Allotment of Securities (Sections 39 & 40)

## Allotment of Securities (Sections 39 & 40)

### 1. Meaning

Allotment of securities is an act of appropriation by the Board of directors out of the previously un-appropriated capital of a company, of a certain number of securities, to persons who have made applications for those securities. Securities come into existence only on allotment.

### 2. General Principles of Allotment

In addition to the statutory provisions, the following general principles apply:

1. Proper authority — Allotment must be made by the Board of directors or a committee duly authorised. Allotment without proper authority is invalid.

2. Reasonable time — Allotment must be made within a reasonable time; otherwise the applicant may refuse.

3. Absolute & unconditional — Allotment cannot be conditional.

4. Communication — Allotment must be communicated. Posting of the allotment letter is valid communication, even if lost or delayed in transit.

5. Commission — A company may pay commission to any person in connection with subscription, subject to prescribed conditions.

### 3. Statutory Conditions for Allotment (Sections 39 & 40)

#### (i) Application Money [Section 39]

• Must be received in cash.
• Must be at least 5% of the nominal value of the security or such other amount/percentage as SEBI may specify.

#### (ii) Escrow Account [Section 40]

• Application money received must be deposited in a separate (Escrow) account in a Scheduled Bank.
• Use of this money is restricted to:
• Adjustment against allotment, where listing is permitted; or
• Repayment to applicants where the company is unable to allot securities.

#### (iii) Minimum Subscription [Section 39]

• The minimum subscription stated in the prospectus must be received within 30 days from the date of issue of the prospectus (or other period as SEBI may specify).
• If not received: issue fails; entire amount to be repaid without interest within 15 days from closure of issue.
• Beyond 15 days: defaulting directors (officers in default) become liable to repay with 15% p.a. interest.

#### (iv) Listing Permission [Section 40]

• Every company making a public offer must apply to one or more recognised stock exchange(s) for permission before making the offer.
• The name of the stock exchange must be mentioned in the prospectus.
• Allotment without stock exchange permission is VOID.

##### Penalty for default under Section 40

#### (v) Waiver not permitted

Any clause requiring or binding an applicant to waive compliance with these requirements shall be void.

### 4. Return of Allotment

Whenever a company having share capital makes any allotment of securities, it must file a Return of Allotment with the Registrar.

#### Time limit & Form

• Form PAS-3 within 30 days of allotment, along with prescribed fees.
• Must contain:
• List of allottees with names, addresses and occupations, and
• Number of securities allotted to each.

#### Additional attachments – Issue for consideration other than cash [Rule 12(3)]

If securities (other than bonus shares) are allotted as fully/partly paid up for consideration other than cash:

• A copy of the contract duly stamped under which securities are allotted; and
• Any contract of sale (property/asset) or contract for services/other consideration.

#### Where contract is not in writing [Rule 12(4)]

The company must furnish complete particulars of the contract, stamped as if it had been reduced to writing — deemed to be an instrument under the Indian Stamp Act, 1899.

#### Registered Valuer's Report [Rule 12(5)]

A report from a registered valuer is required where Rule 12(3) or 12(4) applies.

#### Section 62(1)(c) — Preferential Allotment [Rule 12(7)]

Where shares are issued by a company (other than a listed company whose equity/CCPS are listed) under Section 62(1)(c), valuation report of a registered valuer must be attached to Form PAS-3.

### 5. Penalty for default in Return of Allotment

For default under sub-section (3) or (4), the company and every officer in default shall be liable to a penalty for each default of ₹1,000 per day during which default continues or ₹1,00,000, whichever is less.