CHAPTER-II

ISSUE AND ALLOTMENT OF SHARES

AN OVERVIEW

Share capital is the capital raised by the company

through the issue of shares. Only companies limited by shares
and registered with prescribed share capital can raise capital
through the issue of shares.

Shares can be issued either at the time of formation of

the company for starting business operation or, later on, for
further expansion of the business. But once issued, share
becomes a permanent liability of the company except in the
case of redeemable preference shares.

Regarding issue of shares, the companies have to fulfill

prescribed requirement provided under the statutes, namely,
companies Act, 1956, and the relevant guidelines of the
securities and exchange board of India (SEBI) to protect its
own interests and the interests of the shareholders.

After issue of shares, the another step is allotment of

shares which is appropriation of shares to the eligible
applicants.

The allotment of shares is fundamentally governed by the

law of contract and the relevant provisions under the
companies Act. 1956.

To take shares of a company, the applicant is required to

apply on prescribed form of the company. This is treated as an
offer for shares and when it is accepted by the company, it is
called an allotment. Therefore, allotment may be understood as
an acceptance by the company of the offer to take shares.

There are certain statutory restrictions which are

required to be complied with before allotting the shares, firstly,
allotment is prohibited unless minimum subscription and
application money has been received from the subscribers,
secondly, allotment is also prohibited in certain cases unless a
statement in lieu of prospectus has been filed with the
Registrar of the companies, thirdly, shares cannot be allotted
before the opening of the subscription list, and finally, shares
are to be dealt in on recognized stock exchange.

After the issue and allotment of share, share certificate

must be issued by the company stating particulars of the
allottee with the number of shares allotted to him. Every share
certificate must be under the seal of the company, and must
specify the share to which it relates and amount paid up
thereon.

A. ISSUE OF SHARES

Companies limited by shares have to issue shares to

raise the necessary amount of capital for their business
transactions. A private company may raise its share capital
from a small number of persons who are known to the
promoters or related to them by family connection. On the
other hand, a public company is generally required to issue a
prospectus inviting the public to subscribe to its share capital.
A company takes following steps regarding issue of shares

1. PRELIMINARY DECISIONS

Before issuing its shares every company must take

decisions with regard to several matters, viz., the total amount
of capital which is to be raised by the issue of shares, the
types of shares which will be issued, the time of issuing
shares, listing of shares at a stock exchange etc 1 . A company
cannot raise capital exceeding the amount of authorized
capital, which is specified in the memorandum of association.

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2. REQUIREMENT OF PUBLIC ISSUE OF SHARES

Prior to may, 1992 it was obligatory for every company

under the capital Issues (Control) Act, 1947 to obtain
permission of the controller of capital Issue (C.C.I.) for public
issue of shares and debentures. With the introduction of
liberalised economic policies, the Government decided to
abolish control on capital issues. Accordingly, the capital
issues (control) Act was repealed in May,1992 and the post of
controller of capital issue was abolished.

Companies are now free to make public issue of shares

and debentures and fixed the rate of premium thereon without
seeking the approval of the central Government. However,
such issue must confirm to the guidelines for Disclosure and
Investor Protection (DIP) issued by the securities and
exchange Board of India (SEBI). Moreover, companies are also
required to comply with the provisions of the companies Act
and other applicable laws while making public issue of capital.

SEBI GUIDELINES FOR FIRST AND FURTHER ISSUE OF

CAPITAL

The SEBI originally constituted in 1988 to regulate the

securities market, was converted into statutory body in 1992 by
an ordinance which was later replaced by the SEBI Act, of
1992. Under the Act, SEBI is empowered to issue guidelines to
ensure proper disclosure and investor protection in case of
public issue of capital and to issue other guidelines relating to
commercial activities. Companies are required to follow these
guidelines while making public issue of shares and debentures.

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SEBI GUIDELINES FOR DISCLOSURE AND INVESTOR
PROTECTION. 2000 2

These guidelines lay down the requirement for the issue

of securities public issue of listed and unlisted companies etc.
The main features of these guidelines are as following-

I CONDITIONS FOR ISSUE OF SECURITIES

(a) Filing of offer Document

(i) No company shall make any public issue of

securities, unless a draft prospectus has been filed
with the Board, through an eligible merchant
Banker, at least 21 days prior to the filing of
prospectus with the Registrar of companies
(ROCs).

(ii) No listed company shall make any issue of

securities through a right issue exceeding Rs. 50
Lakhs, unless the letter of offer is filed with the
Board, through an eligible merchant Banker, at
least 21 day prior to the filing of the letter of offer
with Regional stock Exchange (RSE).

(b) Application for Listing

No company shall make any public issue of securities

unless it has made an application for listing of those securities
in the stock exchange.

(c) Issue of Securities in the Dematerialized Form

No company shall make public or rights issue or an offer

for sale of securities unless (i) the company enters into an
agreement with a depository for dematerialization of
securities already issued or proposed to be issued to the
public or existing shareholders; and (ii) the company gives
an option to subscribers/shareholders/investors to receive

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 the security certificate or hold securities in the
dematerialized form with a depository.

(d) Public Issue by Unlisted Company

(i) An unlisted company shall make a public issue of

any equity shares or any security convertible into
equity shares at a later date if it has a pre-issue
net worth of not less than Rs. 1 crore in three out
of preceding five years, with a minimum net worth
to be met during immediately preceding two years;
and it has a track record of distributable profits in
terms of section 205 of the Companies Act, for at
least three years of immediately preceding five
years provided that the issue size does not
exceeds 5 times its pre-issue networth as per the
last available audited accounts, either at the time
of filing draft offer document with the board or at
the time of opening of the issue.

(ii) An unlisted company can make a public issue of

equity shares or any security convertible into equity
shares at a later date, only through book building
process if it does not comply with the above stated
conditions, or its proposed issue size exceeds five
times pre-issue networth as per the last available
audited accounts either at the time of filing draft
offer document with the Board or at the time of the
opening of the issue, provided that 60% of the
issue size shall be allotted to the Qualified
Institutional Buyers (QIBs), failing which the full
subscription moneys shall be refunded.

(e) Public Issue by Listed Companies

(i) A listed company shall be eligible to make a public

issue of equity shares or any security convertible

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 into equity shares at later date provided that the
issue size does not exceed five times its pre-issue
networth as per the last available audited accounts
either at the time of filing draft offer document with
the Board or at the time of the opening of the issue.

(ii) A listed company which does not fulfill above stated

conditions shall be eligible to make a public issue
only through the book building process provided
that the 60% of the issue size shall be allotted to
the Qualified Institutional Buyers (QIBs), failing
which the full subscription moneys shall be
refunded.

(iii) A listed company which has changed its name so

as to indicate that it is a company in the
information technology sector during a period of
three years prior to filing of offer document with the
Board, shall comply with the requirement of
unlisted company, as given earlier, before it can
make a public issue of equity shares or securities
convertible into equity shares at a later date.

(f) Credit Rating for Debt Instrument

(i) No public or rights issue of debt instruments

(including convertible instruments) irrespective of
their maturity or conversion period shall be made
unless credit rating from a credit rating agency is
obtained and disclosed in the offer documents.

(ii) For a public and rights issue of debt securities of

issue size greater than or equal to Rs. 100 crores,
two rating from two different credit rating agencies
shall be obtained.

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(g) Outstanding Warrants or Financial Instrument

No unlisted company shall make a public issue of equity

shares or any security convertible into equity share at a later
date, if there are any outstanding financial instrument or any
other rights which would entitle the existing promoters or
shareholders any option to receive equity share capital after
the initial public offering.

(h) Partly Paid up Shares

No company shall make a public or rights issue of equity

share or any security convertible into equity share at a later
date, unless all the existing partly paid up shares have been
fully paid or forfeited.

II. PROMOTERS’ CONTRIBUTION AND LOCK IN PERIOD

(a) In a public issue by an unlisted company, the

promoters shall contribute not less then 20% of the
post issue capital.

(b) The promoters shareholdings after offer for sale

shall not be less than 20% of the post-issue capital.

(c) In case of public issue by listed company, the

promoters shall participate either to the extent of
20% of the proposed issue or ensure post issue
shareholding to the extent of 20% of the post issue
capital.

(d) In case of composite issue of a listed companies,

the promoters, contribution shall at the option of
the promoters be either 20% of the proposed public
issue or 20% of the post issue capital.

(e) In case of any issue of capital to the public the

minimum promoters contribution shall be locked in
for a period of 3 years from the date of
commencement of commercial production or the

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 date of allotment in the public issue which ever is
later.

III. PRE ISSUE OBLIGATIONS

The pre-issue obligations are as following-

(a) The lead merchant banker shall exercise due

diligence.

(b) The standard of due diligence shall be such that

the merchant banker shall satisfy himself about all
the aspects of offering, veracity and adequacy of
disclosure in the offer documents.

(c) Documents to be submitted alongwith the offer

documents by the company to the Board-

(i) Memorandum of under standing (MOU) which

has been entered into between a lead
merchant banker and the issuer company
specifying their mutual rights, liabilities and
obligations relating to the issue.

(ii) Due diligence certificate alongwith the draft

prospectus.

(iii) All refund orders of the previous issue and all

security certificates signed by the company
secretary or Chartered Accountant, in case of
listed companies making further issue of
capital alongwith the draft offer documents.

(iv) Undertaking relating to the transaction in

securities by the promoters during the period
between the date of filing the offer documents
with the Registrar of Companies or stock
exchange, as the case may be, and the date
of closure of the issue shall be reported to

42
 the stock exchanges concerned within 24
hours of the transactions.

(d) The lead merchant bankers shall satisfy themselves

about the ability of the underwriters to discharge
their underwriting obligations.

(e) The draft offer document filed with the Board shall
be made public for a period of 21 days from the
date of the filing of offer document with the Board.

(f) The lead merchant banker shall ensure that for

public issues, offer documents and other issue
materials are dispatched to the various stock
exchanges, brokers, underwriters, bankers to the
issue, investors associations, etc., in advance as
agree upon.

(g) The lead merchant banker shall ensure that every

application form distributed by the issuer company
or anyone use is accompanied by a copy of the
abridged prospectus.

IV. POST ISSUE OBLIGATIONS

The post-issue obligations shall be as follows-

(a) Irrespective of the level of subscription, the post-

issue Lead Merchant Banker shall ensure the
submission of the post-issue monitoring reports as
per formats specified in schedule XVI of these
guidelines, within 3 working days from due dates.

(b) The post-issue Lead Merchant Bankers shall

actively associate himself with post-issue activities,
namely, allotment, refund and dispatch and shall
regularly monitor redressal of investor grievances
arising therefrom.

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(c) The Lead Merchant Banker shall ensure compliance
with the instructions issued by the RBI handling of
stock invest by any person including the Registrars.

(i) If the issue is proposed to be closed at the

earliest closing date, the Lead Merchant
Banker shall satisfy himself that the issue is
fully subscribed before announcing closure of
the issue.

(ii) In case there is a devolvement on

underwriters, the Lead Merchant Bankers
shall ensure that the underwriters honour
their commitments within 60 days from the
date of the closure of the issue.

(iii) In case of under subscribed issue, the Lead

Merchant Banker shall furnish information
regarding the underwriters who have failed to
meet their underwriters’ devolvements to the
Board in the format specified in the schedule
XVII of these guidelines.

(d) The post-issue Lead Merchant Banker shall ensure

that moneys received pursuant to the issue and
kept in separate bank (i.e, bankers to an issue, as
per the provisions of section 73 (3) of the
companies Act, 1956, is released by the said bank
only after the listing permission under the said
section has been obtained from all the stock
exchanges where the securities were proposed to
be listed as per the offer document.

(e) The allotment shall be subject to allotment in

marketable lost, in a proportionate basis.

(f) The Lead Merchant Banker shall ensure that the

dispatch of share certificates/ refund orders/

44
 cancelled stock invests and demat credit is
completed and the allotment and listing documents
submitted to the stock exchanges within 2 working
days of finalization of the basis of allotment.

(g) The post-issue lead manager shall ensure that all

steps for completion of the necessary formalities
for listing and commencement of trading at all stock
exchange where the securities are to be listed are
taken within 7 working days of finalization of the
basis of allotment.

(h) The post-issue Lead Merchant Banker shall submit

within two weeks from the date of allotment, a
certificate to the Board certifying that the stock
invests on the basis of which allotment was
finalized, have been realize.

V. OTHER ISSUE REQUIREMENTS

The Lead Merchant Bankers (LMB) shall ensure with the

following requirements.

(a) Public offer by unlisted company with post issue

capital should be limited up to Rs. 5 crores.

(b) An unlisted company, with a commercial operation

of less than 2 years proposing to issue securities to
the public resulting in post issue capital of 3 crores
and not exceeding 5 crores, shall be eligible to
apply for listing of securities only on those stock
exchange(s) where trading is screened based.

(c) The issuer shall appoint market maker(s) on all the

stock exchanges when the securities are proposed
to be listed.

(d) The unlisted company whose capital after the

proposed issue of securities is less than 3 crores

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 shall be eligible to be listed only on the over the
counter exchange of India (OTCEI).

(e) In case of a public issue by an unlisted company,

the net offer to public shall be at least 25% of the
post issue capital.

(f) In case of a public issue by listed company the net

offer to public shall be at least 25% of the issue
size.

(g) In case of a public issue or offers for sale of equity

shares or securities convertible into equity share at
a later date by unlisted companies in any of the
eligible sector at least 10% of the securities issued
by such company may be offered to the public if
minimum 20 Lakhs securities are offered to the
public, and the size of the offer to the public is
minimum Rs. 50 crores.

(h) If the subscription money is proposed to be

received in calls, the calls shall be structure in
such a manner that the entire subscription money is
called within 12 months from the date of allotment.

(i) No company shall make any further issue of capital

till the securities referred to in the offer document
have been listed or application money refunded on
account of non-listing or under subscription etc.

(j) Subscription list for public issue shall be kept open

for at least 3 working days and not more than 10
working days.

(k) Rights issue shall be kept open for at least 30 days

and not more than 60 days.

(l) The issuer has the option to have a public issue

underwritten by the underwriter.

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 (m) The merchant banker shall appoint a senior officer
as compliance officer to ensure that all Rules,
Regulations, Guidelines, Notification etc. issued by
the Board, the Government of India and other
regulatory organization are complied with.

(n) In case of issue exceeding Rs. 500 crores the

issuer shall make arrangements for the use of
proceeds of the issue to be monitor by anyone of
the financial institutions.

(o) Any buy back or safety net facility shall be limited

upto a maximum of 1000 shares per allottee and
the offer shall be valid at least for a period of 6
months from the last date of dispatch of securities.

3. APPLICATION FOR SHARES

The prospectus issued by a company contains an

invitation to the public to subscribe to its shares. The
prospectus must be issued within 90 days after the date on
which a copy of the same has been delivered for registration
and if the prospectus is issued beyond that period, it is
deemed to be a prospectus, copy of which has not been
submitted to the Registrar 3 .

Intended subscribers to the capital are usually required

to apply for shares in printed application form within a
prescribed date through the company’s bankers. Every
application form issued to the public should be accompanied
by a copy of the prospectus 4 .

The investors of the company are required to forward

their share’s application directly to the company’s banker
alongwith necessary application money which shall not be less
than 5% of the face value of the shares.

The bank credits the application money received in the

shares applications accounts of the company, prepares lists of

47
the application money received and sends them to the
company along with application forms collected.

On receipt of the list of the application forms and moneys

from the bank, the secretary arranges for the scrutiny and
sorting out of the applications. Then the details of each
applications are entered in a list called the ‘share application
and allotment list’.

4. ISSUE OF [SECURITIES] 5 AT PREMIUM

Where securities are issued at a price higher than their

nominal value, it is said to be issued at a premium. The word
premium has not defined in the Act. However, the term
premium may be understood as the amount of the price above
the nominal value of the share. A company is entitled to issue
securities at a premium but the amount collected as premium is
required to be transferred to an account called “the securities
premium account” 6 . Where shares are issued for consideration
other than cash and the value of the assets so acquired is
more than the nominal value of the shares issued, shares may
be taken to have been issued at a premium 7 . Amounts to the
credit of the share premium account is to be regarded as paid
up share capital of the company and it can be reduced only in
a manner the share capital is reduced. However the amounts
of this accounts may be applied by the company:-

(a) in paying up un issued securities of the company to

be issued to members of the company as fully paid
bonus shares;

(b) in writing off the preliminary expenses of the

company;

(c) in writing off the expenses of any issue of shares or

debentures of any company or in writing off the
commission paid or discount allowed on, in any
issue of securities of the company; or

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 (d) in providing for the premium payable on the
redemption of any redeemable preference shares
or of any debentures of the company 8 .

Where a company has before the commencement of this

Act, issued any securities at a premium, the provisions of
section 78 applies as if the securities has been issued after
the commencement of this Act but such part of the premium as
does not form an identifiable part of the company’s reserves
shall be disregarded in determining the sum to be included in
the share premium account 9 .

5. ISSUE OF SHARES AT A DISCOUNT

As a general rule that the shares should not be issued at

a discount. The allottee is bound to pay the full nominal value
of the shares. Thus share of the nominal value of Rs. 10
cannot be issued Rs.8

In Ooregum Gold mining co. of India V/S Roper 1 0 , a

company’s ordinary share of a nominal value of 1 pound was
only worth 2S.6d in the share market due to financial crisis. It
issued preference share of 1 pound each with 15s credited as
paid with the result that 5s was payable on each share. The
court held that the issue was ultra virus and the shares were to
be paid fully by the allottees. A transaction of this nature will
not be allowed to operate even indirectly.

Where shares of a company are issued for a price less

than their nominal or face value, they are said to be issued at
a discount. A company cannot issue shares at a discount
except as provided under section 79. In short, shares at a
discount can only be issued, if the following conditions are
fulfilled 1 1 :-

(a) Shares must be of a class already issued;

(b) the issue of the shares at a discount is authorized

by the resolution passed in the general meeting of

49
 the company and sanctioned by the Company Law
Board (CLB);

(c) the resolution specifies the maximum rate of

discount at which the shares are to be issued
provided that no such resolution shall be
sanctioned by the CLB if the maximum rate of
discount specified in the resolution exceeds 10%
unless the Board is of the opinion that a higher
percentage of discount may be allowed in the
special circumstances of the case;

(d) not less that one year at the date of issue must be
elapsed since the date on which the company was
entitled to commence business;

(e) the share to be issued at a discount are issued

within two months after the date on which the issue
is sanctioned by the CLB or within such extended
time as the CLB may allow.

Every prospectus relating to the issue of the shares is

required to contain particulars of discount allowed on the issue
of shares or of so much of that discount as has been written off
at the date of the issue of the prospectus 1 2 .

In case of default in complying with sub-section (4) as

aforesaid, the company and every defaulting officer shall be
punishable with fine not exceeding 500 Rupees.

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B ALLOTMENT OF SHARES : GENERAL PRINCIPLES

After the subscription list has been closed and all the
share applications have been received from the bank, the
share application and allotment list is prepared. The directors
them proceed to allot the shares. When a share application is
accepted it is called allotment 1 3 . Chitty. J., observed:

“What is termed allotment is generally neither more nor

less than the acceptance by the company of the offer to take
shares….that offer is accepted by the allotment either of the
total number mentioned in the offer or the less number, to be
taken by the person who made the offer. This constitute a
binding contract to take that number according to the offer and
acceptance. Allotment ………is an appropriation out of specific
shares…….but of a certain number of shares 1 4 .

Allotment is an appropriation out of the previously

unappropriated capital of a company and, therefore where a
forfeited share is re-issued it is not allotment 1 5 .

The allotment of shares is governed by:-

1. General Principles of Law of Contract,

and

2. The Provision of the Companies Act

1. GENERAL PRINCIPLES OF LAW OF CONTRACT

The general principles relating to the law of contract

applies to the allotment of shares also 1 6 . When a person
wishing to take shares applies to the company for them, it is
called an offer and when the directors of the company are
resolved to allot shares to the applicant, it may be treated as
the acceptance of the offer and when the acceptance is
communicated to the applicants it results in a binding
contract 1 7 .

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I AN APPLICATION FOR SHARES IS CALLED AN OFFER
TO TAKE SHARES.

Usually a written application for shares is made but an

oral or a verbal application is also valid. An application for
shares may be conditional. It may either be a condition
precedent or a condition subsequent. A condition precedent is
required to be fulfilled before the allotment is made. Such a
condition becomes the part of the offer by the applicants and,
therefore, allotment of shares cannot be valid unless the
directors of the company agree to the condition. Thus, for
example, in Ramanbhai V/S Ghasiram 1 8 , where a person
applies for 400 shares on the condition that he will be
appointed as a cashier of the new branch of the company
Bombay High Court held that the allotment is binding on him
only if the condition is fulfilled i.e., he is appointed as a
cashier and if the condition is not fulfilled, he is fully entitled to
reject the allotment. Where the condition is a condition
subsequent viz., a condition which is to operate subsequent to
the allotment of shares, it will not effect the validity of the
allotment and the applicant cannot reject it. However, he may
bring an action for damages under the collateral agreement.

II ALLOTMENT OF SHARES IS CALLED AN

ACCEPTANCE OF OFFER

An allotment is required to be made by a resolution of the

board of directors. Allotment is a duty primarily falling upon the
directors; and this duty cannot be delegated except in
accordance with the provision of the articles. Thus, an
allotment made by a general manager under an improper
delegation by the directors was held to be void 1 9 .

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III ALLOTMENT MUST BE MADE WITHIN REASONABLE
TIME

If there is unreasonable delay in the allotment of share,

the application or share is deemed to have been revoked under
section 6 of the Indian contract Act. Where no allotment was
made until five months after the application, the applicant was
allowed to reject the allotment 2 0 .

IV ALLOTMENT MUST BE COMMUNICATED TO THE

APPLICANT

Where the notice of allotment is communicated through a

letter, the posting of the letter is a sufficient communication
provided the letter is properly addressed and stamped. Thus,
for example, in House hold fire and carriage accident
Insurance Co. V/S Grant 2 1 , the defendant, Grant applied for
some shares by post in the plaintiff company. A letter of
allotment was dispatched by the company soon after. But the
letter never reached the applicant. The court nevertheless held
him liable as a shareholder.

It is noted that the communication of the notice of

allotment will not be necessary to complete of the allotment if
the applicant states that he does not require notice of
allotment. The application for shares may be withdrawn at any
time before it is accepted by the company.

2. COMPLIANCE WITH THE PROVISION OF COMPANIES

ACT

The Companies Act required that following rules are to

be observed before allotting shares that have been offered to
the public

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I PROHIBITION OF ALLOTMENT UNLESS MINIMUM
SUBSCRIPTION AND APPLICATION MONEY RECEIVED

S. 69 provide that no allotment shall be made of any

share capital of the company offered to the public for
subscription unless the amount stated in the prospectus has
been subscribed. Minimum subscription means the amount,
which is, in the estimate of the directors, enough to meet the
following needs 2 2 :-

(a) Purchase price of any property to be defrayed partly or

wholly out of the proceeds of the issue;

(b) any preliminary expenses and commission payable by the

company to persons subscribing of procuring subscription
for shares;

(c) the repayment of any money borrowed by the company in

respect of the matters stated above;

(d) working capital; and

(e) any other expenditure stating the nature and purpose

thereof.

No allotment of shares can be made unless at least so

much amount has been subscribed and the application money,
which must not be less than 5% of the normal value of the
share, have been received in cash 2 3 .

The courts on several occasion go on to say that it is a

condition precedent to valid allotment that the whole of the
application money should have been paid to and received by
the company in cash 2 4 . Again it has been held that where an
allotment of shares made without the application money being
paid, the allotment is invalid and the directors are guilty of
misfeasance 2 5 .

The object of these provisions is to prevent the company

getting under way till it has raised the capital needed to carry

54
out the objects in which it has invited the public to participate;
it would obviously be iniquitous to force an applicant; who has
accepted an invitation to participate in a one million issue for
the purpose of buying wembley stadium, to sink his capital in a
company which has only raised enough money to buy a
suburban villa. They also afford protection to the creditors by
ensuring that a limited company is not able to incur
commitments if it is grossly under-capitalized 2 6 .

If the minimum subscription is not received on the expiry

of 120 days after the first issue of the prospectus, all moneys
received from applicants must be repaid to them without
interests but if any such money is not so repaid within 130
days after the issue of prospectus, the directors are jointly and
severally liable to repay that money with interest at the rate of
6% per annum from the expiry of 130 days but a director is not
so liable if he proves that the default was not due to his
misconduct or negligence 2 7 .

II PROHIBITION OF ALLOTMENT IN CERTAIN CASES

UNLESS STATEMENT IN LIEU OF PROSPECTUS
DELIVERED TO REGISTRAR.

If a company having share capital has not issued a

prospectus, it cannot allot any of its share or debentures
unless at least three days before the first allotment of shares
or debentures, it has delivered to the Registrar for registration,
a statement in lieu of prospectus in prescribed form 2 8 . Since a
private company is not required to issue a prospectus or a
statement in lieu of prospectus, this provision does not apply
to a private company 2 9 .

An allotment made in contravention of provision of s.69

or 70 shall be voidable at the instance of the applicant
provided he moves within two months of the statutory meeting,
or where the statutory meeting is not required to be held or

55
where the allotment is made after the holding of statutory
meeting, within two months after the date of the allotment 3 0 .

Where the contravention is willful, the directors guilty

thereof are liable to compensate both the allottee and the
company, provided that the company suing has sustained a
loss and brings the action within 2 years of the allotment 3 1 .

III PROHIBITION OF ALLOTMENT BEFORE THE TIME OF

OPENING OF SUBSCRIPTION LIST

Shares cannot be allotted at once after the issue of the

prospectus S. 72 provides that where shares or debentures of
a company are offered by a prospectus issued generally, no
allotment of any share or debenture of the company shall be
made until the beginning of the 5 t h day after the date on which
prospectus is first issued or such later time as may be
specified in the prospectus. This time is known as the time of
“the opening of the subscription list”. The directors may extend
this time by a statement to that effect in the prospectus, but it
cannot be cut short. If the allotment is made in contravention
of this provision, its validity will not be effected but the
company and its every officer who is in default shall be
punishable with fine which may extend to Rs. 50,000 3 2 .
Application for shares are not revocable until the end of the 5 t h
day from the opening of the subscription list 3 3 .

IV ALLOTMENT OF SHARES TO BE DEALT IN ON STOCK

EXCHANGE OR LISTING OF SECURITIES

Every company intending to offer shares or debentures to

the public by the issue of a prospectus has to make an
application before the issue to any one or more of the
recognized stock exchanges for permission for the shares or
debentures to be dealt with at the exchange 3 4 .

Such prospectus shall state the name of the stock

exchange or each such stock exchange and any allotment

56
made on an application in pursuance of such prospectus shall
be void if the permission has not been granted by the stock
exchange or each such stock exchange before the expiry of 10
weeks from the date of closing of the subscription list 3 5 .
However, where an appeal against the decision of any
recognized stock exchange refusing permission for the shares
or debentures to be dealt in on that stock exchange has been
preferred under section 22 of the securities contracts
(Regulation) Act, 1956 (SCRA). Such allotment shall not be
void until the dismissal of the appeal. S. 22 of SCRA provides
right of public company to appeal against the refusal of stock
exchange to list its securities.

The Amendment Act, of 1988 has made on application to

a stock exchange compulsory. Formally, it was optional with
the company.

If the allotment becomes void under this section, the

company shall forth with repay without interest all moneys
received from applicants and, if any such money is not paid
within 8 day, the company and every director of the company
shall be liable to pay it jointly and severally with interest 3 6 .

If a share is not duly stamp, the company may refuse to

register it even though it is complete in all other respects 3 7 .

OVER SUBSCRIBED PROSPECTUS

Where the permission of a stock exchange has been

granted, and the prospectus being over-subscribed, the over
subscribed portion or the money received must be sent back
to the applicants forthwith within 8 days, and in case of failure
to do so, the company and every officer in default shall on and
from the expiry of 8 days, be jointly and severally liable to
pay that amount with interest at such rate not less than 4% and
not more than 15%, as may be prescribed, having regard to the
period of delay in making the repayment of such money 3 8 . It is,

57
thus, not possible for a company to retain the moneys of
applicants for an unreasonably long time.

RETURN AS TO ALLOTMENT

On any allotment of shares being made, every company

must, within 30 days thereafter, or such further time as may be
allowed by the Registrar under sub-section (3) of s. 75 of the
Act:-

(a) file with the Registrar a return of the allotment

stating the number and nominal amount of the
shares with names, addresses and descriptions of
the allottees and the amount paid or due and
payable an each share; provided that no shares in
respect of allotment of which cash has not actually
been received shall be shown in such return as
having been allotted for cash;

(b) in the case of shares (not being bonus shares)

allotted as fully or partly paid up otherwise than in
cash, produce for the inspection and examination of
the Registrar all contracts in writing constituting
the title of the allottee to the allotment together
with any contract to the sale, or a contract for
service or other consideration in respect of which
that allotment was made, such contracts being duly
stamped, and file with the Registrar copies verified
in the prescribed form of all such contracts and a
return stating the number and nominal amount of
share so allotted, the extent to which they are to
be treated as paid up, and the consideration for
which they have been allotted; and

(c) file with the Registrar (i) in case of bonus shares,

a return stating the number and amount of such
shares comprised in the allotment together with the

58
 names, addresses and occupations of the allottees
and a copy of the resolution authorizing the issue
of such shares, and (ii) in the case of issue of
shares at a discount, a copy of the resolution
passed by the company authorizing such issue
together with a copy of the order of the court
sanctioning the issue, and where the maximum
rate of discount exceeds ten percent, a copy of a
similar order of the central government permitting
the issue at the higher percentage 3 9 .

Thus, allotment means the appropriation out of the

previously unappropriated share capital of a company, of a
certain number of shares to a person 4 0 . The shares come into
existence as such only on the date of allotment. Sub section
(5) of section 75 declare that a re-issue of a forfeited share is
not allotment of shares within section 75 (1) and a company
need not file any return in respect of the re-issue of the
forfeited shares. The use of the word “allotment” in sub-
section(5) is used by way of caution to prevent any argument
being raised that a return has to be filled of the re-issued
shares forfeited for non-payment of calls 4 1 .

In Golcunda Industries V/S companies Registrar 4 2 , it was

held that the registrar has no power under section 609 of the
Act to refuse to register a return of allotment on the ground
that some of the shares have been allotted to a minor since his
powers are of a ministerial nature, and if the return accords
with the actual facts and is also other wise complete, his duly
is limited to the examination of the return and not to inquire
into the validity of the transaction covered by it.

In case of default in complying with this section, every

officer of the company who is a party thereto shall be liable to
a fine not exceeding Rs. 5,000 per day, and in case of
contravention of the proviso to clause (a) of sub- section (1) of

59
this section every such officer and every promoter of the
company who is guilty thereof shall be punishable with fine not
exceeding Rs.50,000 4 3 .

Moreover, the court trying an offence under this section

may direct, by an order under section 614A of the Act, any
officer or employee of the company to make good the default
within the time specified in the order on pain of being further
punished with imprisonment for a term which may extend to six
months, or fine, or both. In addition to it the company law
Board may make an order under section 614 directing the
company or any other officer thereof to make good the default
within such time as may be specified in the order on the
application of any member or creditor of the company or the
Registrar himself.

PROVISIONS RELATING TO UNDERWRITING COMMISSION

AND BROKERAGE

There is always a possibility that the issue of shares may

not be fully subscribed. Therefore, to ensure the raising of
necessary capital through public invitation, before offering the
shares or debentures of the company for public subscription,
the company enters into a contract with a sound financial
concern in consideration of a commission agrees to take so
many shares as specified in the underwriting agreement if the
public do not subscribe for them. The financial concern who
promises to subscribe for the shares or debentures if they do
not subscribed by the public, is called underwriter and the
commission paid by the company to the underwriter for his
such promise is called underwriting commission. It is noted
that the company is required to pay commission to the
underwriter on all the shares or debentures underwritten by
him irrespective of the fact whether the underwriter is called
upon to subscribe for any of those shares or debentures or not.

60
 As a general rule that a company cannot, save as
provided in section 79, allot any of its shares or apply any of
its moneys, directly or indirectly, in the payment of any
commission, discount or allowance to any person in
consideration of his subscribing, or procuring subscription for
any shares unless the following conditions are satisfied:-

a) the payment is strictly by way of commission and not with

a view to issue shares at a discount;

b) the articles authorized the payment of the commission;

c) the payment does not exceed 5% of the price at which

the shares are issued or the amount or rate authorized
by the articles, and in case of debentures, two and a half
percent of the price at which the debentures are issued
or the amount or rate authorized by the articles
whichever is less;

d) the amount or rate of commission paid or agreed to be

paid is disclosed in the prospectus or in the statement in
lieu of prospectus as the case may be;

e) the number of shares which have agreed for a

commission to subscribe in also disclosed in the
prospectus or in the statement in lieu of prospectus as
the case may be; and

f) a copy of the contract for the payment of the commission

is delivered to the Registrar at the time of delivery of the
prospectus or the statement in lieu of prospectus for
registration 4 4 .

Sub- section (4A) of section 76, however, provides that

no commission shall be paid to any person who has subscribed
or agreed to subscribe for shares in, or debentures of,
company if such shares or debentures are not offered to the
public for subscription.

61
 In any case, any attempt to issue of shares at a discount
by allowing co-called commission to a subscriber of shares is
contrary to the provision of S.76 and the company may be
retrained from doing so. In Keatinge V/s Paringa Mines Ltd. 4 5
the company proposed to issue 1,20,000 shares on the term
that a bonus of 7% would be returned to each applicant, and
also that a commission of 10% on that amount produced by the
issue would be paid to certain guarantors. The court held that
it was a case of issue of shares at a discount and was illegal.

Brokerage is defined as a payment made by a company

to a broker who agrees to place its shares or who finds out
some person to take its shares. Hence, brokerage is the
payment to stockbrokers, bankers and the like, who exhibit
prospectus and send them to their customers and by whose
mediation the customers are induced to subscribe.

S. 76 (3) permits a company to pay such brokerage as

heretofore has been lawful for a company to pay. Thus, a
reasonable brokerage is permitted. A commission of 2.5% paid
to a broker is a reasonable brokerage 4 6 .

It is said that the amount paid as brokerage is required to

be disclosed in the prospectus. In Andreae V/s Zinc Mines
Ltd 4 7 . A to whom commission was payable under an agreement
did not take pain to carry on any business but merely agreed to
introduce persons to the company to buy its shares in return
for a sum of money. A, brought an action for recovery of the
balance of the agreed amount. The court held that the
company will not be liable to pay such amount as commission
payable under the agreement which had not been disclosed in
the prospectus, and the sum could not be regarded as
brokerage because A did not carry on business as a broker
and was thereby not a broker.

62
C SHARE CERTIFICATES

1. MEANING AND ISSUE

A share certificate is a formal statement issued by a

company under its common seal stating that the person whose
name and other particulars appears in the document is
registered holder of specified number of shares in that
company and that the shares are fully paid or paid up to
amount specified therein. In case the shares are of more than
one class, the share certificate is required to state the class of
shares to which it relates.

Under section 113 of the Act every company must, within

three months after the allotment of any of its shares,
debentures or debentures stock, and within two months after
the application for the registration of the transfer of any such
shares, debentures or debenture stock, deliver in accordance
with S. 53 of the Act, the certificates of all shares debentures
or debenture stock allotted or transferred.

Proviso of the said section further provides that Company

Law Board can extend the above periods to a further period up
to nine months if it is satisfied about the inability of the
company to deliver the said certificates within said periods on
an application, made to it by the company.

The expression ‘transfer’ means a transfer duly stamped

and otherwise valid and does not include any transfer which
the company is for any reason entitled to refuse to register and
does not register.

Every certificate shall be under the seal and shall specify

the share to which it relates and the amount paid up thereon 4 8 .
In case of any share or shares held jointly by several persons,
the company shall not be bound to issue more than one share
certificate, and delivery of a certificate for a share to one of

63
several joint holders shall be sufficient delivery to all such
holders 4 9 .

If company makes default in delivering of share

certificate or certificates, a notice may be served upon the
company by the person entitling to the certificate requiring to
make good the default, and if the company fails to comply with
the notice within 10 days after the service of the notice, the
Company Law Board may, on the application of such person
order the company or any officer thereof to make good the
default within such time as it may specify and to pay all costs
of and incidental to the application 5 0 . Moreover, the company
and every defaulting officer thereof are liable to pay a fine not
exceeding Rs. 5,000 for every day of the default 5 1 . This section
applies in relation to debentures and debentures stock as well.

In Herdilla and other v/s Ms. Aparajita Chauhan 5 2 where

a company failed to deliver share certificates till filing the
complaint whereas the company was required to deliver the
shares within 3 months from the date of allotment by registered
post at the registered address of the applicant. Therefore, a
complaint was filed in the special Judicial Magistrate Court,
Rajasthan. Magistrate took cognizance of the offence under
section 113(2) of the companies Act, 1956 against the
petitioners. Rajasthan High Court held that special Judicial
Magistrate has territorial jurisdiction to take cognizance
against the petitioners for the offence under section 113 (2) of
the companies Act.

2. OBJECT AND ADVANTAGES OF SHARE

CERTIFICATES

A share certificate issued under the common seal of the

company specifying any shares held by any member is a prima
facie evidence of the title of the member to such shares 5 3 .
Therefore, it is said that the object of share certificate is to

64
enable a shareholder to show at once his title to the shares by
producing the certificate. It is very easy for a shareholder to
sell his shares in a market by producing a share certificate
showing his title to these shares. Besides, it would be very
easy for a lender to lend money to the shareholder taking the
possession of his share certificate by way of security.

3. EFFECT OF SHARE CERTIFICATE

A company by issuing share certificate makes a

representation to the person named in the certificate and all
those persons 5 4 with whom he may be expected to deal that:-

(a) the person named in the share certificate is entitled to

have shares specified therein; and

(b) the shares are paid up to the extent stated in the

certificate.

The share certificate does not constitute a title rather it

is an evidence of the title. It gives rise to the doctrine of
estoppel. By reason of operation of this doctrine the company
may in certain circumstances be unable to deny the truth of the
contents in the certificate even if they are incorrect. However,
estoppel is not a principle of substantive law. It is only a rule
of evidence founded on the legal implication of a conduct of a
person. The share certificate operates as an estoppel against
the company in the following cases:-

I ESTOPPEL AS TO TITLE

When a company issues a share certificate it declares to

the world that the person in whose name the certificate is
issued, and to whom it is given from the date of the issue of
certificate is the registered holder of certain number of shares
in the company. In other words, the company is estopped from
denying his title to the shares as against any one who has
altered his position on the strength of the certificate as, for
example in Re Behia V/S San Francisco Rail co. 5 5 :-

65
 T was a registered holder of the company; the company
registered a transfer of share from T to S and O. The transfer
was effected through a broker who had forged T’S name on the
instrument of transfer. S and O eventually transferred the
shares to B and D and the transfer was registered by the
company. When the forgery was discovered, the company
registered T’S name in the register B and D then brought and
action against the company for damages on the ground of
estoppel. It was held that the company was estopped from
denying the validity of certificates and must pay damages
equal to the value of the shares at the date when the company
first refused to recognize B and D as registered holder with
interest.

The measure of damages in all such cases is the value of

the shares at the date of the assumed breach of statutory duty
in either wrongfully refusing to register the transferee or
subsequently removing him from the register 5 6 .

Another example of such type is the case, namely, Dixon

V/S Kennaway and Co . 5 7 :-

D applied for 300 shares in a company through its

secretary L and paid for them. A clerk in the company who
owned no shares executed the transfer in favour of D. the
directors relying on the assurance given by L that the shares
were good, issued the certificate to D. later on, when L was
dismissed by the company and adjudicated bankrupt, D sued
the company for damages because the share had been
obtained under the forged transfer. It was held that in the
normal course of business the company would not have been
estopped by the issue of certificate under the forged transfer
but in the present case they were estopped from denying the
title of D because D had relied on the certificate to her
detriment in that she had lost all her remedies against L, who
was bankrupt.

66
 The doctrine will not operate it the certificate itself is
forgery and is issued by a person without apparent authority 5 8 .

II ESTOPPED AS TO AMOUNT PAID ON THE SHARE

Where the share certificate shows that the full value of

each of the share has been paid, the company is estopped, as
against the bonafide purchaser of the shares, from denying
that they are not fully paid. Reference may be made to a case,
namely, Bloomenthal V/S Ford 5 9 , where B lent 1,000 pound to
the company on the security of 10,000 fully paid preference
shares. The shares, however, were not paid. During the
winding up of company B was placed on the list of
contributories in respect of the whole amount of the shares. He
claimed that the company was estopped from denying that the
shares were fully paid. The House of Lords held that both the
company and its liquidator were estopped from denying that
the shares were fully paid and B’S name must be removed from
the list of contributories.

The doctrine of estoppel will not operate where shares

are issued under a transaction which turns out to be ultra
virus 6 0 , or where a person knows that the statement in a
certificate are not true 6 1 . But a bonafide transferee from him
can claim an estoppel 6 2 .

RENEWED OF DUPLICATE CERTIFICATE

A shareholder is expected to keep his share certificate in

safe custody, for which he is not entitled to a duplicate one
unless he proves that the original has been lost, or destroyed
or having been defaced or mutilated or torn, is surrendered to
the company 6 3 .

The company shall be punishable if with intent to

defraud, it renewed or issued a duplicate certificate 6 4 . Any
other terms and conditions for the renewed or duplicate
certificate is also prescribed under section 84 (4).

67
 Section 84 (4) provides that not withstanding anything
contained in the articles of a company, the manner of issue or
renewal of a certificate or issue of a duplicate thereof, the form
of a certificate, original or renewed, or of a duplicate thereof,
the particulars to be entered in the register of members or in
the register of renewed or duplicate certificates, the form of
such registers, the fee on payment of which, the terms and
conditions, if any, on which a certificate may be renewed or a
duplicate thereof may be issued, shall be such as may be
prescribed 6 5 .

68
 CHAPTER-II

NOTES AND REFERENCES

1. Prasanta K.Ghosh, An Outline of secretarial practice

and office management; 8 t h Ed., p. 130.

2. These guideline issued by the SEBI under Sec. 11 of

the SEBI Act., 1992.

3. Section 60(4) of the Act. Under such circumstances

the company and every person who is knowingly party
to the issue of prospectus is liable to a fine which may
extend to 50, 000 Rupees [S. 60(5)].

4. See section 56(3) of the Act.

5. 5. Substituted for the word “share” by the companies

amendment Act, 1999 w.e.f. 31.10.1998. This term
substituted for the word “share” in all the places of
this section.

6. S. 78(1) of the Act.

7. Henry Head & co. Ltd., V/S Ropner Ltd. (1951) 2 All
E.R. 994.

8. S. 78(2) of the Act.

9. See section 78(3) of the Act.

10. (1892) A.C. 125.

11. See section 79(2) of the Act.

12. S. 79(4) of the Act.

13. Srigopal Jalan and Co. Ltd. v/s Stock Exchange Assn.
Ltd. A.I.R. 1964 SC 250-51.

14. Re Florence Land and Public Works Ltd.; (1885) 29

Ch.D. 421-426.

69
15. Supra, 4.

16. S. 72 (1) (b) of the Act specifically provides that the

provision of this section will not have the effect of
affecting any liability under the general law.

17. Kailash Rai, Principles of Company Law, 4 t h Ed., p.

149.

18. (1918) 42 Bom. L.R. 595.

19. Bank of Peshwar v/s Madho Ram (1919) Lahore, 351.

20. Ramsgate Victoria Hotel co. v/s Mohtefione (1866) l.R.

I. Ex. Ch. 109.

21. (1879) 4 Ex. Div. 216.

22. Clause 5 of schedule II of the Companies Act.

23. See section 69(3) of the Companies Act.

24. Naresh v/s western Canada & paper co. (1905) 2 Ch.
353; Malabar Iron & steel works Ltd., Re, 1964 Ker,
311.

25. Indian states Bank Ltd. v/s Kunwar Sardar singh AIR
1934 All 855.

26. L.B.C. Gower, the Principles of Modern company Law

5 t h Ed.

27. S. 69(5) of the companies Act.

28. S. 70(1) of the Act, Jenkins committee recommended

repeal of this provision see paras 235-252.

29. See section 70(3) of the Act

30. See section 71(1) of the Act.

31. See section 71(3) of the Act.

32. See section 72(3) of the Act.

33. S. 72(5) of the Act.

70
34. S. 73 (1) of the Act.

35. S. 73(1A) of the Act.

36. S. 73(2) of the Act. At such rate not less then 4% and
not more than 15% as may be prescribed.

37. L.M. Sharma, A Company may refuse to register share

not ‘duly stamp’ (1992) 1 comp L.J., 41.

38. See section 73(2-A) of the Act.

39. See section 75(1) of the Act.

40. S.M. Shah’s Lectures on company Law, 19 t h Ed., P

131.

41. Shri Gopal Jalan & Co. Calcutta Stock Exchange

association Ltd. (1963) 33 comp. Cases 862 (S.C.)

42. AIR (1968) Delhi 170.

43. S. 75(4) of the Act.

44. S. 76(1) & (2) of the Act.

45. (1902) W.N. 15.

46. Metropolitan coal consumer’s Assn. v/s Scrimgeor

(1895) 2Q. B. 604.

47. (1918) 2K.B. 454.

48. Regulation 7, Table A, Schedule I of the companies

Act.

49. Ibid.

50. S. 113(3) of the Act.

51. S. 113(2) of the Act.

52. (2000) 1 Comp. L.J. 249 (Raj)

53. S. 84(1) of the Act.

54. The person named in the certificate or the holder of

the share certificate.

71
55. (1968) L. R.3 Q.B.D. 584.

56. Re Ottos Kopge Diamond Mines Ltd. (1893) ICh. 618.

57. (1960) ICh. 833.

58. Ruben v/s Great Fingal consolidated (1906) A.C. 439.

59. (1897) A.C. 156.

60. Re Eddystone Marine Insurance Co. (1893) 3 Ch. 9.

61. See crickmer case (1875) 10Ch App. 614.

62. Borrow case (1880) 14 Ch. D. 432.

63. S. 84(2) of the Act.

64. S. 84(3). The company shall be punishable with fine

not exceeding one Lakh Rupees and every defaulting
officer shall be punishable with imprisonment for a
term which may extend to six months, or with fine not
exceeding one Lakh Rupees or with both.

65. By the companies (Issue of share certificates) Rules,

1960. Rule 4(3) says that no duplicate share
certificate shall be issue in lieu of those that are lost
or destroyed without the prior consent of the Board or
without payment of such fees, if any, not exceeding
Rs.2 and on such reasonable terms, if any, as to
evidence and indemnity and the payment of out-of-
pocket expenses incurred by the company in
investigating evidence as the Board thinks fit.

72