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Raising capital is extremely crucial for every business. Capital can be either owned or borrowed. Owned Capital is known as Equity and Borrowed Capital is known as Debt. Equity is raised by issuing instruments called securities in the form of shares which are purchased by shareholders or members of the company.
Shares are a unit in which the capital of a company is divided. Shares can be two kinds:
- Equity shares
- Preference shares
Public companies raise capital by making a public offer. Investors amongst the general public who wish to subscribe to the shares make a share application to the company upon which shares are allotted to them.
The concept of subscription and allotment of shares is not only limited to The Companies Act, 2013 (hereinafter also referred to as the “2013 Act”) but is covered by Companies (Prospectus and Allotment of Securities) Rules, 2014 (hereinafter referred to as the “2014 Rules”).
UNDERSTANDING THE CONCEPT OF SUBSCRIPTION AND ALLOTMENT OF SHARES
- The term allotment per se has not been defined anywhere in the 2013 Act. The meaning of the word “allotment” has been construed as an appropriation out of the previously unappropriated capital of a company.
- In simple words, a public company first makes a public offer for the issue of shares by the public. Subsequently, the investors make applications to the company as an offer to purchase the shares of the company. Allotment of shares is simply the acceptance of that offer to take up shares by the company.
- One of the statutory provisions on the allotment of shares is the minimum subscription. Minimum subscription ought not to be less than ninety percent of the amount issued.
- In case of a public company, minimum seven people are required to subscribe their names to the memorandum of association of the company in order to form a public company.
RETURN ON ALLOTMENT
- It is a mandatory statement that is to be filed to the Registrar of Companies by all the companies who have a share capital and have made allotment of securities.
- It contains details about the name, address, number of shares allotted to each of the members of the company, etc.
- Return on allotment ought to be filed within fifteen days from the date of allotment of shares.
- Failure to file the return on allotment on time can lead to a penalty of Rs. 1000 per day till the time the default continues. The maximum penalty that can be imposed is of Rs. 25 Lakhs.
RELEVANT PROVISIONS OF THE STATUTE
Section 3 of the 2013 Act: It expressly stipulates that in order to form a public company minimum seven people ought to subscribe their names to the memorandum of association of the company.
Section 39 of the 2013 Act: In a nutshell it prescribes that:
- Allotment of shares shall not be made to the public for subscription unless the minimum subscription as set out in the prospectus is met and all the sums payable on the application for the said amount have been received by the company. In case the minimum subscription amount is not met and within thirty days of issue of the prospectus the application money is not received, then, the entire amount received is to be returned.
- Application amount to be paid for each security should not be less than five per cent of the nominal amount of that security
- Return on allotment shall be filed by every company making allotment of securities and having a share capital.
- Penalty for non-compliance of return of amount received within the prescribed time and return on allotment is Rs. 1000 per day till the continuance of the default or Rs. 1 Lakh whichever is less.
Section 42 of the 2013 Act: Section 42 (8) prescribes that it is mandatory for a company to file the return on allotment within fifteen days from receipt of allotment.
SETTLED LEGAL POSITION
In C.J. Mathew v. Greendot Hotels & Resorts (India) (P.) Ltd. the Petitioner, who was the holder of fifty percent of the share capital of the Respondent Company alleged oppression and mismanagement on the part of the Respondent Company. However, the contentions of the Petitioner were dismissed by National Company Law Tribunal, Chennai Bench because he was unable to prove that he had paid the subscription money.
[Image Sources : Shutter stock]
In A P L Industries Ltd.v.Securities Exchange Board of India the Petitioner Company had floated the prospectus for public issue but failed to receive the minimum subscription. The Respondent Banks were directed by the Petitioner Company to refund all the money along with interest to the share applications but the Respondent Banks asserted that they had not accrued any interest on the application money. It was held by the Delhi High Court that it was the duty of the Petitioner Company to have made adequate funds available to the Respondent Banks so that they could have issued refund warrants to the share applicants.
DIFFERENCES BETWEEN THE 2013 ACT AND THE 1956 ACT
- The new act stipulates that the return on allotment has to be filed in compliance of rule 12 of the 2014 Rules.
- Penalty for delayed filing of return on allotment has been increased from Rs. 50 thousand as per the earlier act to Rs. 25 Lakhs.
- The new act covers all types of securities under the ambit of minimum subscription.
- The new act provides that minimum subscription ought to be received within thirty days in contrast to one hundred twenty days as prescribed by the old act.
Author: Sonakshi Pandey, Symbiosis Law School, NOIDA, in case of any queries please contact/write back to us via email to email@example.com or at Khurana & Khurana, Advocates and IP Attorney.
- Satwinder Singh, Companies Act 2013
- Sri Gopal Jalan and Co. v. Calcutta Stock Exchange Assn. Ltd., (1964) 3 SCR 698
- DESIKAN BALAJI, “Subscription Of Shares For Non-Cash Consideration”
- PROF R BALAKRISHNAN, “Consequences of delayed filing of Return of Allotment under the Companies Act, 2013 – a case study”
- K.A. PADMANABHAN, “Allotment of subscription shares – Can filing of return of allotment be dispensed with?”
- J. Mathew v. Greendot Hotels & Resorts (India) (P.) Ltd., 2019 SCC OnLine NCLAT 473
- A P L Industries Ltd. Securities Exchange Board of India 2016 SCC OnLine Del 5799
2019 SCC OnLine NCLAT 473
2016 SCC OnLine Del 5799