Shares and General Principle of Allotment of Shares

Shares and General Principle of Allotment of Shares

A share is the interest of shareholders in a company. The capital of the company is divided into certain units of fixed amounts these units are known as shares. Share (Section 2(84) of Company Act, 2013) means share capital of the company it includes stock as well. In the case of Commr. Of Income Tax v. Standard Vacuum Oil Co. Ltd. ((1957) 27 Comp. Cas.175) shares were defined as an interest of money value and made up diverse rights and liabilities specified under Article of Association.

Nature of the Shares

The shares of a member in a company are the movable property (Section 44 of Company Act, 2013) and are transferable in the manner as specified under the Article of the company. Even though the share is a movable property it cannot be moved as a common commodity. A share is a commodity brought into existence by the legislature. Hence a share is incorporeal in nature and has a bundle of rights and obligations (Vishwanath v. East India Distilleries)

Stock is a collection of fully paid shares that are consolidated and divided for the purpose of convenient holding into different parts. A stock denotes that the company has recognized the fact of the complete pavement of shares and can be assigned in fragments.

Conversion of shares into stock

A company can buy ordinary resolution can convert any paid-up share into stock or reconvert any stock into paid-up share. The holder of any stock can transfer the stock in the same manner as the shares from which the stock arose.

General Provisions Regarding Allotment of Shares

The general principles as to offers and acceptance in the Law of Contract apply to the application and allotment of shares. These principles are as follows:

1. The allotment application must follow the proper authority. The allotment must be made by a resolution of the Board of Directors. This duty cannot be delegated by the Directors. It is necessary that the Board pass a valid resolution of allotment in a valid meeting (Homes District Consolidated Gold Mines Re (1888) 39 Ch D 546 (CA)). An allotment by a Board irregularly constituted may be ratified by a regular Board (Portuguese Consolidated Copper Mines, (1889) 42 Ch. D 160 (CA)).

2. The application of Allotment of shares must be accepted within a reasonable time (Section 6 of Indian Contract Act, 1872) what is a reasonable time is a question of fact in each case. An applicant has the choice to refuse shares if the allotment is made after a long time. The interval of about 6 months between application and allotment was held unreasonable in the case of Ramsgate Victoria Hotel Company v. Montefione ((1866) LR 1 EX 109)

3. The allotment must be absolute and unconditional. Shares must be allotted on the same terms as they were applied for and as they were stated in the application. Allotment of share is the subject of certain valid conditions. If the number of shares allotted is less than those applied for, the allotment cannot be termed as an absolute allotment.

4. The allotment is to be communicated. A letter of allotment or allotment advice is taken as a valid communication. It is irrelevant if the letter is received or not or lost in transit. It was held that even if the letter of allotment never reached the applicant he is still the shareholder of the company and is liable to pay for the liabilities of the company when arose ((1879) 4 E.D. 216). In the case of  Official Liquidator, Bellary Electric Supply Co. v. Kanni Ram Ramwoothmal (Household Fire And Carriage Accident Insurance Co. Ltd. v. GrantAIR 1933 Med 320) it was held that a mere entry of the shareholder’s name in the company’s register is insufficient to establish that allotment was made or not.

5. The allotment can only be made via application only. A valid allotment cannot be made on an oral request. A person should agree in writing to become a member of the company.

6. Allotment to not be in contravention of any other law. Hence, any shares that are allotted on an application of a minor such an allotment are void.

The procedure of Allotment of Share

1. A public company has to file a prospectus or statement in lieu of prospectus, inviting offers for the purchase of shares in the company.

2. When the public applies for shares of the company in the prescribed format. The company can issue the price of the share to be paid in full along with the application or it can be payable in installments as share application money. The amount payable as application money has to be at least 5% of the nominal amount of the share.

3. No allotment of shares to be made unless the Minimum Subscription (Section 39 of Company Act, 2013) given in the prospectus has been subscribed for. The minimum subscription has to be stated in the prospectus.

4. The share application money must be deposited in the bank. It can be operated after getting the certificate of commencement.

5. If the minimum subscription amount of 90% of the issue is not achieved by the company within 60 days from the date of closure of the issue, the company is liable to refund the entire subscription amount. For any delay beyond 78 days, the company is liable to pay an interest of 6% per annum.

After the allotment, the directors can call upon the shareholders to pay the amount due on shares in the manner as mentioned in the prospectus. The Articles of the company usually contain provisions regarding this. If there is no such provision in the Articles, the following provisions may apply:

• No call to be more than 25% of the nominal value of each share.

• The interval between the two calls should not be less than one month.

• 14 day notice to be given to each member for a call specifying the amount, date and place of payment.

• Calls to be made on a uniform basis for the entire body of shareholders that are under the same class.

In the case of Spitzer v. Chinese Corpn ((1899) 80 L.T. 347), it was stated in this case that allotment is the appropriation to an application by resolution of Board of Directors a company of a certain number of shares in the company as a response to the application.

“The views of the authors are personal

Frequently Asked Question

What is the difference between share and stock?

The collections of fully paid shares that are consolidated and divided are stocked. A stock denotes that the company has recognized the fact that shares and can be assigned in fragments.

What are the general provisions in allotment of shares?

Application of allotment and allotment is nothing but offer and acceptance. Hence these are dealt under the Indian Contract Act. The principles that follow are allotment by proper authority, within a reasonable time, acceptance to be absolute and unconditional.

What are the statutory restrictions on the allotment of shares?

Minimum subscription and application money as mentioned in Section 39 of Company Act, 2013 and Shares to be dealt in on stock exchange only as under Section 40 of Company Act, 2013.

Shivani Sethi
I am Shivani Sethi indebted to the law for achieving my goal to become an inspiration. This life is so incomplete without research and skills and I feel so overwhelmed to welcome my happiness into this legal world.