Allotment of Shares: Procedure and Compliance Under The Companies Act, 2013

Key takeaways

• Allotment of shares is the formal act by which a company assigns new shares to applicants, increasing its issued share capital. A person becomes a shareholder when the board passes the allotment resolution and communicates that decision, not at the point of application.
• Authorised share capital is a hard ceiling on what can be allotted. Any issue that would exceed it requires a shareholders' resolution to increase the authorised limit before the allotment proceeds.
• For an allotment to be legally valid, the board must have proper authority, the allotment must be made within a reasonable time, and the decision must be communicated to the allottee. For private placements, Section 42(6) sets a statutory 60-day limit from receipt of application money.
• Rights issues under Section 62 require only board approval. Private placements under Section 42 and preferential allotments under Section 62(1)(c) require a special resolution. Bonus issues under Section 63 require general meeting authorisation by ordinary resolution.
• Form PAS-3 must be filed with the Registrar of Companies within 30 days of allotment regardless of the route. Late filing penalties under Section 42 extend to ₹25 lakh for the company, its promoters, and directors.
• For private companies other than small companies, MCA's Rule 9B requires securities to be issued in dematerialised form. The post-allotment obligation is immediate depository intimation, not a physical share certificate.
• Where shares are allotted for non-cash consideration, a registered valuer's report is required before the allotment is made. Where any allottee is a non-resident, FEMA pricing guidelines and post-allotment RBI reporting obligations apply.

What is allotment of shares?

Allotment of shares is the process by which a company accepts applications for its shares and formally assigns those shares to applicants, making them shareholders. It is distinct from a share transfer, which moves existing shares between parties without creating new capital. Every allotment increases a company's issued share capital; a transfer does not.

The Companies Act, 2013 does not provide a single allotment procedure. It provides several routes, each triggered by who the company is issuing to, why, and under what authority. The procedure a company follows, the approvals it needs, and the forms it must file all depend on which route applies.

Authorised share capital and its role in allotment

Before any allotment proceeds, the company must confirm that its authorised share capital is sufficient to cover the proposed issue. Authorised share capital is the maximum share capital a company is permitted to issue, as recorded in its Memorandum of Association. It functions as a hard ceiling. If the proposed allotment would push total issued capital beyond it, the company must first pass a shareholders' resolution to increase the authorised limit and file the change with the Registrar of Companies (RoC).

Allotting shares beyond authorised capital renders the allotment void, regardless of how correctly every subsequent step is followed. 

What makes an allotment legally valid

An allotment is a contractual act, and general contract law principles apply alongside the Companies Act. Four conditions must be met for an allotment to be valid.

Proper authority. The board must pass a resolution authorising the allotment. Where the route requires shareholder approval, that resolution must come first.

Reasonable time. The allotment must be made within a reasonable time of the application. For private placements, Section 42(6) sets a limit of 60 days from receipt of application money.

Communication. The allotment must be communicated to the allottee. A properly addressed letter of allotment is sufficient, even if delayed in transit.

Minimum subscription (public companies only). For public offers, the minimum subscription stated in the prospectus must be received before allotment. If not received within 30 days, all application money must be refunded. Private companies are exempt.

Valuation for non-cash allotments. Where shares are allotted for consideration other than cash, a registered valuer's report is required before the allotment is made.

FEMA compliance for foreign allottees. If any allottee is a non-resident, the issue price must meet RBI pricing guidelines and post-allotment reporting must be completed within prescribed timelines.

Scenarios where allotment of shares is applicable

1. Subscription to the memorandum of association at incorporation
2. Rights issue under Section 62(1)(a)
3. Employee Stock Option Plan (ESOP) under Section 62(1)(b)
4. Preferential allotment under Section 62(1)(c)
5. Private placement under Section 42
6. Bonus issue under Section 63
7. Initial Public Offering (IPO)
8. Follow-on Public Offer (FPO)
9. Qualified Institutions Placement (QIP)
10. Conversion of debentures or loans into shares under Section 62(3)
11. Conversion of preference shares into equity shares
12. Allotment pursuant to a scheme of compromise or arrangement under Section 230 to 232
13. Allotment of sweat equity shares under Section 54
14. Allotment pursuant to a merger or amalgamation
15. Indian Depository Receipts (IDR) issued under Section 390

The role of board resolution in allotment of shares

The board resolution is the operative act that legally creates the shares. A defective resolution can compromise the entire allotment, regardless of how correctly the pre-allotment steps were handled.

A compliant allotment resolution must record:

• The name of each allottee, or for rights and bonus issues, the category and pro-rata basis of allotment
• The number and class of shares being allotted
• The consideration received, or in the case of a bonus issue, the reserve being capitalised
• The authority given to the company secretary or designated officer to complete post-allotment filings

In certain cases (such as private placement, preferential allotment, sweat equity shares etc.), the board resolution must additionally confirm that the allotment is being made in accordance with the special resolution passed at the general meeting and that all conditions under the specific governing act have been satisfied.

Allotment vs. transfer of shares

Post-allotment obligations and timelines

Once the board passes the allotment resolution, a set of time-bound obligations begins. Missing any of these deadlines attracts penalties that accrue mechanically.

PAS-3 (return of allotment). Under Section 39(4) read with Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014, the company must file Form PAS-3 with the Registrar of Companies within 30 days of allotment, for all routes. The form must attach a certified list of allottees with their names, addresses, and number of securities allotted. Late filing attracts a penalty of Rs. 1,000 per day up to Rs. 1,00,000 under Section 39(5). For private placements, the ceiling is higher: Section 42(9) sets the penalty at Rs. 1,000 per day up to Rs. 25 lakh for the company, its promoters, and directors.

Share certificates or depository intimation. For shares in physical form, the company must issue share certificates in Form SH-1 within two months of allotment under Section 56(4)(b). Before the certificate is issued, the company may dispatch a letter of allotment to each allottee. Non-compliance attracts a penalty of Rs. 50,000 on both the company and the officer(s) in default under Section 56(6).

When shares are issued in dematerialised form, which is now the default for private companies other than small companies under Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules, and for all public companies, the company must intimate the depository (NSDL or CDSL) of the allotment details immediately after the board resolution. The depository then credits the securities to allottees' accounts. 

FAQs on allotment of shares

What is meant by allotment of shares?

Allotment of shares is the process by which a company accepts applications for its shares and formally assigns those shares to applicants, making them shareholders. A person becomes a shareholder at the point the board passes the allotment resolution and that decision is communicated to them, not at the point they apply. Allotment increases the company's total issued share capital; a transfer of existing shares does not.

What is the difference between issue and allotment of shares?

These terms are often used interchangeably but describe different steps. A company issues shares when it makes an offer or invitation to subscribe, whether through a rights issue letter of offer, a private placement offer letter in Form PAS-4, or a public prospectus. Allotment is the subsequent act by which the board formally assigns a specific number of shares to each applicant. The allotment resolution is the point at which legal title to the shares vests; the issue precedes it.

How can I check the allotment of shares?

For a public offer such as an IPO or FPO, allotment status can be checked on the BSE or NSE website using a PAN number or application number, or through the registrar to the issue. For a private company allotment, the company's register of members maintained under Section 88 of the Companies Act, 2013 is the authoritative record. Allottees receive either a letter of allotment as interim confirmation, a share certificate in Form SH-1 within two months, or a depository credit if shares are held in demat form.