as per the agreement between the Board and the member
paying calls in advance. However, the rate of interest shall not exceed 12% per annum.
(Schedule I Table F regulation 18).
5. The amount paid as calls in advance is non-refundable.
6. A member is not entitled to any voting rights in respect of calls in advance.
7. Dividend can be paid in proportion to the amount paid up on each share, if authorized by
articles.(section 51)

Rights shares or Further issue of shares (Section 62)

1. The new shares shall be offered to every existing shareholders in proportion to the paid
up capital held by them.
2. Notice shall be given to every existing shareholder. The notice shall contain the following
particulars
a. The number of shares offered.
b. The time limit within which the member may subscribe right shares or make
renunciation or right shares. Time limit should not be less than 15 days.
c. A statement that if the offer is not accepted by the shareholder within the time
specified in the notice, the offer shall be deemed to have been declined.
d. A statement that every shareholder has the right to renounce the shares offered
to him to any other person including a non-member.

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 3. If Special Resolution is passed, further shares need not be offered to existing
shareholders. However, if Special Resolution is passed but only an Ordinary Resolution is
obtained then Central Government approval shall be obtained that further shares need
not be offered to existing shareholders.
4. A person in whose favour a right of renunciation has been made by the existing
shareholder, shall not have a further right to renounce such shares. However, if articles
restrict renunciation, the shareholder shall not have such right.
5. Right shares is available only to existing equity shareholders i.e., further shares are not
offered to Preference shareholders.

Stock-(Section 61) – Stock means a bundle of fully paid up shares expressed in lump sum. It
means the aggregate of fully paid up shares of a member merged into one fund.

Company cannot make the original issue of stock.

Conversion of shares into stock –

1. The company is authorized by the articles in this behalf.

2. The company passes an ordinary resolution.
3. The company shall give a notice to the registrar within 30 days of conversion of shares
into stock.

The register of members shall show the amount of stock held by each member instead of shares
previously held by each member. Such conversion does not affect the rights or a member. Stock
can be transferred in fractions.

Note – For reconversion of stock into shares the company shall follow the same conditions as
required to be complied at the time of conversion of shares into stock.