Allotment of shares, private placement and membership

1. Allotment: the general principles

An application for shares is an offer; allotment is its acceptance, and creates a binding contract. The ordinary rules of offer and acceptance therefore apply:

• Proper authority. Allotment is made by a resolution of the Board (section 179(3)(c)) or a duly authorised committee; an allotment by an unauthorised person is void unless ratified.
• Reasonable time. An offer lapses if not accepted within a reasonable time. In Ramsgate Victoria Hotel Co. v. Montefiore (1866) an allotment made five months after the application was not binding on the applicant.
• Communication. Acceptance must be communicated; posting a letter of allotment completes it.
• Absolute and in accordance with the application. An allotment of a different number of shares, or on different terms, is a counter-offer, unless the application authorised allotment of a smaller number.
• Conditional applications. If an application is made subject to a condition, the allotment binds only if the condition is fulfilled.

2. Statutory restrictions on allotment

• Minimum subscription (section 39(1)): no allotment of securities offered to the public unless the amount stated in the prospectus as the minimum amount has been subscribed and the application money for it received by cheque or other instrument. SEBI's regulations fix the minimum subscription for public issues (ninety per cent of the issue in an ordinary case).
• Application money (section 39(2)): not less than five per cent of the nominal amount of the security, or such other percentage as SEBI specifies.
• Refund (section 39(3)): if the minimum is not subscribed and received within thirty days of the issue of the prospectus (or the period SEBI specifies), the money must be returned as prescribed.
• Return of allotment (section 39(4)): filed with the Registrar after every allotment. Default under section 39(3) or (4) attracts a penalty of one thousand rupees a day up to one lakh rupees (section 39(5)).
• Listing (section 40(1), (2)): a company making a public offer must, before the offer, apply to a recognised stock exchange for permission to deal, and name the exchange in the prospectus.
• Separate bank account (section 40(3)): application money is kept in a separate account in a scheduled bank, to be used only for adjustment against allotment once listing permission is granted, or for refund.
• No waiver (section 40(4)): a condition requiring an applicant to waive these requirements is void.
• Dematerialised form (section 29): public offers must be in demat form.

Under the 1956 Act (section 71) an allotment in breach of the minimum subscription rule was voidable at the applicant's instance within two months. The 2013 Act relies instead on refund obligations and penalties.

3. Private placement: section 42

A private placement is an offer of securities to a select group of identified persons, not exceeding fifty or such higher number as is prescribed (the Rules prescribe two hundred in a financial year), excluding qualified institutional buyers and employees under ESOPs. The offer is made by a private placement offer-cum-application letter, carries no right of renunciation, must not be advertised, and the money must come from the subscriber's bank account. Allotment must be made within sixty days of receipt of the money, failing which it is refunded within fifteen days, with interest at twelve per cent thereafter. An offer to more than the prescribed number, whatever it is called, is deemed a public offer and must comply with the prospectus provisions (Explanation III).

This rule was at the centre of Sahara India Real Estate Corporation Ltd. v. SEBI, 2012 INSC 367, (2013) 1 SCC 1. Two Sahara companies raised thousands of crores from about three crore investors through optionally fully convertible debentures described as a private placement. The Supreme Court held that an offer to fifty or more persons was a public issue under the proviso to section 67(3) of the 1956 Act, that SEBI had jurisdiction, and directed refund to the investors with interest at fifteen per cent.

4. Who may be a member

Any person competent to contract may be a member, subject to the articles. In particular:

• Minor. A minor cannot contract, so an allotment to him is void; but fully paid shares may be transferred to him or held through a guardian, since no liability attaches.
• Company. A company, being a person, may hold shares in another company, but a subsidiary may not hold shares in its holding company (section 19).
• Partnership firm. Not a legal person, so shares are registered in the names of the partners, except that a firm may be a member of a section 8 company (section 8(3)).
• Hindu undivided family through its karta; a trust through its trustees; a society registered under the Societies Registration Act.
• Non-residents and foreign companies, subject to FEMA and foreign investment rules.
• The company itself cannot be its own member, except under a buy-back (and then the shares are extinguished): Trevor v. Whitworth (1887); section 67.

5. How one becomes a member: section 2(55)

• (i) Subscribers to the memorandum are deemed to have agreed to become members, and on registration are entered as members. They are members from incorporation even if no shares are allotted and their names are not yet entered.
• (ii) Every other person who agrees in writing to become a member and whose name is entered in the register of members: by application and allotment, by transfer from an existing member, by transmission on death or insolvency, or by holding out (allowing one's name to stay on the register, which estops him from denying membership).
• (iii) Every person holding shares as a beneficial owner in the records of a depository.

Membership ends on transfer, forfeiture, surrender, buy-back, death, or winding up.

6. Problem

‘D’ subscribed the memorandum for 100 shares. The company was duly registered but D ultimately took only 20 shares. At the time of winding up the company asks D to pay for all 100 shares. D refuses. Advise D.

Issue. Whether a subscriber to the memorandum is liable for the shares he subscribed for, though they were never allotted to him.

Law. A subscriber is deemed to have agreed to become a member and to take the shares set against his name (section 2(55)(i) and the subscription clause of the memorandum). Money payable by a member under the memorandum is a debt due from him to the company (section 10(2)). Section 10A requires a declaration that every subscriber has paid the value of the shares agreed to be taken. In a winding up, a person liable to contribute is a contributory (section 2(26)). The English authority is Mackley's Case (1875), where a subscriber was held liable as a contributory for the shares he had subscribed although none were allotted to him.

Application. D's signature on the memorandum was itself his agreement to take 100 shares. The company did not need to allot them to bind him, and its taking only 20 from him does not release him from the rest of his undertaking unless the company validly allotted those 80 shares to others in his place, which the facts do not suggest. The liquidator can place D on the list of contributories for the unpaid amount on the remaining 80 shares.

Conclusion. D is liable to pay for all 100 shares. He has a defence only to the extent that the other 80 shares were in fact issued to and paid for by someone else.

How this is examined

June 2025 asked “Explain the statutory restrictions on allotment of shares” for 10 marks; January 2026 asked “Who may be a member of a company? How to become a shareholder of a company?” and set the D problem above. For allotment: the general principles first, then sections 39 and 40 in order. For membership: section 2(55) three ways, the special cases of minors, firms and companies, and a line on cessation.