A company makes an offer to subscribe to its shares by way of an application. "The allotment of shares precedes the issue of shares. Allotment of shares means appropriation of unissued shares to any particular person preliminary to the issue of shares. Issue of shares is something distinct from allotment and is some subsequent act whereby the title of the allottee becomes complete. A re-allotment and re-issue of shares which have already been issued and have subsequently been forfeited is not an issue of shares. An issue of a share creates a movable property in the shape of the issued share. There can be no issue of a share which has already been issued and which is already an existing article of property."[1]

Statutory restrictions on allotment (S. 39):-
The first step towards a valid allotment is the fulfillment of required minimum subscription amount. Every company offering shares to the public has to state a minimum subscription amount in the prospectus. Further, there is a restriction on the company towards allotment of shares until the minimum stated amount has been subscribed and the application money has been received by the company in the form of a cheque or any other instrument. Also, the minimum application money cannot be less than five percent of the nominal value of security or any other percentage or amount specified by SEBI.

Another restriction imposed upon the company is towards receiving of minimum subscription amount within a period of thirty days, failing which the company has to return the amount so received within a period as may be specified. Also, a company making allotment of securities is required to file a return of allotment with the registrar of companies in a prescribed manner.

Consequences of default- The penalty to be paid towards non-compliance by the company or the officer-in-charge is of Rs. 1,000 for each default for each day the default continues or Rs. 1,00,000 whichever is less.

Applicable Rules: (Prospectus and allotment of securities) Rules, 2014-
# Rule 11- If the minimum amount has not been subscribed and application money has not been received then a company is obligated to return the money within fifteen days. Further, the application money can be credited only to the bank account from which the subscription was remitted.

\
# Rule 12- A company having a share capital makes an allotment of securities is required to file a return of allotment with the registrar of companies within thirty days in form PAS-3 along with fees as specified in (Registration offices and fees) Rules, 2014.

Shares to be dealt in on stock exchange (S. 40):-
The company offering shares or debentures to the public by way of a prospectus is required to first make an application to one or more recognized stock exchanges and has to obtain its consent for the securities to be dealt with in the stock exchange(s). Further, it is required to state in the prospectus, the name(s) of the stock exchange in which the securities shall be dealt with. Also, it is mandatory to keep all the money received towards subscription from the public on application in a separate bank account and it can only be used for adjustment against allotment of securities if the securities have been permitted to be dealt with in the stock exchange(s) specified in the prospectus or towards repayment to the applicants in case the allotment of securities is not possible for any other reason, within a time period prescribed by SEBI.

Any condition which may require or bind the applicant to waive compliance with respect to any requirements under this section is void. Further, a company is allowed to pay commission to any person in connection with the subscription to its securities subject to certain prescribed conditions.

Consequences of default-A penalty of minimum five lakhs can be imposed upon the company which may extend to fifty lakhs in case a default is made with respect to this section and every officer who is in default shall be punishable with imprisonment upto one year or with a minimum fine of fifty thousand which can be extended upto three lacs or with both.

Applicable Rules: (Prospectus and allotment of securities) Rules, 2014-
Rule 13- A company may pay commission to any person in connection with the subscription or procurement of subscription to its securities, whether absolute or conditional, subject to the following conditions, namely:-
# the articles of association of the company shall authorize the payment of such commission;
# the commission may be paid out of proceeds of the issue or the profit of the company or both;
# the rate of commission paid or agreed to be paid shall not exceed, in case of shares, five per cent of the price at which the shares are issued or a rate authorised by the articles, whichever is less, and in case of debentures, shall not exceed two and a half per cent of the price at which the debentures are issued, or as specified in the company's articles, whichever is less;
# the prospectus of the company shall disclose-(i) the name of the underwriters; (ii)the rate and amount of the commission payable to the underwriter; and (iii)the number of securities which is to be underwritten or subscribed by the underwriter absolutely or conditionally.
# there shall not be paid commission to any underwriter on securities which are not offered to the public for subscription;
# a copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of the prospectus for registration.

Private Placement (S.42):-
A company can make a private placement by way of issue of offer letters. An offer of securities/ invitation to subscribe to securities can be made to a number of persons not exceeding 50 or to such number of people as are prescribed. This proviso excludes the qualified institutional buyers and employees of the company being offered securities under a scheme of employee stock option. Thus, this section does not regulate the offer being made to an existing shareholder of the company. Further, if an offer is made to the people exceeding the prescribed number, the same is deemed to be a public offer and is governed by the provisions relating to public issues. Further, no fresh offer/invitation for allotment of securities can be made unless the ones made earlier have been completed or withdrawn by the company.

Moreover, any offer which is in non-compliance with the provisions of this section is required to be treated as a public offer and the same has to comply with the requirements of the Securities Contracts (Regulations) Act, 1956 and SEBI Act, 1992.

The mode of payment towards subscription of securities is only by way of cheque, demand draft or other banking channels, but in way can it be done by way of cash.

Consequences of default-In case a company fails to allot the securities within sixty days of receipt of the application money for such securities, the company is obligated to return the money within fifteen days from the date of completion of sixty days. Further, in case the company is unable to return the money within the specified period then the company shall be liable to pay the money along with a twelve percent interest rate from the expiry of sixtieth day.

The company is obligated to keep the money received on application in a separate bank account and the same can only be used for either adjustment against allotment of securities or for repayment of monies when the company is unable to allot securities.

[Exemption- As per notification [GSR 08(E)] dated 04/01/2017 and [GSR 09(E)] dated 04/01/2017 , a Specified IFSC Public company and Specified IFSC Private company respectively is allowed to allot securities within ninety days of receipt of the application money for such securities.]

Further, any offer made under this section can only be made to such persons whose names are recorded by the company prior to the invitation to subscribe. Also, such persons should receive the offer by name, and that a complete record of such offers is required to be maintained by the company in a prescribed manner and the same is to be filed with the registrar within a period of thirty days of circulation of relevant private placement offer letter.

A company offering securities under this section is prohibited from using any public platform such as releasing any public advertisements or to utilize any media etc. to inform the public at large about such an offer.

A company making any allotment of securities under this section, is required to file with the Registrar a return of allotment in a prescribed manner including a complete list of all security-holders, with their full names, addresses, number of securities allotted and other prescribed relevant information.

Penalty for contravention- A company making an offer or accepting monies in contravention of this section, along with its promoters and directors is liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company is also required to refund all monies to subscribers within a period of thirty days of the order imposing the penalty.

Applicable Rules: (Prospectus and allotment of securities) Rules, 2014-
Rule14- A Company can make an offer or invitation to subscribe to securities through issue of a private placement offer letter in Form PAS-4.
·A private placement offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within thirty days of recording the names of such persons in accordance with sub-section (7) of section 42.

Proviso- That no person other than the person so addressed in the application form is allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid.

·A company cannot make a private placement of its securities unless-
(a) the proposed offer of securities or invitation to subscribe securities has been previously approved by the shareholders of the company, by a Special Resolution, for each of the Offers or Invitations.
(b) Such offer or invitation is to be made to not more than two hundred persons in the aggregate in a financial year.
(c) the value of such offer or invitation per person is to be with an investment size of not less than twenty thousand rupees of face value of the securities;
(d) the payment to be made for subscription to securities is to be made from the bank account of the person subscribing to such securities and the company shall keep the record of the Bank account from where such payments for subscriptions have been received.
Proviso- that monies payable on subscription to securities to be held by joint holders shall be paid from the bank account of the person whose name appears first in the application.
·The company shall maintain a complete record of private placement offers in Form PAS-5. Proviso- that a copy of such record along with the private placement offer letter in Form PAS-4 shall be filed with the Registrar with fee as provided in Companies (Registration Offices and Fees) Rules, 2014 and where the company is listed, with the Securities and Exchange Board within a period of thirty days of circulation of the private placement offer letter.

·A return of allotment of securities under section 42 shall be filed with the Registrar within thirty days of allotment in Form PAS-3 and with the fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 along with a complete list of all security holders containing-
# the full name, address, Permanent Account Number and E-mail ID of such security holder;
# the class of security held;
# the date of allotment of security;
# the number of securities held, nominal value and amount paid on such securities; and particulars of consideration received if the securities were issued for consideration other than cash.[2]

End-notes
[1]Sri Gopal Jalan & Co. V. Calcutta Stock Exchange Assn Ltd, AIR 1964 SC 250
[2](Prospectus and allotment of securities) Rules, 2014