Share allotment is the formal act by which a company appropriates and distributes shares to persons who have applied for or agreed to take them. Once the board passes the allotment resolution and communicates the decision, a binding contract comes into existence and the allottee becomes a member of the company, with their name entered in the Register of Members under Section 88 of the Companies Act, 2013. Every fresh issue of equity or preference shares — whether by a private limited company, an unlisted public company or a startup closing its first funding round — must follow the allotment procedure and the post-allotment filings correctly.
Authority and conditions for allotment
- Allotment is approved by a Board Resolution; the board may delegate the mechanical act to an allotment committee, but the decision rests with the directors.
- The company must have sufficient authorised capital in its MOA. If the proposed issue exceeds it, increase the authorised capital (Form SH-7) before allotting.
- Under Section 39(2), application money must be at least 5% of the nominal (face) value of the security, unless SEBI prescribes a higher amount for a public issue.
- For a public offer, the minimum subscription stated in the prospectus must be received before any allotment (Section 39(1)); otherwise the application money has to be refunded.
- Consideration must be received through proper banking channels, and preferential or private-placement issues need a registered valuer's report to justify the price.
Post-allotment compliance timeline
Missing these statutory windows is the most common and most expensive error. Each deadline runs from the date of the allotment resolution:
| Action | Form | Deadline |
|---|---|---|
| Return of allotment (general issue) | PAS-3 | Within 30 days of allotment |
| Return of allotment (private placement, Section 42) | PAS-3 | Within 15 days of allotment |
| Issue of share certificates | SH-1 | Within 2 months of allotment |
| Entry in Register of Members | MGT-1 | Without delay |
| Stamp duty on share certificates | State Stamp Act | Generally within 30 days of issue |
Types of share allotment
- Rights issue (Section 62(1)(a)): offered to existing shareholders in proportion to their holdings.
- Preferential allotment (Section 62(1)(c)): to identified persons at a price supported by a valuation report, requiring a special resolution.
- Private placement (Section 42): to a select group of up to 200 persons per financial year per security class, offered through Form PAS-4.
- ESOP allotment (Section 62(1)(b)): on exercise of vested employee stock options.
- Bonus issue (Section 63): fully paid shares capitalised from free reserves, securities premium or capital redemption reserve, with no cash inflow.
Common mistakes and penalties
Founders frequently spend the subscription money before filing PAS-3 — in a private placement the funds cannot be utilised at all until the return is filed. Other pitfalls include allotting beyond the authorised capital, skipping the registered valuer's report on a priced issue, and keeping share application money pending beyond 60 days without either allotting or refunding it.
- Late PAS-3 (Section 39(5)): the company and each officer in default pay ₹1,000 for every day of default, capped at ₹1 lakh each.
- Delay in issuing certificates (Section 56(6)): a penalty of ₹50,000 on the company and ₹50,000 on every officer in default.
- MCA additional filing fees (up to 12 times the normal fee for long delays) apply on late PAS-3, over and above the penalty.
Because pricing, valuation and filing errors are hard to unwind once shares are issued, have a company secretary or qualified professional review the paperwork before the board approves the share allotment.