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Allotment and Statutory Restrictions: An Informed Approach


"Allotment" refers to the process by which a company allocates and assigns shares or securities to individuals or entities who have applied to purchase them. It's a crucial step in the process of issuing securities, such as shares, to investors. Allotment determines the final distribution of securities among applicants and solidifies their ownership in the company.

Key points about allotment:

  1. Application Process: Before shares are allotted, interested investors need to submit applications indicating the number of shares they wish to purchase and the price they are willing to pay.
  2. Allotment Decision: The company's board of directors or designated committee reviews the applications and decides how many shares to allocate to each applicant based on factors such as demand, availability of shares, and applicable regulations.
  3. Pro Rata Allotment: In cases where demand for shares exceeds supply, the company might opt for a pro rata allotment. This means that shares are allotted to applicants in proportion to the number of shares they applied for relative to the total demand.
  4. Over-Subscription: If the number of applications exceeds the number of shares available, the company might be oversubscribed. In such cases, allotment decisions become more critical, and the pro rata principle may be applied.
  5. Refunds: In case of undersubscription or when the number of shares applied for is less than the number available, the company refunds the excess application money to applicants.
  6. Allotment Letter: Once the allotment decision is made, the company issues an allotment letter to successful applicants, confirming the number of shares allotted to them. This letter serves as evidence of ownership.
  7. Payment and Share Issuance: Successful applicants are required to make the payment for the allotted shares within a specified period. Once payment is received, the company issues share certificates or dematerializes the shares, depending on the mode of holding.
  8. Listing and Trading: If the company is listed on a stock exchange, the allotted shares may become tradable once they are listed. Investors can buy and sell the shares in the secondary market.
  9. Regulatory Compliance: The allotment process must comply with applicable laws and regulations, ensuring transparency, fairness, and protection for investors.
  10. Company Act Compliance: The Companies Act and relevant securities regulations in each jurisdiction provide guidelines for the allotment process to ensure it is conducted ethically and in accordance with the law.

Allotment is a critical step that completes the process of issuing shares or securities to investors. It formalizes ownership and enables successful applicants to become shareholders in the company. The process must be conducted in a transparent and equitable manner, ensuring compliance with legal requirements and protecting the interests of both the company and the investors.

Statutory Restrictions on all Allotment:

Statutory restrictions on allotment refer to legal limitations and regulations imposed by company laws and securities regulators on how companies can allocate and issue shares or securities to investors. These restrictions are in place to ensure fairness, transparency, and proper functioning of the capital markets. Here are some common statutory restrictions on allotment:
  • Minimum Subscription Requirement: Some jurisdictions require that a company cannot allot shares unless a minimum amount of capital has been subscribed by the public. This ensures that the company has sufficient funds to start its operations.
  • Maximum Number of Allotments: In certain cases, there might be restrictions on the maximum number of allotments a company can make within a specific period. This prevents companies from excessively diluting existing shareholders by making too many allotments.
  • Prohibition on Allotment at Discount: Many jurisdictions prohibit companies from issuing shares at a discount to their face value or market price. This is to protect the interests of existing shareholders and prevent unfair dilution.
  • Allotment within Time Limits: Some laws stipulate that shares must be allotted within a specified time frame from the date of receipt of application money. This prevents companies from holding onto funds for extended periods without providing shares in return.
  • Consent for Listing: If a company plans to list its shares on a stock exchange, there might be requirements that shares can only be allotted if the application for listing has been approved by the exchange.
  • Approval from Regulatory Authority: In certain cases, companies may need approval from the securities regulatory authority before they can make allotments. This is often the case for public offerings.
  • Preemption Rights: Some jurisdictions grant existing shareholders the right of first refusal (preemption rights) to subscribe to new shares before they are offered to external investors. This ensures that existing shareholders have the opportunity to maintain their proportional ownership.
  • Debt-Equity Ratio Limits: In some cases, restrictions are placed on the debt-equity ratio a company can maintain. This can impact the company's ability to raise funds through share allotment, especially if it would lead to an excessively leveraged capital structure.
  • Public Disclosure and Prospectus Requirement: Companies must provide detailed information about the allotment process in the prospectus, ensuring that potential investors have a clear understanding of the terms and conditions.
  • Reporting Obligations: Companies may have reporting obligations to the regulatory authority regarding their allotment activities, including the number of shares allotted, the names of allottees, and any deviation from the initial allotment plan.

It's important for companies to be aware of and comply with these statutory restrictions on allotment to avoid legal and regulatory issues. Adhering to these restrictions ensures that the allotment process is conducted fairly and transparently, protecting the interests of both the company and its investors.

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