By Admin 
When companies look to raise funds, they often do so by issuing shares or other types of securities (like bonds) to investors. This process is called allotment of securities. While it might sound complicated, it’s essentially about distributing shares or securities in a structured and legal manner. But before companies can do this, there are specific rules they must follow to make sure everything is handled correctly.
Here’s an easy-to-understand breakdown of the key provisions companies need to consider when allocating securities.
What Does Allotment of Securities Mean?
In simple terms, allotment refers to assigning shares or other securities to investors who apply for them. It’s more than just handing out shares, though—there’s a formal process involved to ensure transparency and compliance with the law.
Key Provisions for Allotment of Securities
When companies issue securities, they must follow certain rules to ensure they are acting fairly and legally. These rules help protect both the company and investors. Below are some of the key provisions companies must follow:
1. The Company’s Rules Must Allow It
Before a company can issue securities, its Articles of Association (the company’s governing rules) must give it the power to do so. If the company’s Articles don’t include this, they need to be updated before the allotment can happen.
2. Getting Approval from Shareholders
For companies listed on stock exchanges, shareholder approval is often required before new securities can be issued. Shareholders vote on whether the company can proceed with the allotment, typically during a general meeting. If shareholders don’t approve, the company can’t move forward with issuing securities.
3. Approval from the Board of Directors
Even after shareholders approve the plan, the company’s board of directors must formally approve the allotment through a board resolution. This resolution outlines how many securities will be issued, the price, and other important details.
4. Following Regulatory Guidelines
In many countries, companies must comply with regulations from bodies like the Securities and Exchange Commission (SEC) in the U.S. or the Securities and Exchange Board of India (SEBI). These agencies set the rules for how companies should issue securities and ensure everything is done legally.
5. Minimum Subscription Requirement
For public companies, there’s usually a requirement that a minimum number of securities must be applied for by investors before the allotment can go ahead. If this minimum isn’t reached, the company can’t proceed with issuing the securities.
6. Filing a Return of Allotment
After securities have been allotted, companies must file a return of allotment with the relevant authority (like the Registrar of Companies). This document lists who received the securities and how many were allotted, keeping everything transparent and above board.
7. Private Placement Rules
If a company issues securities through a private placement—offering them only to selected investors rather than the public—it must follow special rules. This often includes filing specific paperwork and ensuring they stick to strict regulatory guidelines.
8. Special Rules for Listed Companies
For companies listed on stock exchanges, there are additional regulations to follow. In India, for example, SEBI sets rules around how securities must be priced and how the company must report the allotment to ensure fairness and investor protection.
9. Issuing Securities for Non-Cash Considerations
Sometimes companies issue securities in exchange for assets other than cash, like property or services. In these cases, the company must carefully ensure the value of what they receive matches the value of the securities they issue. This helps avoid any potential disputes.
Restrictions on the Allotment of Securities by Public Listed Companies
When a public company wants to issue shares or securities to raise funds, they need to follow specific rules. These rules are in place to protect investors, ensure transparency, and maintain a fair market. Let’s break down the key restrictions in simple terms:
1. Minimum Subscription Requirement
When a company offers shares to the public, they must receive a certain number of applications from investors. This is called the minimum subscription. If they don’t get enough interest to meet this requirement, they can’t go ahead with the allotment. This ensures the company raises enough funds and shows that there’s real interest from investors.
2. Regulatory Approval
Before a company can offer shares to the public, they need approval from the regulatory body in their country, like the SEC in the U.S. or SEBI in India. These regulators review the company’s offering documents to make sure everything is legal and transparent. If there are any issues, the regulators can stop the company from moving forward.
3. Allotment After Offer Period Ends
Companies can only allot shares after the offer period is closed. The offer period is the time during which investors can apply for the shares. Once that period ends, the company can distribute the shares to those who applied.
4. Stock Exchange Rules
Public companies need to follow the rules of the stock exchange they’re listed on. For example, they must make sure all issued shares are fully paid before they can be traded on the exchange. This rule helps ensure that only valid shares are traded publicly.
5. Rules for Preferential Allotment
If a company wants to issue shares to a select group of investors, there are additional rules. They must clearly disclose details about the deal and follow strict pricing guidelines. This prevents companies from offering shares at unfairly low prices, which could hurt the value for other shareholders.
6. Preventing Insider Trading
Companies need to be careful that insiders—like executives or board members—don’t use confidential company information to make money by buying or selling shares during the allotment process. This illegal activity is called insider trading. Companies have to monitor this to keep everything fair.
7. No Unfair Practices or Fraud
Regulators closely monitor companies during the allotment process to ensure they aren’t engaging in dishonest practices. For example, companies aren’t allowed to mislead investors or manipulate the market when offering new shares. If they do, they could face penalties or legal consequences.
8. Pricing and Information Rules
In places like India, there are rules about how companies should price their shares and how much information they need to share with investors. Companies must provide clear details about their financial situation, how they plan to use the funds raised, and any risks involved. This helps investors make informed decisions.
9. Restrictions for Large Institutional Investors
When companies issue shares to big investors like banks or financial institutions (often called Qualified Institutional Buyers), there are special rules. For example, companies must ensure that shares are not sold at an unfairly low price, which could affect the stock’s value.
10. Lock-In Period for Some Investors
In certain cases, such as during an initial public offering (IPO) or a private offering, some investors (like founders or key shareholders) are not allowed to sell their shares for a certain period, called a lock-in period. This helps prevent a sudden drop in the stock price if large investors sell their shares right away.
Why Are These Provisions Important?
Issuing securities is a crucial way for companies to raise money and grow, but it comes with strict rules to prevent mistakes or abuses. If a company doesn’t follow these provisions, it could face fines, legal trouble, or lose investor trust. Following these rules ensures that the process is fair, transparent, and legal, protecting both the company and its investors.
Conclusion
Issuing securities may seem complicated at first, but it becomes much simpler when broken down into these basic provisions. By following the rules—from getting approval from shareholders and the board to filing the proper paperwork—companies can issue securities smoothly and without legal problems.
Whether you’re part of a company preparing to issue securities or just curious about how it works, knowing these simple provisions is a good starting point.