Allotment of Securities
Chapter Twenty-Four
Syllabus topic 1.3, labels: "Allotment of securities by company", "Securities to be dealt with in stock exchanges", "Public offer of securities to be in dematerialized form"
Pages 138 to 143 of 830
In one line
A company may not allot shares to the public until the minimum subscription named in the prospectus has actually come in, it must apply for listing before it makes the offer, and it must issue the securities in electronic form.
In exam wording: section 39 forbids allotment unless the minimum amount stated in the prospectus has been subscribed and the application money received; section 40 requires a company making a public offer to apply for and obtain stock exchange permission before making the offer and to keep the application monies in a separate bank account; and section 29 requires every company making a public offer to issue its securities only in dematerialised form.
Why the law has this at all
Each of the three answers a specific way in which an issue can go wrong.
Minimum subscription, section 39. A company raising money for a factory needs the whole amount. If it raises a third and spends it, the investors have paid for a third of a factory, which is worth nothing. So the Act says: if the minimum does not come in, nobody is allotted anything and the money goes back.
Listing, section 40. An investor in a public issue expects to be able to sell. If the company applies for listing after the money is collected and permission is refused, he holds a security he cannot trade. So the application must be made before the offer, and the monies must sit in a separate account until permission is known.
Dematerialisation, section 29. Paper certificates can be forged, lost and transferred outside the register. Electronic holding through a depository removes all three problems and makes ownership traceable, which is also why it matters for insider trading and for significant beneficial ownership.
Some words this chapter uses
Allotment is the act of appropriating securities to an applicant, which turns his offer into a contract. Minimum subscription is the least amount that must be raised for the issue to proceed, stated in the prospectus. Nominal amount of a security is its face value. Dematerialised means held in electronic form with a depository. A scheduled bank is one listed in the Second Schedule to the Reserve Bank of India Act 1934. Return of allotment is the filing telling the Registrar who was allotted what.
Dematerialised form: section 29
Section 29(1). Notwithstanding anything in any other provision of this Act:
- (a) every company making public offer; and
- (b) such other class or classes of companies as may be prescribed,
shall issue the securities only in dematerialised form by complying with the Depositories Act 1996 and the regulations under it.
Note the word that was removed. Clause (b) used to read "such other class or classes of public companies as may be prescribed". The word "public" was omitted by the Companies (Amendment) Act 2019 with effect from 15 August 2019, so the power to prescribe now reaches private companies too.
Allotment of Securities
Section 29(1A) carries that further: in the case of such class or classes of unlisted companies as may be prescribed, the securities shall be held or transferred only in dematerialised form in the manner laid down in the Depositories Act 1996 and its regulations. Note the difference in verb: sub-section (1) is about issue, sub-section (1A) about holding or transfer.
Section 29(2). Any other company may convert its securities into dematerialised form, or issue them in physical form in accordance with this Act, or in dematerialised form in accordance with the Depositories Act 1996. So for companies outside sub-sections (1) and (1A) it is a choice.
Allotment: section 39
Section 39(1): the minimum subscription rule.
No allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company by cheque or other instrument.
Two conditions, both necessary. The minimum has been subscribed, that is, applied for. And the application money for that amount has been paid to and received by the company, and by cheque or other instrument, which excludes cash.
Section 39(2): how much must be paid on application. The amount payable on application on every security shall not be less than five per cent of the nominal amount of the security, or such other percentage or amount as SEBI may specify by regulations.
Section 39(3): what happens if the minimum does not come in. If the stated minimum amount has not been subscribed and the sum payable on application is not received within thirty days from the date of issue of the prospectus, or such other period as SEBI may specify, the amount received under sub-section (1) shall be returned within such time and manner as may be prescribed.
Section 39(4): the return of allotment. Whenever a company having a share capital makes any allotment of securities, it shall file with the Registrar a return of allotment in the prescribed manner.
Section 39(5): the penalty. In case of any default under sub-section (3) or sub-section (4), the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which the default continues, or one lakh rupees, whichever is less.
Allotment of Securities
Note that the penalty attaches to failures under (3) and (4) only, that is, failure to refund and failure to file the return.
Stock exchange dealings: section 40
Section 40(1): apply before you offer. Every company making public offer shall, before making such offer, make an application to one or more recognised stock exchange or exchanges and obtain permission for the securities to be dealt with in that exchange or those exchanges.
Section 40(2): say where. Where a prospectus states that such an application has been made, the prospectus shall also state the name or names of the stock exchange in which the securities shall be dealt with.
Section 40(3): the separate account. All monies received on application from the public for subscription to the securities shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than:
- (a) for adjustment against allotment of securities, where the securities have been permitted to be dealt with in the stock exchange specified in the prospectus; or
- (b) for the repayment of monies within the time specified by SEBI, received from applicants in pursuance of the prospectus, where the company is for any other reason unable to allot securities.
Read (a) and (b) together and the design is clear: the money may be used only if listing permission has come, and must otherwise be returned. There is no third option.
Section 40(4): no contracting out. Any condition purporting to require or bind any applicant for securities to waive compliance with any of the requirements of this section shall be void. So a clause in an application form asking the applicant to give up these protections is worth nothing.
Section 40(5): the penalty. On default:
- the company shall be punishable with a fine of not less than five lakh rupees and up to fifty lakh rupees; and
- every officer of the company who is in default shall be punishable with a fine of not less than fifty thousand rupees and up to three lakh rupees.
Section 40(6): commission. A company may pay commission to any person in connection with the subscription to its securities, subject to such conditions as may be prescribed. So underwriting and brokerage commission are lawful, within the prescribed conditions.
A worked example
Latur Solar Limited issues a prospectus on 1 October 2026 offering forty crore rupees of equity, stating a minimum subscription of thirty crore rupees. Each share has a nominal value of ten rupees.
Before the offer. Under section 40(1) the company must already have applied to one or more recognised stock exchanges and obtained permission for the securities to be dealt with. The prospectus states that the application has been made and names the exchanges, as section 40(2) requires. Under section 29(1)(a), being a company making a public offer, it must issue the securities only in dematerialised form under the Depositories Act 1996.
Allotment of Securities
Application money. Under section 39(2) the amount payable on application on each share must be at least five per cent of ten rupees, that is fifty paise, unless SEBI has specified otherwise.
The money comes in. All application monies go into a separate bank account in a scheduled bank under section 40(3) and may be touched only for adjustment against allotment once listing permission is in hand, or for repayment.
Case one, the issue succeeds. Applications for thirty four crore rupees are received and the application money is paid by cheque. The minimum of thirty crore has been subscribed and the money received, so section 39(1) is satisfied and the company may allot. It then files a return of allotment with the Registrar under section 39(4).
Case two, the issue fails. Only twenty two crore rupees is subscribed and by 31 October 2026, thirty days from the date of issue of the prospectus, the balance has not come in. Under section 39(3) the amount received must be returned in the prescribed time and manner. If the company delays, section 39(5) imposes on the company and every officer in default a penalty of one thousand rupees a day, or one lakh rupees, whichever is less, for each default.
Case three, listing is refused. The exchange declines permission. The money in the separate account cannot be used for adjustment against allotment, because clause (a) of section 40(3) applies only where the securities have been permitted to be dealt with. It must be repaid under clause (b) within the time SEBI specifies. A clause in the application form by which applicants purported to waive this is void under section 40(4). Default costs the company five to fifty lakh rupees and every officer in default fifty thousand to three lakh rupees under section 40(5).
Distinctions that carry marks
| Section 39, minimum subscription | Section 40, stock exchange | |
|---|---|---|
| What must happen, and when | The minimum stated in the prospectus must be subscribed and received before allotment | Listing must be applied for and permitted before the offer is made |
| Money held how | Not addressed by section 39 | Separate account in a scheduled bank, section 40(3) |
| If it fails | Refund within the prescribed time, section 39(3) | Repay within the time SEBI specifies, section 40(3)(b) |
| Waiver | Not addressed | Void, section 40(4) |
| Penalty | One thousand rupees a day or one lakh rupees, whichever is less, for defaults under (3) and (4) | Company five to fifty lakh rupees; officer in default fifty thousand to three lakh rupees |
Allotment of Securities
| Public offer | Private placement | |
|---|---|---|
| Minimum subscription | Section 39(1) applies | Not applicable |
| Listing | Section 40(1) applies | Not applicable |
| Dematerialised issue | Compulsory, section 29(1)(a) | Only if prescribed |
| Return of allotment | Section 39(4), prescribed manner | Section 42(8), within fifteen days, with a complete list of allottees |
What this does NOT mean
It does not mean a company can allot as soon as the applications add up. The application money for the minimum amount must actually have been paid to and received by the company, and not in cash.
It does not mean listing permission can be sought afterwards. Section 40(1) requires the application to be made and permission obtained before making the offer.
It does not mean the company may use the money while listing is pending. Section 40(3)(a) permits use only where the securities have been permitted to be dealt with.
It does not mean dematerialisation is only for listed companies. Section 29(1)(a) covers every company making a public offer, and since 15 August 2019 the power to prescribe under clause (b) is no longer limited to public companies.
Quick revision
- Section 29(1): every company making a public offer, and such other classes as may be prescribed, shall issue securities only in dematerialised form under the Depositories Act 1996. The word "public" was omitted from clause (b) w.e.f. 15 August 2019. 29(1A): prescribed classes of unlisted companies must hold or transfer only in demat form. 29(2): others may choose.
- Section 39(1): no allotment unless the minimum amount stated in the prospectus is subscribed and the application money received by cheque or other instrument, not cash.
- 39(2): application money at least five per cent of nominal value, or as SEBI specifies.
- 39(3): if not received within thirty days of the issue of the prospectus, or as SEBI specifies, the money must be returned.
- 39(4): return of allotment to the Registrar whenever a company having share capital allots.
- 39(5): default under (3) or (4) costs one thousand rupees a day or one lakh rupees, whichever is less, for each default, on the company and the officer in default.
- Section 40(1) and (2): apply for and obtain stock exchange permission before making the offer, and name the exchanges in the prospectus.
- 40(3): monies in a separate account in a scheduled bank, usable only for adjustment against allotment where permission has been given, or for repayment.
- 40(4): any waiver is void. 40(5): company five to fifty lakh rupees; officer in default fifty thousand to three lakh rupees. 40(6): commission payable subject to prescribed conditions.
Allotment of Securities
Test yourself
1. When may a company allot securities offered to the public? Only when the amount stated in the prospectus as the minimum amount has been subscribed, and the sums payable on application for that amount have been paid to and received by the company by cheque or other instrument: section 39(1). Cash is excluded.
2. What is the minimum application money per security? Not less than five per cent of the nominal amount of the security, or such other percentage or amount as SEBI may specify: section 39(2).
3. The minimum subscription is not received within thirty days. What follows? The amount received must be returned within such time and manner as may be prescribed: section 39(3). Default attracts a penalty of one thousand rupees for each day, or one lakh rupees, whichever is less, on the company and every officer in default: section 39(5).
4. When must a company apply for listing? Before making the public offer. Section 40(1) requires it to apply to one or more recognised stock exchanges and obtain permission for the securities to be dealt with, before making the offer.
5. For what may the monies in the separate account be used? Only for adjustment against allotment where the securities have been permitted to be dealt with in the exchange specified in the prospectus, or for repayment where the company is for any other reason unable to allot: section 40(3).
6. An application form says the applicant waives the requirements of section 40. Is that effective? No. Section 40(4) makes void any condition purporting to require or bind an applicant to waive compliance with any requirement of the section.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.