Issue and Allotment of Shares
The exam tests the lawful route from an offer of shares to a valid allotment, and the numbers attached to each stage.
Modes of issue (Sec 23 and related)
- Public issue through a prospectus, including IPO or FPO; book building is the price discovery route for large issues.
- Rights issue (Sec 62(1)(a)): offer to existing shareholders in proportion to holding; a letter of offer is sent and the right is renounceable.
- Private placement (Sec 42): to not more than 200 persons in a financial year, excluding QIBs and employees under ESOP; money must be kept in a separate bank account.
- Bonus issue (Sec 63): free shares from free reserves or securities premium, not from revaluation reserves; also sweat equity (Sec 54) and ESOPs (Sec 62(1)(b)).
Allotment rules
- Minimum subscription (Sec 39): the issue must be subscribed to at least 90% of the offer; otherwise no allotment and application money is refunded.
- Application money must be kept in a scheduled bank account and cannot be used until allotment.
- Allotment must be made within 60 days of receipt of application money; if not, refund within 15 days with interest at 12% per annum.
- Return of allotment in Form PAS-3 within 30 days.
- Securities of a public issue must be issued in dematerialised form (Sec 29).
Worked example
A company offers 10,00,000 shares but receives valid applications for 8,50,000, that is 85%. Since 85% is below the 90% minimum subscription, the Board cannot allot. The application money must be refunded within 15 days with interest at 12% p.a., and the issue lapses.
Traps
- Writing 75% instead of 90% for minimum subscription; 75% belongs to a special resolution.
- Using revaluation reserves for a bonus issue.
- Treating application money as available to the company before allotment.