An allotment, legally, is the company’s acceptance of an offer to buy its shares. It is governed by the following rules of the common law relating to contract:-
(a) Where a company issues a prospectus, the issue is an invitation to treat but not an offer: - It is not regarded as an offer because if it was regarded as an offer, every application made pursuant thereto would constitute an acceptance and the company would be contractually bound to allot all the shares applied for. If the shares were oversubscribed, the company would be sued by the applicants who were not given the shares they had applied for. When applications are made, they constitute offers, and hence the company cannot be sued because there is no contract between them and the company.
(b) The company’s, acceptance must be unconditional: - If the application was made for 10 shares and 5 were allotted, allotment would be a counter-offer which the allottee could reject. But whenever the issue is oversubscribed companies invariably prepare application forms which contain a clause to the effect that the applicant “agrees to accept” such number of shares as the company in its absolute discretion may allot to him.
(c) The acceptance must be communicated to the applicant:-This means that the allottee must actually receive the letter of allotment so that he is aware of the allotment. If the letter of allotment is lost in transit there would be no binding contract. If the applicant authorizes the company to communicate the acceptance by post, there would be a binding contract the moment the letter of acceptance is posted.
Case Law: Dunlop vs. Higgins (1849)
‘A’ applied for the shares of a company. The company accepted the offer. The allotment letter was delayed in the post. ‘A’ repudiated the allotment.
It was held that the contract was complete when the allotment letter was posted.
(d) The allotment must be made within a reasonable time:-If there is undue delay in the allotment the offer lapses.
Case Law: Ramsgate Victoria Hotel Co.vs. Montefiore (1866)
X applied for shares on June 28. Shares were allotted on November 23. X refused to take them. It was held that the offer had lapsed and X was not liable to pay for them.
Section 49 (1) provides that no allotment shall be made of any share capital of a company offered to the public for subscription unless the amount stated in the prospectus as minimum amount, which in the opinion of directors must be raised by the issue of share capital and the sum payable on application for the amount so stated has been paid to and received by the company.
Section 50 (1) provides that a company having a share capital which has not issued a prospectus, or which has issued a prospectus but has not proceeded to allot the shares, the company shall not make a first allotment of its shares unless it has delivered a statement in lieu of prospectus to the registrar at least 3 days before the allotment.
Section 50 A (1) provides that a company having a share capital shall not allot any of its shares to a body corporate which is not a company formed and registered under this Act without prior consent in writing of the Treasury to such allotment, and any allotment made without such consent shall be void.
Requirement of Allotment
(i) Public company must file a prospectus or a statement in lieu of prospectus before making the first allotment.
(ii) Minimum subscription: – No shares which are offered to the public can be allotted until the minimum subscription stated in the prospectus has been subscribed and the amount payable on application has been received in cash.
(iii) Application money: - The money payable on application for each share shall not be less than 5% of the nominal value of the shares. If the minimum subscription is not subscribed within 60 days after the issue of prospectus, all money received from applicants must be returned forthwith.
(iv) If the prospectus states that the application has been or will be made to the stock exchange for permission for the shares or debentures offered thereby to be dealt in on stock exchange, then the permission must be applied before the third day after the issue of the prospectus, failing to which the allotment would be void.
An allotment of shares is considered irregular if it contravenes the provisions of Section 49 or Section 50. Section 49 prohibits allotment unless minimum subscription is received. Section 50 prohibits allotment in certain cases unless statement in lieu of prospectus is delivered to the registrar.
Incase it contravenes these two sections, it becomes voidable at the instance of the applicant within one month after holding of statutory meeting of the company and not latter.
Where the director contravenes the provisions of Section 49 and Section 50, he must compensate the company and the allotee respectively for any loss, damage or costs which the company or allotee has incurred. But no proceedings to recover any such loss, damage or costs may be commenced after the expiry of two years from the date of allotment.