Allotment of Securities in India: Types, Process and Compliance Under the Companies Act, 2013

Allotment is the moment a company actually issues securities, most commonly equity shares, to a person in exchange for consideration. Until shares are validly allotted, an investor or founder has no legal ownership, however much money has changed hands.

Because allotment changes who owns the company, the law treats it carefully. This guide walks through the routes, the process, and the filings that follow.

Allotment versus issue versus transfer

These terms are often mixed up:

• Allotment is the company creating and assigning new securities to a person.
• Transfer is an existing shareholder passing their securities to someone else. The company itself doesn't issue anything new.

Allotment increases the share capital and dilutes existing holders. A transfer changes who holds the shares but not the total number.

Common routes for allotment

1. Subscriber shares (at incorporation). The initial shares taken by the subscribers to the MoA when the company is formed.

2. Rights issue. New shares offered first to existing shareholders in proportion to their holdings, under Section 62(1)(a) of the Companies Act, 2013.

3. Preferential allotment. Shares issued to a select person or group, such as an investor, under Section 62(1)(c), typically needing a special resolution and a valuation report.

4. Private placement. An offer made to a limited number of identified persons, under Section 42. It has its own forms and strict rules on banking channels.

5. Bonus shares. Free shares issued to existing shareholders out of free reserves, subject to conditions in the Articles and the Act.

6. ESOPs and sweat equity. Shares issued to employees or directors under separate provisions and rules.

The typical process for a private company

1. Check authorised capital. If the new shares would exceed it, increase it first by altering the MoA, and file the required forms.
2. Check the Articles. They must permit the kind of issue you plan.
3. Board meeting. Approve the proposal, the offer terms and the notice for a general meeting.
4. Shareholder approval. A special resolution is generally needed for preferential allotment or private placement, and it must be filed with the ROC in Form MGT-14.
5. Valuation. For preferential and private placement issues, a registered valuer's report is generally required to support the issue price.
6. Offer. In private placement, the offer is made through a private placement offer letter (Form PAS-4) to named persons only, and the company keeps a record of offers (Form PAS-5).
7. Receive the money through banking channels. Cash isn't acceptable, and the money must come from the subscriber's own bank account.
8. Allot. The board (or a committee) passes a resolution allotting the shares. In private placement, allotment must happen within the statutory period after receiving the application money, otherwise the money must be refunded.
9. File the return of allotment. Form PAS-3 is filed with the ROC within 30 days of the allotment.
10. Issue share certificates and update registers. The register of members is updated, and share certificates are issued within the time the Act allows, or shares are credited to the demat account where dematerialisation applies.

Foreign investors: extra steps

If the allottee is a non-resident, FEMA rules also apply:

• The issue price must meet the applicable pricing guidelines, supported by a valuation.
• The sector and investment limits must permit the investment.
• The company must report the allotment through the RBI's reporting system, generally within 30 days, using Form FC-GPR.

Missing the RBI reporting deadline is a frequent trigger for late fees and compounding.

Stamp duty

Stamp duty applies to the issue of securities under the Indian Stamp Act, with the rates collected as prescribed. Check the current rate before you allot, since rates and collection mechanisms have been revised in the past.

Common mistakes

• Allotting before the resolutions are in place, or before authorised capital is increased.
• Accepting funds from a third party rather than from the allottee.
• Skipping the valuation report where one is required.
• Filing PAS-3 late. The 30-day window is strict and late filing attracts additional fees.
• Missing the MGT-14 filing for the special resolution.
• Not updating statutory registers, which creates problems in due diligence later.
• Ignoring the cap table. Every allotment should be reflected in an up-to-date cap table.

How we help

We manage allotments end to end: checking the Articles and authorised capital, drafting the resolutions and offer documents, coordinating valuation, filing MGT-14, PAS-3 and FEMA forms, and updating your statutory registers, so your cap table is clean when the next investor asks for it.

Planning a fundraise or issuing shares to a co-founder? Get in touch before you take the money.

This article is for general information and isn't legal advice. Requirements, thresholds and fees change, so please confirm current provisions with a qualified professional.