What is company?
The term company has no strict and definite meaning in technical or legal sense
but it is used to describe a voluntary association of persons for some common
goal and objective, it's purposes is multi-various and includes both economical
and non-economic objectives. Indian law gives two types of associations i.e,
company and partnership. Section 2(20)defines a company as an incorporation
under the companies act 2013 or under any previous law. This company has a
number of characteristics like it is an incorporate association, it has its own
legal entity which is distinct from its members, it is considered as an
artificial person with limited liability, though liability can also be unlimited
where the shareholders decide such nature. A company has it's own separate
property, transferability of shares and perpetual succession. It even has it's
own common seal.
There are numerous types of companies:
- Private Companies: one person company and small company
- Public companies: public companies can be incorporated as limited or
unlimited liability, where a limited liability company will be - (1)company
limited by shares or (2)guarantees or (3)by both shares and guarantees.
- Companies can also be further categorised by - Registered, Statutory,
Foreign, Existing, Association not for profit, Government and Holding and
What is Public Company?
The definition of public company is provided under Section 2(71) of the act as
amended by the Amendment act of 2015, that it is a company which is not private
in nature and has a minimum paid-up share capital as prescribed. A subsidiary of
any public company shall also be deemed to be a public company even where such
subsidiary company continues to be a private company in its article of
memorandum and association.
Section 3 says that for a public company minimum
number of person would be 7 in number and there is no restriction in maximum
number of persons. Section 44 provides that shares of any member of a company is
movable property and is no restriction in transferability in the manner
provided by article of the company. Section 2(68) a public company unlike a
private one can issue prospectus. According to section 149 a public company may
have at least 3 directors and section 152 says that in public company at least
2/3rd of the directors must be those whose office period is subject to
retirement by rotation.
What are shares?
Under Section 2(84) of the Companies Act 2013, characterises "Shares" as,
"Offer" signifies an offer in the offer capital of an organisation including
stocks. Shares are considered as a sort of security. Securities is characterised
in the Sub-section 80 of Section 2 of the said Act, which alludes to the meaning
of the securities as characterised in section 2(h). Section 2(84) of the
Companies Act 2013, characterises "Shares" as, "Offer" signifies an offer in the
offer capital of an organisation including stocks
Shares are considered as a sort of security. Securities is characterised in the Section 2(80)of the said
Act, which alludes to the meaning of the securities as characterised in
proviso (h) of section 2 of the Securities Contracts Act, 1956. In the matter
of Harmony and Montage Tin and Copper Mining Company the court held that “any
payment which is presently enforceable against the company such as consideration
payable for property purchased, will constitute payment in cash”.
What is allotment of shares?
Company issues different types of stock to the public as an effort of expanding
of their businesses or to pay their debts. Fresh Issue is share which is issued
at the time of the incorporation of the company while after incorporation
issuance of share is called Private Issue. Though public companies can issue
their shares of the company to public but private companies do have certain
restrictions on this thing.
Provisions and procedures under the companies act
for allotment and issuance of shares/securities:
- Issuing of the prospectus:
to raise money for the company is the first step and a prospectus is
basically an invitation to the public to purchase the shares of the company.
“The organization needs to present a duplicate of the prospectus to the SEBI though the privately owned businesses don't have to give
any prospectus. The prospectus of an organization gives the data about the
responsible company – names of Directors, terms of issue, opening and shutting
date of the share issue, names of Directors, application expenses, bank
subtleties for deposit and least shares for application.
- Receiving the application:
In this second step it is of applying for
shares alongside the application expense by the intrigued financial purchasers
or investors. At the point when the quantity of offers applied for is more than
the quantity of offers gave, this is named as Over-membership while the quantity
of use for the issue of offer is not exactly expected then this is known as
“Under-Subscription”. The sum paid for the application cash should be in any
event 5 percent of the ostensible measure of offer.
- Allotment of shares:
The choice of the allotment of shares depends on
the respective company. Designation of shares to its investors is called
Acceptance and is preposterous until membership. The base membership measure of
90% of the issue is to be accomplished by the organisation in 60 days from the
date of conclusion of the issue. In the event that on the off chance that it
isn't met, the organisation should discount the whole membership sum. There is
an unwinding of 18 days. For any postponement following 78 days, the
organisation should pay an interest of 6 percent for each annum as a punishment.
After the Acceptance of offers, the candidates become investors in the
The court in CIT v SSV Meenakshi
Offers for shares are essentially
made when the forms of application are provided by the company”.
It is viewed as
an allotment of share when an application is acknowledged. That is presumed as
an appointment out of the already un-appropriated capital of an organisation.
Subsequently where relinquished offers are re-given, it isn't something very
similar as a distribution. For a portion to be viewed as legitimate it will
consent to the necessities of the and standards of the law of agreement that is
with respect to acknowledgment of offers.
Method for the Allotment of Shares after Company's Incorporation:
The issue of
shares in an organization is the interaction by which organizations apportion
new shares to the investors. According to the provisions of the Companies Act of
2013, a Companies issue shares to the shareholders. In the matter of Chokkalingam
v. Official Liquidator the court held that “Allotment of shares against
promissorynotes shall not be valid.”
Restrictions on Allotment
According to section 39 of the Companies Act 2013:
- Minimum subscription and application money:
Minimum Subscription is the base sum expressed in the prospectus that is
needed to maintain the Business. As per Section 49 of Companies Act, 2013
the primary essential of a legitimate portion is that of least membership.
In the given prospectus of the organisation
the measure of least membership will be expressed when offers are offered to the
As indicated by Section 69(1) of the Companies Act, no
apportioning can be made by the organisation until the base Subscription has
been gotten.”As observed in the case of Rishyashringa Jewellers Ltd v Bombay
Stock Exchange no shares shall be allotted unless a specified amount has been
subscribed and the application money, which will not be less appeal that was
held to be effective, the choice of stock trade was saved and the posting would
be allowed. The allotment would be saved.
- Over-subscribed Prospectus:
An allotment is substantial when the consent
of a stock exchange has been conceded and the outline being considered as
over-bought part of the cash got will be sent back to the candidates under the
given time period. In the case of Alote Estate v. R.B. Seth Hiralal Kalyanmal
Kasliwal, the court said- in the event of insufficiency of consideration, the
shares will be considered as not completely paid and the shareholder will be
obligated to cover them, except if the agreement is deceitful.
- Application money & Money to be deposited in a Scheduled Bank:
Section 69(3), the sum due on particular share ought not be under 5 percent of
the Nominal worth of the shares. According to Section 69(4), the Money got from
the candidates should be saved in Schedule Banks up to the endorsement of
beginning of Business has been acquired. As indicated by section 69(5), if the
Allotment can't be made inside 120 days from the date of distribution of the
prospectus or if the base Subscription has not been raised, the Director needs
to restore the cash got from the candidate.
- Opening of the Subscription List & Rejection of Application:
per Section 72, no apportioning can be made before the start of the fifth day
after the distribution of the prospectus or any time later as referenced in the
prospectus. On the off chance that any individual gives public notification of
withdrawal of the consent to the issue of the prospectus, any candidate can
renounce this application.
Principles of Allotment of Shares:
- Allotment of shares by proper authority:
In general, allotment is made by a goal that comprises of the Board of
directors. In any case, where the articles so gave, an allotment made by
secretaries and treasures was held to be standard.
- Within the reasonable time:
It is essentially made inside a sensible or indicated timeframe in any case
the application will slip by. The predetermined time span of a half year
among application and allotment is held to be not sensible.
- Shall be communicated:
It is essential that there should be communication of the allotment to the
candidate. Posting of an appropriately tended to and stepped letter of
allotment is considered as an adequate communication regardless of whether
the letter were to be deferred or lost.
- Absolute and unconditional:
As indicated by Section 6 of the Indian Contract Act 1872 the allotment
application should be acknowledged inside a sensible time and should be
outright and unqualified. In this way where an individual applied for 400
offers depending on the prerequisite that he would be delegated clerk of
another part of the organization, the Bombay High Court held that he was not
limited by any allotment except if he was so designated as expressed by
court in Ramanbhai M.
Nilkanth vs Ghashiram Ladliprasad.
In the matter of Shree Gopal Jalan and Company Vs. Calcutta Stock
, respondent Company did not file any return of the re-issued forfeited
shares under section 75(1) of the act and therefore the appellant shareholder
moved to the high court for an order requiring it to do so. The words allotment
of shares has been discussed in section 75 to indicate the creation shares by
appropriation out of the unappropriated share capital to a particular person.
The question was that was is the meaning of allotment occurring in section 75 of
the act. The Supreme court while dismissing the case said that“the trade was not
subject to record any arrival of the relinquished shares under Section
75(1) Corresponds to section 39 when the equivalent were re-issued.
The Court saw that when an offer is relinquished and re-issued, there is no
allotment, in the feeling of apportionment of shares out of the approved and
unappropriated capital and affirmed the perceptions of“Chief Justice “Harries
in S. M. Nandy & Ors vs State Of West Bengal & Ors
” case that:
forfeiture all that happened was that the right of the particular shareholder
disappeared but the shares considered as a unit of issued capital continued to
exist and was kept in suspense until another shareholder was found for it.” The
case was based on article 21,22 and 24 of the Indian constitution. It was also
held that “allotment is the appropriation of shares to a particular person by
the company. While application of share is an offer, allotment constitutes
acceptance leading to a binding contract b/w the company and the shareholder”.
What is an IPO?
IPO is the abbreviation for Initial Public Offering. It is the offer of stock by
an organisation to the public. An IPO is fundamentally alluded to as 'opening up
to the world' on the grounds that until an organisation's stock is offered
available to be purchased to the public, the last can't put resources into
it. Section 23 (1) arrangements with a Public proposal by both Public and
In the matter of Sahara India Real Estate Corporation Ltd. vs. SEBI
the supreme court said that “the actions and intentions on the part of the
two companies clearly show that they wanted to issue securities to the public in
the garb of a private placement to bypass the various laws and regulations to
that effect.” The Apex Court at long last concluded that regardless of the idea
of the offer being offered, in the event that it's done as such to in excess of
50 individuals it will be understood as a public issue. Section 67 arrangements
with offers made by an organisation of in excess of 50 people and explicitly
portrays it as 'public offer'.
Rules for IPO under SEBI (Issue of Capital and Disclosure Requirements)
More rules and regulations:
- Regulation 4 accommodates following general qualification conditions for
the issue of IPO i.e, Issuer, its advertiser gathering or chiefs or people in charge
of the issuer or in charge of some other organization ought not be suspended
from getting to capital market. Issuer to make application to at least one
perceived stock trades for posting of shares. Issuer to go into concurrence with
a store for demat of indicated securities. All somewhat settled up value shares
have been made completely settled up which made firm plans of account through
irrefutable methods towards 75% of the expressed methods for money barring the
add up to be raised through the issue or through inside gatherings.
- The Capital and Disclosure Requirements regulations govern the Initial
Public Offers provides the procedure norms apart from the Companies Act
which indeed is the parent legislation for all the rules. The regulations of ICDR
issued by SEBI, comprises of brief provisions regulating and governing the
Initial Public Offer and provide detailed guidelines. Regulation 6 defines the
eligibility requirements for making an initial Public Offer.
- Sub-section 1 says that to create an IPO an issuer must assure that:
- The company has the 'net tangible assets; evaluating to at least 3 Crores INR
in each of the preceding 3 years prior to the issue of an Initial Public Offer.
Also, out of these 3 crores, the monetary assists must not exceed a value of 50
percent of the total. However, if such monetary assists are over 50 percent, the
issuer has to make a promise to use such excess monetary assets in its business
and project. The company must assure to achieve an average operating profit of at
least 15 crore INR during the three years preceding the issue of Initial Public
Offer. Regulation 26 deals with profits and assets.
- The organization should have a total assets of at any rate 1 crore INR in
every one of the former three years before the issue of Initial Public Offer. In
the event that the organization has changed its name in any way, shape or form,
inside the most recent year, at any rate half of the income should be acquired
(when contrasted with the occasions before the name was changed) under its new
- Disclosure requirements
the companies are required to disclose details and information regarding
them at the time of issuing the Initial Public Offer and some of the key
disclosure requirements are as follows
- Corporate and Legal Matters:
the disclosure requirements can be broadly
classified into details about the company structure including governance &
administration. The business model followed by the company which depicts the
strengths, weaknesses, risk factors etc. Utilisation of proceeds received from
issuing of shares. License materials etc. Apart from such matters, the legal
matters must be disclosed by the companies as well.
- General Financial Disclosure:
The financial statements be it standalone
statements, supplementary statements or the adjustment over the final records,
all are bound to be disclosed
- Publicity guidelines:
ICDR also imposes publicity restrictions on issuers
and intermediaries during the Initial Public Offer process. This period
commences when the board of directors approve the Initial Public Offer and ends
after the listing of shares. In this period, no statements, interviews, public
communications can be shared which can affect the investors. Advertising and all
promotional activities shall also be consistent with the past with no new
changes during this period.
What is an FPO?
FPO stands for Follow on Public Offer
or Further public offer. FPO is a
process by which a listed company on the stock exchange can raise capital by
offering new shares to the investors or the existing shareholders of the
company. FPO is have these two purposes: To raise additional capital and To
reduce existing debt. There are two types of FPO : 'Dilutive FPO and
Non-Dilutive FPO.' In the previous the organisation issues extra number of
shares in the market yet the estimation of the organisation's shares stays as
This diminishes the general offer cost and consequently lessens the profit per
share likewise though in last mentioned, Non-dilutive IPO happens when large
investors of the organisation like the governing body sell their secretly held
shares in the market. This strategy doesn't expand the quantity of shares for
the organisation yet the quantity of shares accessible for the overall
population increases. Unlike dilutive FPOs, since this technique doesn't build
the quantity of shares, it doesn't influence an organisation's EPS ratio. Since
we have realised above what is an IPO and what is FPO with types and models.
Presently let us comprehend the contrast among IPO and FPO.
Rules and Regulations regarding Further Public Offer
Regulation 155 talks regarding the rules and guidelines for the Further Public
Offer. To successfully issue Further Public Offer a company must:-
Have the equity shares enlisted on any stock exchange for a minimum period of 3
years before the date of issue of further public offer. Dematerialise the entire
shareholding of the promoter group from the reference date.
Have the normal marker capitalisation of public shareholding at least 1,000
crore INR. Normal market capitalisation of public shareholding
alludes to the
amount of every day market capitalisation of public shareholding for a time of
one year up to the furthest limit of quarter. Have the annualized exchanging
turnover of the value shares of at any rate two percent of the weighted normal
number of value shares during the a half year time frame before the issue. Have
the annualized conveyance based exchanging turnover of value shares at any rate
a modest amount of annualized exchanging turnover of value shares during the
time of a half year before issue.
About 95% of complaints and issues were resolved which were received by
investors till the end of quarter. No Show-cause notice issued or prosecuting
initiated against by the board during three years prior to issue. Have not
gotten the issue of equity shares suspended from trading in the form of any sort
of a disciplinary measure during the last three years prior to the issue. Have
no conflict of interest between the lead managers and the company or its group
Allotment of Securities is the issue of new shares by an association to the
first or existing financial backers. General society all things considered gets
jumbled between the issue of shares and Allotment of shares. Issuance of offer
is the commitment of shares to the financial backers while Allotment of shares
is the methodology for movement of shares in the association and the Allotment
or affirmation decision is taken by the real association.
So Allotment of shares is the most basic strategy in the association, which is
basically suggested for expanding the Business by offering shares when all is
said in done society. While IPOs are more productive than FPOs as they are more
dangerous and it is extremely unlikely of realising how an IPO will perform.
Henceforth, it is vital for delve further into the possibilities and essentials
of the organisation.
- Company Law and Practice - A Comprehensive Text Book on Companies Act
2013 (24th Edition August 2019) by Dr. G.K. Kapoor