Procedure for a Company's Securities Allotment
- Companies might require to allot shares to the public in order to expand their business or settle a debt.
- A company can allot/issue various types of shares depending upon its preferences.
- The term "fresh issue" refers to shares allotted/issued at the time of the company's establishment, whereas "private issue" refers to shares issued post-incorporation of the company.
What sections of the Companies Act govern the issuance and allocation of shares?
- There are particular laws that must be followed while issuing the company's shares. However, they are limited to Private Limited Companies.
- Private Limited companies are not permitted to publish prospectuses requesting subscriptions to their share capital from the general public.
- However, public companies may offer their shares for the public, subject to compliance with the Companies Act.
Below are the provisions and steps that must be duly followed to issue a share
- A prospectus is a request to the public to buy shares of the company.
- The company is required to file a prospectus’ copy to the SEBI, on the contrary private companies are not obliged to do so.
- The company’s prospectus contains all the relevant information about the company issuing the shares, including the directors' names, the terms of the issue, the opening and closing dates of the share issue, application fees, bank account's information for a deposit, and the minimum number of shares required to apply.
- Post-reading the company's prospectus, potential investors submit an application for shares together with the registration/application fees.
- Over-subscription occurs when the applied number of shares exceeds the number of shares granted.
- When the number of applications for shares issued is fewer than anticipated, this is referred to as Under-Subscription.
- The application fee must be a minimum of 5% of the nominal value of the share.
- The company makes the choice about the issuance of shares.
- Acceptance is the process through which shares are allocated to shareholders and is not doable until subscription.
- The Minimum Subscription Amount is the smallest amount specified in the prospectus that is essential to operate the Business.
- It is quite improbable that all candidates will get an allocation letter.
- Certain candidates receive letters of regret, and their application fees are also refunded.
- Following the company's allotment of shares, owners are required to pay the outstanding balance due on the shares in accordance with the processes outlined in the prospectus.
- It is obligatory that the company must attain at least 90 per cent of the subscription's minimum value of the shares issued within 60 days post the issue's closing.
- If this stipulation is not satisfied, the company will be required to return the whole subscription amount.
- There is an 18-day grace period. Post 78 days, pursuant to the companies act the company can be penalised with interest at the rate of 6% per annum.
- The applicants are officially recognized as the shareholders in the company upon the purchase of shares.
If no such clause is included in the prospectus, the below-mentioned rule applies:
- The company cannot demand more than 25% of the share's nominal value.
- After one month, the company may request payment of the subsequent share amount.
- Each member receives a 14-day notification detailing the amount and date of payment.
- Various shareholders belong to distinct classes, and as such, the request for payment should be issued on a regular basis on the shareholder's specific body.
Prospectus & allotment of securities Rules
Under Rule 13- A company may pay a commission to any individual in connection with the subscription or obtaining of subscriptions to its shares, subject to the following requirements, whether absolute or subject to conditions:
- The payment of such commission shall be approved by the articles of association of the company.
- The commission might be paid from the profits or the company's securities.
- The commission rate paid or admitted to be paid shall not exceed 5% of the value at which the shares are issued or, in the event of shares, the rate authorised in the articles, whichever is lesser in the amount.
- In the event of debentures, it is obligatory that the amount shall not surpass 2.5 per cent of the value at which the debentures are issued, or as stipulated in the company's articles of association, whichever is less.
- The company's prospectus should include the following information: (i) the name of the underwriter; (ii) the total commission granted to the underwriter; and (iii) the sum of securities subscribed for or underwritten by the underwriter, either with conditions or unconditionally.
- No commission shall be paid to the underwriter for securities that are not placed for public subscription.
- On commission's payment, the contract’s copy shall be submitted to the Registrar at the time of issuing the prospectus for registration.
Procedure for Share Allotment Following Company Formation
- The procedure through which companies distribute new shares to shareholders is called the issuance of shares.
- All the shares issued by the company to the shareholders shall be in line with the Companies Act-201
Procedural Guidelines for Privately Listed Shares
- All shareholders shall be notified that an Extraordinary General Meeting will be convened to approve the private placement offer letter.
- Not draft the private placement offer letter.
- Adopt resolutions in preparation for the Extraordinary General Meeting (EGM).
- Form MGT-14 is submitted to the ROC (Registrar of Companies) within 30 days post the shareholder's meeting approving a special resolution.
- Within 30 days of the Special resolution's adoption, an offer letter is published in Prospectus and Allotment of Securities ( PAS-4).
- Following that, a comprehensive record of the private placement is created in the Prospectus and Securities Allotment of Securities ( PAS-5).
- Form PAS-5 and Form PAS-4 must be duly filed with the ROC in accordance with the prescribed procedures within 30 days of the offer letter being issued in Form GNL-2.
- Allotment of shares should be made within 60 days of receiving money from the individuals who were authorised the right.
- A meeting of the Board of Directors shall be convened to discuss the allotment of shares.
- Within 30 days post Allotment, PAS should be submitted with the ROC.
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