INTRODUCTION

The offers for shares of a company are made on application forms supplied by the company.
When such application is accepted, it amounts to allotment.[1] What is termed as ‘allotment’ is
neither more nor less than the acceptance by the company of the offer to take shares.[2] “Broadly
speaking, it is an appropriation by the directors... of shares to a particular person.”[3] It is merely
an appropriation out of the previously unappropriated capital of the company.[4]However, re-
issue of forfeited shares does not amount to allotment of shares.[5]

The Companies Act, 2013 ('Act, 2013') which got the consent of the President on 29 August,
2013 has rolled out noteworthy improvements in the procurements identifying with private
arrangement of securities, which was an imperative course for raising the capital required by the
companies. The Draft Rules under the Act, 2013 ('Draft Rules') have additionally been
discharged by the Central Government for public remarks. Keeping in mind the end goal to
guarantee more noteworthy control and consistence over the privately owned businesses, the Act,
2013 has withdrawn the vast majority of the exemptions as accessible under the Companies Act,
1956 ('Act, 1956'). The Act, 1956 did not characterize the term 'private placement', rather
certain offers of shares or debentures/invitation to subscribe for shares or debentures to any
segment of general society were not viewed as public issues under Section 67(3) the Act, 1956
i.e where shares or debentures are accessible for subscription or purchase only to those receiving
the offer/invitation.

Be that as it may, according to the stipulation to Section 67(3) of the Act, 1956, when an
organization made an offer or invitation to subscribe for shares or debentures to 50 or more
persons, such offers was dealt with as made to the public. Under the Act, 1956 the conditions
identifying with private placement were appropriate just to public companies. Whereas the Act,
2013 gives different conditions to private placement of shares and debentures which apply to
both privately owned businesses and public companies.
In the present assignment the author shall focus his discussion on the provision of allotment of
shares in light of the recently enacted Companies Act, 2013, and the changes (i.e. regarding
private placement) that have been incorporated in it differently from the 1956 act

AIMS & OBJECTIVES

The major objectives of Allotment of shares are :

1. To provide ready marketability and liquidity of a company’s securities.

2. To provide free negotiability to stocks.

3. To protect shareholders and investors interests.

4. To provide a mechanism for effective control and supervision of trading

 NEED AND IMPORTANCE
The main reason a company will issue new shares is to raise money to finance the business. They
are as follows.
1. When the company is first incorporated, a number of shares will usually be issued – there are a
number of factors that influence how many shares to issue. This share issue, along with any
money that the company may borrow, enables the company to trade. The initial shareholders are
often referred to as ‘subscribers’, because they are said to subscribe to the new
company’s Memorandum of Association.
2. Shares may be issued in order to repay some or all of the company’s borrowing.
3. New funds may simply be required to grow the business organically.
4. Issuing shares might also fund a particular new development or project, which will often require
significant initial capital with the rewards (hopefully) seen in later years.
5. A share issue could be used to fund the purchase of another company. This may mean raising
cash from a share issue and using that cash to buy the other business. Alternatively, new shares
could be issued to the current shareholders of the target company – they’d effectively be
exchanging their shares in the company being purchased for shares in the company that is buying
it.
6. To repair a damaged balance sheet. Many companies, large and small, found themselves needing
to allot shares to continue trading in the recent financial crisis.
7. The company can make a bonus or capitalisation issue of shares to existing shareholders. Instead
of the shareholders needing to pay for the shares themselves, in this type of share issue the
company uses its own profits to fund the allotment instead. This usually has the effect of
reducing the value of the shares in issue, which may in turn make them more marketable to
investors.
8. If shareholders prefer not to receive a cash dividend, the company may offer them a ‘scrip’
dividend instead – allotting shares of the same value as the cash dividend. This is often popular
among companies because issuing shares as a dividend does not impact cashflow in the way a
cash dividend does.
9. If a director or employees exercise a share option that they’ve been granted by the company, they
may acquire the shares via an allotment to them.
10. As part of a new director or senior employee joining the business or an existing employee
becoming a director, they may acquire shares in the company. Often used by professional
companies, this can both demonstrate and cement the employee’s commitment to the business –
they’ll have a clear and direct interest in the company’s success. The shares would either be
passed to the employee by a new allotment of shares or via a transfer from existing shareholders.

Presentation
When a company receives an application for shares issued by means of prospectus, it proceeds to
allot shares on predetermined basis (which is set out in the prospectus). Where applications
exceed the shares available, allotment is made proportionally, though often applications for
shares up to a stated number are accepted in full.
The allotment of shares is made by means of a letter of allotment. This entitles the recipient to a
certificate for the number of shares stated in the letter. His title may however depend on his
paying the sum previously stated as due on allotment.
It means an appropriation of a certain number of shares to an applicant in response to his
application for shares. Allotment means distribution of shares among those who have submitted

written application.

Allotment in Private Limited Company v/s Public Limited Company

There are many ways to issue shares like: Right Issue of Shares, Private Placement of Shares,
ESOP, Sweat equity shares, preferential allotment of shares etc.One of the main distinctions
between a Private Limited Company and a Public Limited Company is the nature of allotment/
issuance of share. For a Private Limited Company the it is prohibited to issue any prospectus to
invite the general public to subscribe towards share capital. Hence the shares can only be taken
up privately by the promoters and their relatives or friends. On the contrary in the case of a
Public Limited Company a proper procedure has been set up by the Companies Act issue and
allotment of shares.
In terms of Section 179 of Companies Act, 2013, the power to issue securities have been vested
on the Board of Directors of the company by way of passing resolution at meetings of the Board.
As per Section 23 of the new Companies Act, 2013, a public or private company may issue
securities in any of the following manner:

Public Company

 To public through issue of Prospectus

 Private Placement
 Rights Issue or a Bonus Issue

Private Company

 Rights or Bonus Issue

 Private placement

Private Placement
Section 42 of the new Companies Act, 2013 deals with private placement. Any offer of
securities or invitation to subscribe to securities to 200 persons or less (excluding qualified
institutional buyers and employees) in a financial year will be a ‘private placement’ under
Section 42(2) of the Companies Act, 2013. Reading the Rule 13 of the of Companies (Share
Capital and Debentures) Rules, 2014 makes it is very clear that any preferential allotment by
rights issue has to comply with private placement.

Preferential Offer
This refers to an issue of shares or other securities, by a company to any select person or group
of persons on a preferential basis and does not include shares or other securities offered through
a public issue, rights issue etc.Section 62(1) (c) deals with preferential allotment of shares.
Certain conditions for Preferential Allotment of Shares given in the Act are-
1. Offer to be previously approved by Special Resolution:
The proposed offer of shares or invitation to subscribe shares has been previously approved by
the shareholders of the company, by a Special Resolution, for each of the Offer of Invitation.
2. Authorization in Article of Association:
There should be authority in AOA of the Company to issue shares/ securities through PAS. If
such power is absent then amend the clauses of AOA to insert power to PAS.
2. Maximum No. of persons to whom offer can be made:

 An offer can be made under a Private Placement Offer Letter to not more than 200 people
in a financial year.
 Not just the limitation of allotment to 200 people but even an invitation to subscribe can’t
be made to more than 200 people.
 The 200 people limit excludes Qualified Institutional Buyers and Employees and the limit
of 200 people is calculated individually for each kind of security.

RIGHTS ISSUE OF SHARES: -

The Right issue of shares means issue when new shares are offered to the existing shareholders
in proportion to their current shareholding. The Right Issue of shares is governed by Section
62 of the Companies Act, 2013.
 OPINION

Section 42 of the Act, 2013 defines 'private placement' which can be said to be in consonance
with the interpretation of the Supreme Court in the SEBI-Sahara case[8] as "any offer of
securities or invitation to subscribe securities to a select group of persons by a company (other
than by way of public offer) through issue of a private placement offer letter and which satisfies
the conditions specified in this section including the condition that he offer or invitation is made
to not more than 50 or such higher number of persons as may be prescribed (excluding QIB's
and employees offered securities under ESOP) in a financial year".

It is likewise to be noted that the procurements for private placement applies to the issue of
"securities" and not "shares". Therefore the new procurements have extended the extension and
spread to an entire host of instruments, for example, shares, bonds, debentures and other
marketable securities and so on. The Act, 2013 under section 42(4) orders an organization to
consent to the provisions of SEBI Act & SCRA, if any offer or invitation is not in consistence
with the provisions of the section and such offer or invitation should be dealt with as a public
offer.

The section stipulates that all monies payable towards subscription of securities by private
placement might be paid through check or interest draft or other keeping money channels yet not
with money furthermore all the securities under private placement are to be allotted inside a time
of 60 days from the receipt of use cash. In the event that the company is not ready to assign the
securities inside the indicated period, the application cash is to be discounted inside a time of 15
days from fulfilment of 60 days time. The cash raised by the issue of offer or invitation should be
in a separate bank account and can't be utilized until allotted. Each company making any
allocation under the said section might submit with the Registrar the particulars of each private
offer inside 30 days of dissemination of offer letter.
Under section 29 of the 2013 Act,
1. Every company making public offer; and
2. Such other class or classes of companies as may be prescribed
shall issue the securities only in the dematerialised form. When any company issue its securities
in dematerialised form, provisions of the Depositories Act, 1996 and regulations made under that
Act shall be applicable. There is no bar for any other company to issue its securities in any form.
Any other company may convert its securities into dematerialised form.

Per section 39 of the 2013 Act, after public offer, any allotment shall be made only if the amount
stated in the prospectus as minimum amount. The sum payable on application for the amount so
stated as minimum amount has been paid to and received by the company by cheque or other
instrument.[9] The amount payable on application on every security shall not be less than five
percent of the nominal amount of security or such other percentage or amount as may be
specified.
If the stated minimum amount has not been subscribed and the sum payable on application is not
received within a period of thirty days from the date of issue of the prospectus, all amount
received shall be returned within prescribed time and in prescribed manner. The company shall
file with the Registrar of Companies a “Return of Allotment” in prescribed manner.[10]

Finally, section 40 of the 2013 Act declares that every company making public offer shall make
an application to at least one stock exchange before making the public offer. This is duty of
company to obtain permission of stock exchange or stock exchanges for the dealing of securities
there. Prospectus for the public offer shall also state the name or names of the stock exchange in
which application for dealing of the securities has been made.[11]

CONCLUSION
Since the necessities for raising the capital by method for private placement have been made
more stringent, it will fundamentally expand the burden to comply on private companies looking
to raise finance through private placement. It is additionally to be noted that as no particular
exclusion has been accommodated for private companies or little companies, it will prompt
diminished adaptability accessible to private organizations and the companies operated by
closely held individuals for the raising of finance. Nonetheless, the better administration of all
companies is expected which will prompt the transparency in the businesses of the Company and
responsibility of the directors.

While a few conditions to control offer of securities by private companies are justified
considering a portion of the recent cases, the current set of regulations appear to be too
outlandish, bulky and prohibitive for private companies.

With satisfactory administrative oversight, investors ought to be furnished with sufficient

adaptability to bring capital up in a closely held private company wherein contemplations
identifying with minority investor representation and/ or safety are non-existent

REFERENCE:

www.investopedia.com

www.indiastudychannel.com

www.legistify.com