Restrictions for allotment of shares

Restrictions for allotment of shares

There are some other statutory restrictions on the allotment of shares.

(1) The company cannot proceed to make any allotment of its shares offered to the public for subscription unless the minimum subscription has been received. The sum payable on application has been paid to and received by the company either in cash or by a cheque or other instrument which has been paid.  Any application for shares which is not accompanied by the prescribed payment of money will be deemed to be an invalid offer.  If the directors make allotment on the basis of an invalid offer, they are guilty of misfeasance. It is doubtful whether such allotment will at all be treated as valid one.  This act is ultra vires the directors.  Further, the applicant will be presumed to have an implied notice of the articles which require payment of money along with the application for shares.  This is a condition precedent to an allotment.  It may happened that the articles were altered between the time of application and the time of allotment to give effect to the offer not accompanied by money as was provided in the unaltered articles.  But still that will invalidate the allotment, for, no alteration of the articles can be effected in between the period of application and allotment.

(2) The company cannot proceed to allot any of its shares unless a statement in lieu of prospectus in accordance with Schedule III has been delivered to the Registrar for registration in

absence of the issue of prospectus. The first allotment in such case must not be made before the lapse of at least three days from the date of delivery of the statement in lieu of prospectus to the Registrar.  This statutory provision is mandatory which will be evident from the use of expression “A company . . . shall not allot”.  A private company is not subject to this statutory limitation.  Where a company has issued a prospectus generally, no allotment shall be made until the beginning of the fifth day from the date of the issue of the prospectus, or from the date of the public notice first given by those persons who are responsible under section 62 of the Act for the prospectus.  The beginning of the fifth day or some other later day as may be prescribed in the prospectus for the opening of the first allotment is called as “the time of the opening of the subscription lists”.

(3) Where a prospectus states that application for shares has been or will be made for permission for the shares to be dealt in on a recognised stock exchange, such prospectus shall state the name of the stock exchange and any allotment made on an application without such permission shall be void. The application for such permission shall be made before the tenth day after the first issue of the prospectus.  If this is not done or if the permission has not been granted before the expiry of four weeks from the date of the closing of the subscription lists or such longer period not exceeding seven weeks, the allotment shall be void.  The applicant is under such circumstances entitled to refund of money paid along with the application forthwith and not later than eight days after the company is liable to repay it.  Otherwise, the directors shall be jointly and severally liable to repay that money with interest at the rate of 12% per annum after the expiry of the eighth day.  Liability of a director in this case is subject to any misconduct or negligence on his part