CHANAKYA NATIONAL LAW UNIVERSITY

Effect of Irregular Allotment of Shares

A Project on Corporate Law - I

By: Prasen Gundavaram

Roll 5451

ACKNOWLEDGEMENT

First of all I want to thank GOD for enabling me to successfully complete this project. Then I
would like to give my sincere thanks to our respected Corporate Law faculty who has guided
me all the way in completing this project and enlightening me from time to time in
understanding the technicalities pertaining to the project
Then I would like to give sincere thanks to our librarians who have helped me all the way in
searching through the source materials and guiding me in my research work at the library.
The list couldnt be completed without thanking all my friends and family who have
encouraged me in successful accomplishment of this project and been a pillar of support all
through the completion of the project.

Prasen Gundavaram
Roll Number: 5451
VII Semester

RESEARCH METHODOLOGY
Aims and Objectives:
The aim of the project is to present a detailed study of the topic Effect of Irregular Allotment
of Shares. through reports, suggestions and different writings. The aim has been to come to a
conclusion very much indigenous.
Scope and Limitations:
Though the topic Effect of Irregular Allotment of Shares. is an immense project and pages
can be written over the topic but because of certain restrictions and limitations we might not
have dealt with the topic in great detail.
Sources of Data:
The following secondary sources of data have been used in the project1. Books
2. Internet
3. Reports

Method of Writing and Mode of Citation:

The method of writing followed in the course of this research paper is primarily analytical.
The researcher has followed Uniform method of citation throughout the course of this
research paper.

Contents
ALLOTMENT OF SHARES..................................................................................................... 5
Procedures regarding Allotment of Shares: ........................................................................... 5
Return of Allotment of Bonus Shares ........................................................................................ 9
Return of Allotment of Shares Issued at Discount................................................................. 9
Return to be Filed................................................................................................................. 10
Return of Allotment to be Filed in Respect of Every Allotment ......................................... 10
Allotment of Fractional Shares ............................................................................................ 10
Share Application Form ....................................................................................................... 11
Partial Allotment .................................................................................................................. 12
Time limit for allotment ....................................................................................................... 12
Irregular Allotments ................................................................................................................. 12
Voidable Allotment .............................................................................................................. 13
Void Allotment and its Effects ................................................................................................ 13
Effect of Irregular Allotment ................................................................................................... 16
Rectification by company of irregular allotment ................................................................. 17
Lapse of application on undue delay in allotment ............................................................... 17
Cases where applicant cannot avoid allotment .................................................................... 17
CONCLUSION ........................................................................................................................ 19
BIBLIOGRAPHY .................................................................................................................... 20

ALLOTMENT OF SHARES
Allotment of shares means an appropriation of a certain number of shares to an applicant in
response to his application for shares. Allotment means distribution of shares among those
who have submitted written application.

Procedures regarding Allotment of Shares:

(1) Fulfillment of statutory conditions which need to be fulfilled: The company secretary
has to see that the statutory conditions regarding the allotment of shares are fulfilled before
the Board proceeds to allot the shares.

The following are the statutory conditions which need to be fulfilled:

(i) Valid offer and acceptance: There should be a valid offer and acceptance for the
allotment to be a valid one. Here the company is the offertory and the acceptors are the
general public. If there is no company to offer then there would be no public to accept.

(ii) Unconditional Allotment: The allotment must be absolute and unconditional and also as
per the terms and conditions mentioned in the application. The allotment should be unbiased,
and not according to the caste, creed, religion. It is not that rich shareholders pay more on the
shares and the poor shareholders pay less on the shares. All have to pay the same price on the
shares.

(iii) Collection of minimum subscription amount: The minimum subscription amount as

noted in the prospectus has been received within 120 days of the issue of prospectus.

(iv) Receipt of application money: Not less than 5% of the nominal value of the share has
been secured and has been received along with the applications.

(v) Deposition of application of money in a scheduled bank: All application money

received along with the applications must be deposited in a scheduled bank. It cannot be
withdrawn until the company gets trading certificate or where such certificate is already

received or till the minimum subscription amount is received.

(vi) Filing of prospectus with the registrar: A copy of the prospectus or statement in lieu of
prospectus has been duly filed with the registrar and at least three days have elapsed after
such filing before the allotment is taken up.

(vii) Time of allotment: No allotment of shares can be effected until the beginning of the
fifth day from the date of issue of prospectus. The subscription list must be opened for at least
3 days as disclosed in the prospectus.

(viii) Proper communication: The allotment must be duly communicated to the applicant
through post i.e. registered post with necessary details.

(ix) Allotment strictly as per documents issued: The Board of Directors have to make the
allotment of shares strictly as per the documents issued which include the prospectus and the
application form. The provisions made in the Memorandum of Association and the Articles
of Association must also be given due consideration.

(x) SEBI nominee: If the issue is over subscribed, the shares are allotted on a proportionate
basis. SEBI's nominee is associated while finalizing the basis of allotment. The purpose is to
see that the allotment is done on a fair and just basis. The allotment also needs to be approved
by a leading stock exchange.

(2) Appointment of allotment committee: The secretary informs the Board, that the share
applications are received and are ready for allotment. If the issue is just subscribed or under
subscribed, the Board will do the allotment of shares, but if the issue is over subscribed, the
Board appoints an allotment committee to do the allotment work. The allotment committee
will study the problem, prepare a report and submit to the Board.

(3) Board meeting for finalization of allotment formula: A meeting of the Board of
Directors will be called to finalize the allotment formula, which is being prepared by the
allotment committee. If the shares are listed, the allotment formula is to be finalized with the
approval of the concerned Stock Exchange Authorities.

(4) SEBI's association with allotment work: A representative of SEBI need to be associated
while finalizing the allotment formula. For this, the company has to request SEBI to nominate
a public representation for allotment work. SEBI's nominee is necessary when the issue is
over

subscribed.

(5) Signature of chairman on application and allotment list: The secretary has to see that
every sheet of application and allotment list is signed by the chairman. The secretary also has
to sign the application and allotment lists.

(6)Resolution of the Board for allotment: The secretary has to see that the Board passes a
resolution regarding the allotment of shares and authorizing him to issue letters of allotment
and letters of regret.

(7) Issue of letters of allotment and letters of regret: After the Board's resolution to allot
shares, the secretary prepares the allotment list. Then he will send allotment letters to those
who have been allotted shares and regret letters to those who could not be allotted shares.

(8) Refund / Adjustment of application money: The secretary has to make suitable
arrangement for the repayment of application money sent by the applicant. The refunded
application money is made to those shareholders who could not be allotted shares. The refund
order is sent along with the letters of regret. If an applicant has been allotted a smaller
number of shares than the number applied for, the secondary has to adjust the excess amount
with the amount due on allotment.

(9) Collection of allotment money: The secretary has to make suitable arrangements with
the Company's Bankers for collection of allotment money against the allotment letters.

(10) Arrangement relating to letters of renunciation: To renounce means to give up.

Certain applicants who are being allotted shares do not want them, so they return the shares
back to the company. this is known as renunciation. The blank form of letter of renunciation
and letter of request for allotment along with the letter of renunciation duly executed and the
original letter of allotment from the renounces, the secretary has to make necessary changes
in the Application of Allotment list in order to enter the names of the new allot-tees.

(11) Arrangement relating to splitting of allotment letters: Splitting means putting the
shares in one or more names. In case any allottee requests for a split of the allotment letter,
the secretary places such a request before the Board for approval. Once the Board approves
the splitting of the allotment letter, the secretary has to enter the details of the split in a
separate list of split allotments and issue the necessary 'split' letters.

(12) Submission of return of Allotment: Every company whether public or private and
having a share capital ans within 30 days of allotment is required to send to the Registrar, a
document known as the "Return of Allotment". The return of allotment contains various
details on allotment of shares such as the nominal value of shares allotted, names and
addresses of allotees, amount paid or payable on each share and particulars of bonus shares
and shares issued at discount. The secretary has to see that these documents are prepared and
submitted in time to the Registrar.

(13) Preparation of Register of members and issue of share certificates: The secretary has
to prepare the Register of members from the Application and Allotment lists. He has to see
that the shares certificates are properly printed, sealed, signed and distributed to all the allottees within three months after the allotment of shares. He has also to see that the share
certificates are issued against the letters of allotment.

Sub-section (3A) of Section 73 directs that application moneys standing to the credit of the
separate bank account shall not be utilised for any purpose other than the following purposes,
namely:

(a)

adjustment against allotment of shares, where the shares have been permitted to be

dealt in on the stock exchange(s) specified in the prospectus; or

(b)

repayment of moneys received from applicants in pursuance of the prospectus, where

shares have not been permitted to be dealt in on the stock exchange or each stock exchange
specified in the prospectus, as the case may be, or, where the company is for any other reason
unable to make the allotment of shares.

Section 75(1) makes it obligatory on the part of every company allotting shares to file with
the concerned Registrar of Companies, return of allotment of the shares within thirty days of

the allotment along with the prescribed filing fee. The return should not show any shares as
having been allotted for cash if cash has not actually been received in respect of such
allotment. The return of allotment of shares is required to be sent in e-form 2 as prescribed in
the Companies (Central Governments) General Rules and Forms (Amendment) Rules, 2006
along

with

the

prescribed filing fee

Sub-section (2) of Section 75 lays down that in the case of shares allotted as fully or partly
paid up otherwise than in cash, the company is required to produce before the ROC for
inspection and examination, a contract in writing constituting the title of the allottee to the
allotment together with any contract of sale or a contact for services or other considerations
in respect of which that allotment was made. The company is required to file along with the
return of allotment, copies of such contracts verified by an affidavit of a responsible officer of
the company stating that they are true copies, as prescribed in Rule 5 of the Companies
(Central Governments) General Rules and Forms, 1956.If the contracts are not reduced in
writing, prescribed particulars of contract in e-form 3 duly stamped along with copy of board
resolution

approving

allotment of shares otherwise than in cash are to be filed with the ROC within 30 days of the
allotment. The original duly filled in and signed e-form 3 on stamp paper, in physical form
are required to be sent to the concerned ROC office simultaneously, failing which the filing
will not be considered and legal action will be taken.

Return of Allotment of Bonus Shares

In the case of allotment of bonus shares, the company is required to attach to the return of
allotment, a certified copy of the ordinary resolution of the general meeting authorising the
issue of such shares.1

Return of Allotment of Shares Issued at Discount

The company is required to attach to the return of allotment, a certified copy of the resolution
passed by the company for the issue of shares at a discount together a copy of the order of the
1

[Refer Section 75(a)(c)(i)]

Company Law Board sanctioning the issue and where the minimum rate of discount exceeds
ten percent, a copy of the order of the Central Government permitting the issue at a higher
percentage. Disposal of Forfeited Shares - No Allotment

Return to be Filed
According to Section 75(1) of the Companies Act, a company is required to file a return of
allotment of shares and not for re-issue of forfeited shares. Allotment, as we have seen above,
is appropriation of the previously unappropriated capital of a company, of a certain number
of shares to a certain person. Till such allotment, the shares do not exist as such. However, in
the case of forfeited shares, they had already been allotted and they had come into existence
at the time of their allotment and their forfeiture is a proof of their existence. Therefore, no
return of allotment is required to be filed with the ROC by a company at the time of re-issue
or disposal of forfeited shares.2

Return of Allotment to be Filed in Respect of Every Allotment

The duty of a company to file a return of allotment is not confined to the first allotment. The
company has to file the return of allotment whenever it makes any allotment of shares.

Allotment of Fractional Shares

The issue of coupons for fractional shares cannot be said to be allotment of any shares till the
holders are issued letter of allotment in respect of any shares from the company in their
names in exchange of the coupons. Any dividend declared in the meantime in respect of the
capital represented by such coupons should not be treated as dividend declared in favour of
any particular holder of a share as such, but dividend is kept earmarked for whoever may be
allotted full shares in exchange of the coupons.3

[Sri Gopal Jalan and Co. v. Calcutta Stock Exchange Association (1963) 33 Com. Cases 862: AIR 1964 SC
250].
3
(Departments clarification vide F.No. 8/31(75)63-PR dated 27th March, 1963)

Share Application Form

The process of allotment of shares of or debentures in a company commences with an
application, which is an offer made by a prospective investor to the company to accept the
shares of the company. The company may or may not accept the offer, which means that the
company has the discretion to accept in full or in part or to reject in toto, the offer of the
applicant or the offeror. The offeror may revoke his offer till it is accepted by the company,
i.e. till the shares are allotted in response to the offer.

Sub-section (3) of Section 56 of the Companies Act, 1956 lays down that no one shall issue
any form of application for shares in or debentures of a company, unless the form is
accompanied by a memorandum containing such salient features as may be prescribed, which
complies with the requirements of the section.

The second proviso to the Sub-section (3) lays down that the sub-section shall not apply if it
is shown that the share application form was issued - (a) in connection with a bona fide
invitation to a person to enter into an underwriting agreement with respect to the shares or
debentures; or (b) in relation to shares or debentures which were not offered to the public.

The Government has instructed that share application form should be a part of the abridged
prospectus, being attached to it along a perforated line. The abridged prospectus and the share
application form should bear the same printed serial number. The investor may detach the
share application form along with the perforated line after he had an opportunity to study the
contents of the abridged prospectus, before submitting the same to the company or to its
designated banker.

The Central Government later allowed companies and their merchant bankers to print
application forms, accompanying one abridged prospectus, being attached to it, along the
perforated line, bearing separate printed numbers. The same procedure should also be
followed while making available copies of the prospectus under Section 56 of the Act. In this
connection, it may be pointed that contravention of the provisions of Section 56(3) is
punishable with fine which may extend to Rs. 50,000.

Partial Allotment
Although the company, in consultation with the manager to the issue and adviser to the issue,
must have included an appropriate clause in its share application form to the effect that partial
allotment, if made by the company, would be binding on the applicant, yet no provision of
any law can be circumvented in such a manner so as to deprive any person of his right, which
has been conferred upon him by virtue of that provision. Under the law of contract as
applicable in India, an application for allotment of shares in a company is only an offer to
accept shares that may be allotted to the applicant. An applicant may refuse to accept fewer
than applied for shares, if he so wishes. Because an offer, if accepted in part, does not
constitute acceptance of the offer and is not binding on the offeror under the Indian Contract
Act. However, if he chooses to accept the quantity of the shares offered, then his acceptance
turns the deal into a contract binding on both the applicant and the company under the
Contract Act and is justifiable in a Court of law.

Time limit for allotment

An allotment should be made within a reasonable time and an applicant is not bound to
accept an allotment after the lapse of a reasonable time. A delay of one year is unreasonable.4

Irregular Allotments
Sections 69, 70, 72 and 73 of the Companies Act, 1956 prescribe conditions of valid
allotment. Violation of any one of those conditions would result into defective or irregular
allotment. An irregular allotment may be void or it may be voidable. A void allotment is no
allotment whereas a voidable allotment may be one which may be avoided by the allottee.
Where the allotment is defective for the reason that it was made before the expiry of the fifth
day after the publication of prospectus issued by the company generally or such other later
day specified in the prospectus, the allotment is valid, but the company and every officer of
the company who is in default shall be punishable with fine which may extend to fifty
thousand rupees as per Sub-section (3) of Section 72 of the Act.

Indian Co-operative Navigation & Trading Co. Ltd. v. Padamsey Premji (1934) 4 Comp Cas 110 (Bom).

Voidable Allotment
According to Section 71 of the Companies Act, 1956, an allotment made by a company to an
applicant in contravention of the provisions of Section 69, which prohibits allotment unless
minimum subscription has been received by the company or in contravention of the
provisions of Section 70, which prohibits allotment in certain cases unless statement in lieu of
prospectus has been delivered to the Registrar, is irregular allotment and shall be voidable at
the instance of the applicant

(a)

within two months after the holding of the statutory meeting of the company, and not

later, or

(b)

in any case where the company is not required to hold a statutory meeting orwhere the

allotment is made after holding of the statutory meeting, within two months after the date of
the allotment, and not later.

The allotment shall be voidable, notwithstanding that the company is in course of being
wound-up.

Void Allotment and its Effects

According to Sub-section (1A) of Section 73, where a prospectus states that an application
has been made for permission for the shares or debentures offered thereby to be dealt in one
or more designated stock exchanges, such prospectus shall state the name(s) of the stock
exchange(s) and any allotment made on an application in pursuance of such prospectus shall,
whenever made, be void if the permission has not been granted by the stock exchange or each
such stock exchange, as the case may be, before the expiry of ten weeks from the date of the
closing of the subscription list. However, where an appeal against the decision of any stock
exchange refusing permission for the shares or debentures to be dealt in on that stock
exchange has been preferred to Securities Appellate Tribunal under Section 22A of the
Securities Contracts (Regulation) Act, 1956, such allotment shall not be void until the
dismissal of the appeal.

As is clear from the wording of Sub-section (1A) as highlighted above, even if a single stock
exchange refuses to grant permission to the shares of the company to be dealt in on it, the
entire allotment becomes void, unless the company succeeds in appeal against the decision of
such stock exchange.5 Sub-section (2) of Section 73 provides that where the permission has
not been applied or such permission having been applied for, has not been granted, the
company shall forthwith repay without interest all moneys received from applicants in
pursuance of the prospectus, and, if any such money is not repaid within eight days after the
company becomes liable to repay it, the company and every director of the company, who is
an officer in default shall, on and from the expiry of the eighth day, be jointly and severally
liable to repay that money with interest at such rate not less than four per cent and not more
than fifteen per cent, as may be prescribed, having regard to the length of the period of delay
in making the repayment of such money.6

Sub-section (2A) of Section 73 lays down that where permission has been granted by the
recognised stock exchange or stock exchanges for dealing in any shares or debentures in such
stock exchange or each such stock exchange and the moneys received from applicants for
shares or debentures are in excess of the aggregate of the application moneys relating to the
shares or debentures in respect of which allotments have been made, the company shall repay
the moneys to the extent of such excess forthwith without interest and if such money is not
repaid within eight days from the day the company becomes liable to pay it, the company and
every director of the company who is an officer in default shall, on and from the expiry of the
eighth day, be jointly and severally liable to repay that money with interest at such rate, not
less than four per cent and not more than fifteen per cent, as may be prescribed, having regard
to the length of the period of delay in making the repayment of such money.
In Raymond Synthetics Ltd. v. Union of India,7 the decision of the Division Bench of the
Bombay High Court was to the effect that liability to refund excess amounts would begin
from the date of allotment if completed earlier than ten weeks because the excess amount
having become known, there was no point in withholding its refund upto the expiry of ten
weeks.

Rich Paints Ltd. v. Vadodara Stock Exchange Ltd. (1998) 28 CLA 276 (Raj.)
Refer Sub-section (2) of Section 73
7
(1992) 73 Com. Cases 1 (1991) 3 Comp L.J 1 (Bombay DB)
6

All moneys received from applicants for shares must be kept in a separate account maintained
with a scheduled bank and they shall not be utilised for anypurpose other than adjustment
against allotment of shares or for repayment to the applicants.8

Refer Sub-section (3) of Section 73

Effect of Irregular Allotment

An allotment is irregular if it is made without complying with the conditions precedent to a
regular allotment as discussed above, viz, the provisions of Section 69 and 70 of the Act.
Consequences of irregular allotment depend upon the nature of irregularity involved. These
may be noted as follows:
Failure to deliver a copy of the prospectus to the Registrar before its issue In case an
allotment has been made without delivering to the Registrar of Companies, a copy of the
prospectus along with other specified documents either before or on the date of its issue, the
company and every person who is knowingly a party to the issue of the prospectus shall be
punishable with fine which may extend to Rs. 50,000.9 The allotment, however, shall remain
valid.
Non-compliance with provisions of Section 69 and Section 70 In the event of noncompliance with the provisions of Section 69 and Section 70 (viz allotment without raising
minimum subscripttion or without either collecting application money or collecting less than
5 percent as application money or failure to deliver a copy of statement in lieu of prospectus
at least three days before allotment), the following consequences shall follow:
The allotment is rendered voidable at the option of the applicant. The option must however be
exercised
within 2 months after the holding of the statutory meeting of the company and not later; or
where the company is not required to hold a statutory meeting, or where the allotment is
made after the holding of the statutory meeting, within 2 months after the date of allotment
and not later.
The irregular allotment is voidable even if the company is in the course of being wound up.
Any director who has knowledge of the fact of the irregular allotment of shares shall be liable
to compensate the company and the allottee respectively for any loss, damages or costs which
the company or the allottee may have sustained or incurred thereby. Proceedings to recover
any such loss, damages or costs cannot be commenced after the expiration of 2 years from the
date of allotment.

Section 60(5)

Rectification by company of irregular allotment

An irregular allotment of shares made by the directors in excess of their powers may be
subsequently ratified by the shareholders at a general meeting.10

Lapse of application on undue delay in allotment

An application to take shares lapses if allotment is delayed unreasonably.11

Cases where applicant cannot avoid allotment

We had noted earlier, that an allottee can avoid the allotment within the time frame
mentioned in Section 71(1) of the Companies Act. However, the applicant cannot avoid the
allotment if he unequivocally affirms the allotment (1) by endeavoring to sell the shares,12;
(2) by executing a transfer of the shares;13 (3) by paying calls or receiving dividends,14; (4) by
attending and voting at a general meeting in person or by proxy,15.
Non-compliance of Section 72 requirements In case allotment is made in contravention of
the provisions of Section 72 (viz, before the beginning of the fifth day from the date of issue
of the prospectus), the company and every officer of the company shall be punishable with
fine which may extend to Rs. 50,000.16 However, allotment in such a case shall be valid.
Condition as to listing of shares on a stock exchange is not observed Where the prospectus
of a company states that an application has been made for permission for the shares offered
thereby to be dealt in one or more recognised stock exchanges, the allotment shall be void, if
either the permission has not been applied for or refused or not granted before the expiry of
10 weeks from the date of the closing of the subscripttion list.17

In a particular case, a company proposed public issue at a premium and it stated in the
10

Bamford v. Bamford, (1969) 39 Com Cases 369

Ramsgate Victoria Hotel v. Montefiore (1866) LR 1 Ex 109 (C Ex)
12
Ex. P. Briggs 1866 LR 1 Eq 483
13
Crawleys case (1969) LR 4 Ch App 322
14
Scholey v. Central Railway of Venezuela (1868) LR 9 Eq 266
15
Sharpley v. Louth Co. (1876) 2 Ch. 663 (CA)
16
Section 72(3)
17
Section 73(1) and (2)
11

prospectus that it had applied for listing of the shares in four recognised stock exchanges.
Three of the stock exchanges granted permission for listing after the Central Government had
issued orders in this regard. The petitioner contended that the allotment made is void under
Section 73 of the Companies Act. The court held that the question of public issue being
declared void does not arise as three exchanges had granted listing permission.18

However, where an appeal against the decision of any recognised stock exchange refusing
permission has been preferred with Securities Appellate Tribunal, under Section 22 of the
Securities Contracts (Regulation) Act, 1956 such allotment shall not be void until the
dismissal of the appeal.19

In case of allotment becoming void, the money becomes due to be refunded forthwith and
must therefore be repaid.

18
19

Smt. Urmila Barutha v. Conventry Spring & Engineering Co. Ltd. and Other (1997) 2 CLJ 48 (Cal)
Section 73(1)

CONCLUSION
The Legislature has clearly defined the consequences for an irregular allotment, Inspite of
which there have arisen lacunas in law. As demonstrated in the cases above there is vast
scope for further studying this particular topic. It is necessary for the legal community to
study this particular topic and prevent any future problems arising out of irregular allotment
of shares.

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