Requirement as to minimum subscription

Section 69 of the 1956 Act prohibits a company from making allotments pursuant to a public issue of capital unless the amount stated in the prospectus as the minimum subscription has been subscribed and the money payable on application in respect of such shares constituting the minimum subscription has been received by company within 120 days. Once this requirement is satisfied section 69(5) of the 1956 Act will have no application. When the minimum subscription is received within the stipulated period, the ban imposed by section 69(5) of the 1956 Act disappears and the company is free to make allotment even after the expiry of 120 days subject to the other requirements of the 1956 Act. A similar requirement as to minimum subscription before allotment of securities is provided under section 39(3)  of the 2013 Act.

Minimum Subscription on debenture issue on rights basis.

A company made a fully convertible debenture issue on rights basis making the statutory declaration that it would refund the minimum subscription money in case the issue does not materialize upto 90%. The issue failed and the company refunded the money to applicants. SEBI proceeded against the company registration on the ground that it should not have done so unilaterally and should have sought SEBI directions, and debarred the company from access to the capital market for ten years. The Calcutta High Court did not approve this line of action on the part of SEBI. The court said that SEBI is a judicial authority. It is bound to observe principles of natural justice. It should not have debarred the company from access to the capital market without hearing the company. Furthermore, SEBI had no power under section 11 A  of the SEBI Act to issue any direction to the company that it should not refund the application money even if the minimum subscription was below 90%, the company being bound under the Companies Act to do so.  Nor the company was under any obligation to seek SEBI directions for refunding.

Allotment

The expression “allotment” is not defined. It means and implies a division of the share capital into definite shares of a particular value or of different classes and assignment of such shares of a particular value or of different classes and assignment of such shares to the different persons. In other words, “allotment means the appropriation out of previously in appropriated capital of a certain number of shares to a person”. But it does not include a re-issue of forfeited shares and, therefore, a return of allotment of such shares to Registrar is not necessary. What is termed “allotment” is generally neither more nor less than the acceptance by the company of the offer to take shares. To take the common case, the offer is to take a certain number of shares or such a less number of shares as may be allotted. That offer is accepted by the allotment either of the total number mentioned in the offer or a less number, to be taken by the person who made the offer. This constitutes a binding contract to take that number according to the offer and acceptance.  To my mind there is no magic whatever in the term “allotment” as used in these circumstances. It is said that the allotment is an appropriation of a specific number of shares. An allotment is an appropriation, not of specific shares, but of  a certain number of minimum shares”. When a block of shares is offered for sale to members, acceptance of  a part of the block is not good.

Communication of  allotment

The mere subscription to shares in a company does not constitute a subscriber a shareholder of a company; he acquires the status of shareholder and the right to demand shares and to exercise the rights of a shareholder only when shares are allotted to him and a communication of the allotment is made to him. Although an application for minimum shares made upon a condition precedent does not become binding on the applicant until it has been complied with or its performance waived, a mere failure of consideration is not a ground for treating shares allotted as unpaid. An application for shares is an offer and like any other offer must not only be accepted but the acceptance must also be communicated to the person making the offer. The mere entry of a shareholder’s name in the company’s register is sufficient to establish that an allotment was in fact made. There can be no proper allotment of shares unless the applicant has been informed of the allotment. A formal allotment is not necessary. It is enough if the applicant is made aware of the allotment.  A letter demanding payment may be a sufficient notification of acceptance. If the acceptance is verbal, by telephone, telex, fax or by conduct, it is, in accordance with the general rules of the law of contract, effective when it is received by the applicant, unless there is a different intention of the parties. He has the right to revoke his offer to purchase his shares and ask for the return of the moneys paid, before he is informed of the allotment . A verbal withdrawal may be enough.

Allotment by post

When communication is by post, the applicant becomes bound by the allotment when the letter is posted provided that this was done during reasonable time and the letter was properly addressed and stamped. The allotee cannot get rid of the allotment by showing that he did not receive the letter. He can ask for a copy but cannot say that is not bound.

Deemed delivery of letter of allotment

The articles of a company provided that the letters of allotment when posted would be deemed to have been delivered to the addressees. The allotment was provisional. The allotee in question had to accept it within the specified period. He never received the letter which was sent to him by recorded delivery. The directors, thinking that the allotment was not accepted, allotted the shares to themselves. The allottee brought an action for rectification of the register of members by cancelling the allotment and restoring his allotment. The court allowed the relief. The letter of provisional allotment was also defective itself inasmuch as it gave less than the statutory period for acceptance of an offer under pre-emptive rights. The purpose the provision relating to deemed delivery is to deal with a case where there was uncertainty as to whether a document had been delivered, such a provision cannot be relied upon where it was established that the document was established that the document was not delivered, such a provision cannot be relied upon where it is established that the document was not delivered. The postman had testified that he had returned the letter to the company registration office. Thus the directors knew that the letter had been delivered and they also knew that the shareholder wanted to take-up the allotment.

Allotment by proper authority

The proper authority for allotment is the Board of Directors. It is not necessary that the Board should be duly constituted and should pass a valid resolution of allotment at a valid meeting. But section 290 of the 1956 Act which may make an allotment valid even if some defect was there in the appointment of directors of company registration but which was subsequently discovered. An allotment by a board irregularly constituted may be subsequently ratified by a regular board. A director who has joined in an allotment to himself will be stopped from all the invalidity of the allotment.

Ultra vires allotment

Where the directors have no authority under the companies memorandum to make an allotment would be irregular and may be ratified by the company. But it would be void Where the company itself has no power to make an allotment . At common law any minimum subscription money was returnable to the allotee. If a member was admitted who was not duly qualified in terms of the articles, only the company, and not the member, could plead that his admission was ultra vires.

Director’s duty in allotment

The directors are bound by the fiduciary duty to make an allotment in utmost good faith only in the best interest of the company. Where certain shares of the company which the auditors had certified to be of high market value were allotted at a merger sum per share, it was held that the allotment was not in the interest of the company. Whilst it may be open to the directors to allot shares at such price and to such parties as they deem fit, there cannot be slightest doubt that the action of the directors must be in the interest of the company. Directors duty is to take into consideration the market value of their company’s shares, except perhaps when they are offering shares on right basis to the existing shareholders in which case they may charge less than the market place, the difference would be an element of bonus to the shareholders.

Offer to the public

The section applies only where a minimum prospectus is issued in the form of an offer to the public. An offer to the public signifies an offer made by advertisement or circular to the general public or some section thereof, as distinguished from an offer made privately, that is, to a select and small circle of friends, customers or connections. Thus where a business is converted into a private company, shares offered by the vendors to their friends , relations or to selected customers, have not hitherto been regarded as having been offered to the public.”

Right to shares

The right to get shares fructifies only when the application of shares is accepted by allotment of which information has been given to the applicant. The personal right of  a shareholder to be allotted shares is not heritable.

Order for maintaining status quo

Where the forfeited shares were to be reissued in accordance with the terms of allotment, and question of the issue of preference shares was bending before the High Court, the order of the Company Law Board to maintain status quo was held proper.

Refund of an application money

It is essentially a money claim. Three years period of limitation becomes applicable.

Money to be kept in separate bank account

It may be noted that section 69(4) of the 1956 Act does not require the application moneys to be kept in a separate bank Account. It requires them only to be kept in a scheduled bank. However, under section 73, subsection (3) of the 1956 Act, where the minimum shares or debentures are to be dealt with on stock exchange, the application moneys must be kept in a separate bank account. The provision in section 73 of the 1956 Act applies to debentures in addition to shares. It is a condition precedent for permission that the shares should be allowed to be dealt with at the stock exchange that the application money was deposited as required by the section in a separate account to be opened with the bankers to the issue. The direction given by the Appellate authority of SEBI for necessary compliance was held to be proper. To the same the effect is, where the requirement of the section being  a condition precedent to listing, a conditional permission that the company should transfer the application money to a separate bank account was held to be a refusal of permission. Procedures for share applications and application money are covered under SEBI Regulations, 2009.

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