Allotment, Listing and Depository Receipts

In one line

A public issue is not complete when investors apply: the company may allot only if the minimum subscription stated in the prospectus has been received, must apply for listing before it offers, must keep the application money in a separate scheduled-bank account it cannot touch, and must return the money if the issue fails.

In exam wording: under section 39(1) no allotment of securities offered to the public shall be made unless 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; under section 40(1) every company making a public offer shall, before making the offer, apply to one or more recognised stock exchanges and obtain permission for the securities to be dealt with there; and under section 40(3) all monies received on application shall be kept in a separate bank account in a scheduled bank and used only for adjustment against allotment or for repayment.

Why the law has this at all

Between the prospectus and the share certificate lies a period in which the investor has parted with his money and has nothing. Three risks arise in that window, and the three sections answer them.

The issue may be too small to work. A company that set out to raise sixty crore for a plant, and raised six, cannot build the plant; the subscriber's money would be locked into a venture that cannot be carried out. Minimum subscription under s.39(1) is the answer: no allotment at all unless the stated minimum is in.

The shares may turn out to be unlisted. An investor buying in a public issue expects to be able to sell. If listing permission were sought after allotment and refused, he would hold an illiquid security he never agreed to buy. Section 40(1) requires the application before the offer, and s.40(6) makes an allotment void where permission is refused.

The money may be spent before the issue succeeds. The application money is not the company's until allotment, yet it sits in the company's hands. Section 40(3) impounds it in a separate scheduled-bank account, usable only for allotment or repayment.

Section 39: allotment

39(1): minimum subscription. No allotment of securities offered to the public shall be made unless 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.

Two elements, both necessary: subscription to the minimum, and actual receipt of the application money for it. A subscription list full of applications on which money has not been paid does not satisfy the section.