Allotment of Shares Process and Legal Requirements
Understanding how allotment of shares works is essential for anyone involved in business, investing, or company formation. Whether you’re starting a private company or applying for shares in a public issue, this process defines how ownership in a company is distributed. Early in the discussion, it’s also useful to compare this with other financial terms such as redemption of preference shares, which involves paying back shareholders instead of allocating new ownership.
What Is Allotment of Shares?
The allotment of shares is the process by which a company issues new shares to investors and assigns ownership rights. When investors apply for shares during a company’s capital-raising activity, the company evaluates the applications and decides how many shares each applicant will receive. Once allotted, the applicant becomes a shareholder and gains certain rights like voting and dividend participation.
In India, this process is regulated by the Companies Act, 2013, the Securities and Exchange Board of India (SEBI) regulations, and the company’s Articles of Association (AoA). A valid allotment is not just about distributing shares; it must comply with legal rules, authorized capital limits, and filing requirements.
Importance of Allotment of Shares
The allotment of shares is vital because it determines the ownership structure and financial strength of a company. For startups, it’s a method to raise funds and attract investors. For large corporations, it helps in expanding capital or rewarding existing shareholders.
It also impacts control and voting rights. The more shares a person holds, the greater their influence on company decisions. This makes the allotment process crucial to maintaining a fair and lawful distribution of ownership.
Legal Framework Governing Allotment of Shares in India
India has a detailed legal structure for handling the allotment of shares, ensuring transparency and fairness. Below is an overview of the primary legal conditions that guide the process:
| Aspect | Details |
|---|---|
| Governing Law | Companies Act, 2013 & SEBI Regulations |
| Authority to Allot | Board of Directors, as per the Articles of Association |
| Time Limit | Allotment must be completed within 60 days from the date of receipt of application money |
| Filing Requirement | Form PAS-3 must be filed with the Registrar of Companies (ROC) |
| Allotment Evidence | Share certificates issued within 2 months or credited in demat form |
These regulations ensure that every allotment of shares is transparent, timely, and legally valid.
Steps Involved in Allotment of Shares
The process for allotment of shares involves several important steps from issue to registration. Here’s how it works in simple terms:
Board Authorization:
The Board of Directors must pass a resolution approving the issue and allotment of shares.
Offer of Shares:
The company invites investors through a prospectus, offer letter, or private placement depending on the type of issue.
Application Process:
Investors submit their applications along with the required payment.
Review and Allotment:
The company examines all applications and decides how many shares to allocate to each investor.
Filing with ROC:
Within 30 days of allotment, the company must file Form PAS-3 and maintain a register of members.
Issuing Certificates:
Finally, the company issues share certificates or credits the allotted shares to investors’ demat accounts.
Types of Allotment of Shares
The allotment of shares can occur in several ways depending on the company’s objective and investor type. Let’s look at the main categories:
| Type of Allotment | Description |
|---|---|
| Private Placement | Shares are allotted to a select group of individuals, institutions, or promoters. |
| Public Issue | Shares are offered to the general public through an IPO. |
| Rights Issue | Existing shareholders are given a right to buy additional shares in proportion to their holdings. |
| Bonus Issue | Additional shares are given to existing shareholders for free, based on the number of shares they already hold. |
| Preferential Allotment | Shares are allotted to specific people at a predetermined price, often based on valuation. |
Each form of allotment of shares has its own regulatory requirements and implications for ownership and control.
Role of the Registrar of Companies (ROC)
The Registrar of Companies (ROC) plays an important role in ensuring that every allotment of shares follows the rules. The company must submit details of allotment, including the number of shares, face value, and particulars of allottees, through Form PAS-3.
Failure to comply with filing timelines can result in penalties for the company and its directors. Hence, timely filing is both a legal necessity and a sign of good governance.
Difference Between Allotment, Issue, and Transfer of Shares
While these terms may sound similar, they refer to distinct processes in corporate law.
| Term | Meaning |
|---|---|
| Issue of Shares | The process of offering shares for sale to the public or selected investors. |
| Allotment of Shares | The act of assigning ownership of specific shares to applicants. |
| Transfer of Shares | The change of ownership from one shareholder to another without creating new shares. |
To understand this better, you can also explore how to transfer shares from one demat account to another, as it gives a clear idea of how ownership changes once the shares are allotted and recorded.
Allotment of Shares Under SEBI and Company Law
For listed companies, SEBI (Securities and Exchange Board of India) provides specific regulations to protect investor interests. SEBI’s guidelines ensure that allotments are fair and transparent, preventing insider advantages or unequal treatment of investors.
In private companies, however, the process is guided primarily by the Companies Act, 2013, which requires clear records and filings. Private placements must follow prescribed procedures, and no allotment can exceed the company’s authorized share capital.
Timeline for Allotment of Shares
The timeline for allotment of shares is crucial for maintaining compliance.
| Event | Timeline |
|---|---|
| Receipt of Application Money | Day 0 |
| Allotment of Shares | Within 60 days |
| Refund (if no allotment) | Within 15 days after 60-day limit |
| Filing Form PAS-3 with ROC | Within 30 days of allotment |
| Issue of Share Certificates | Within 2 months of allotment |
Companies must strictly adhere to these timelines to avoid penalties under Section 42 of the Companies Act.
Significance for Investors and Companies
For investors, the allotment of shares marks the beginning of ownership in a company. It gives them rights such as voting, dividend entitlement, and capital appreciation.
For companies, it represents capital inflow. The funds raised through share allotment can be used for expansion, debt repayment, or new projects. Therefore, it serves as a bridge between capital requirements and investor confidence.
Oversubscription and Refunds
When a public issue receives applications for more shares than available, it leads to oversubscription. In such cases, the company must fairly distribute available shares and refund the excess application money.
Refunds must be processed promptly, usually within 15 days after the closure of the issue. This ensures transparency and compliance with SEBI norms.
Allotment of Shares in Demat Form
Today, most allotment of shares occurs in dematerialized (demat) form rather than paper certificates. This ensures efficiency, safety, and transparency.
After allotment, shares are credited directly to the investors’ demat accounts maintained with depositories like NSDL or CDSL. This digital process reduces fraud, misplacement, and manual delays in share issuance.
Post-Allotment Compliance
Once the allotment of shares is completed, the company must:
File Form PAS-3 with ROC.
Update its Register of Members.
Issue share certificates or credit demat accounts.
Maintain transparency in shareholding patterns.
Failure to comply can attract penalties under the Companies Act, and directors may be held liable.
Conclusion
The allotment of shares is not just an administrative step—it defines the ownership and financial structure of a company. It represents the transfer of capital into the business and the creation of shareholder rights.
By following proper legal steps, maintaining records, and meeting filing deadlines, both companies and investors can ensure that the process remains fair and transparent. From startups to large corporations, understanding how allotment of shares works is crucial for sound financial management and investor trust.
Whether you’re exploring equity investments or corporate compliance, mastering this concept gives you deeper insight into how businesses grow, expand, and sustain their ownership base through lawful and structured procedures.