This article has been written by Mr. Hemant Kumar, a 2nd year LL.B student from Faculty Of Law, Delhi University.
Introduction
Allotment of securities is the process of issuing and transferring shares or other securities by a company to its investors or shareholders. It is a crucial process in corporate law as it provides companies with a means of raising capital to fund their operations and investments. However, allotment of securities is subject to certain legal requirements and procedures that must be followed to ensure compliance with the law. This article provides an overview of the legal framework governing allotment of securities, including case laws, examples, and judgments.
Legal Framework Governing Allotment of Securities
The Companies Act, 2013 is the primary law governing allotment of securities in India. The Act provides for various provisions that regulate the allotment of shares, debentures, and other securities by a company. Section 23 of the Act lays down the conditions for the issue of securities. It states that a company can issue securities either at par or at a premium, subject to certain conditions. The Act also provides for the maximum limit of securities that can be issued by a company. The Securities and Exchange Board of India (SEBI) is the regulatory authority that oversees the allotment of securities in India.
Allotment of Shares
Allotment of shares is the most common form of allotment of securities by a company. A share is a unit of ownership in a company. When a company issues shares to investors, it is essentially selling a part of its ownership to the investors. The allotment of shares is governed by Section 42 of the Companies Act, 2013.
Section 42 provides that a company can issue shares on a preferential basis to its existing shareholders or to any other person, subject to certain conditions. The conditions include obtaining the approval of the shareholders through a special resolution, making a private placement offer letter to the investors, and filing a return of allotment with the Registrar of Companies.
Case Laws
In the case of Tata Consultancy Services Limited vs. SEBI, the Securities Appellate Tribunal held that the allotment of shares by a company must be made in compliance with the provisions of the Companies Act, 2013, and SEBI regulations. The Tribunal also held that the company must ensure that the allotment is made in a fair and transparent manner.
In the case of Jaipur Metals and Electricals Employees Union vs. Jaipur Metals and Electricals Limited, the Rajasthan High Court held that the allotment of shares must be made in accordance with the provisions of the Companies Act, 2013, and the Articles of Association of the company. The Court also held that the company must ensure that the allotment is made in a fair and equitable manner.
Allotment of Debentures
A debenture is a type of debt instrument issued by a company that represents a loan taken by the company from the investors. The allotment of debentures is governed by Section 71 of the Companies Act, 2013. Section 71 provides that a company can issue debentures to its investors subject to certain conditions. The conditions include obtaining the approval of the shareholders through a special resolution, making an offer letter to the investors, and filing a return of allotment with the Registrar of Companies.
Case Laws on Allotment of Securities:
Re: Hindustan Lever Employees’ Union v. Hindustan Lever Ltd. (1995)
In this case, the company had issued shares to its employees under an employee stock option scheme (ESOP). However, the employees’ union challenged the allotment of shares, stating that it was not in compliance with the provisions of the Companies Act, 1956.
The court held that the allotment of shares under the ESOP scheme was in compliance with the provisions of the Companies Act, 1956. The court also stated that the allotment of shares under the ESOP scheme was not in violation of the provisions of the Industrial Disputes Act, 1947.
Sahara India Real Estate Corporation Limited and Ors. v. Securities and Exchange Board of India and Anr. (2012)
In this case, the Securities and Exchange Board of India (SEBI) had directed Sahara India Real Estate Corporation Limited to refund the money raised through the issuance of Optionally Fully Convertible Debentures (OFCDs) to the investors. The company had issued OFCDs to the public without complying with the provisions of the Companies Act, 1956 and SEBI regulations.
The court held that the company had violated the provisions of the Companies Act, 1956 and SEBI regulations by issuing OFCDs without proper registration and disclosure. The court directed the company to refund the money raised through OFCDs to the investors with interest.
Shareholders Association, Karnataka v. Infosys Technologies Limited and Ors. (2014)
In this case, the shareholders’ association challenged the allotment of shares by Infosys Technologies Limited to its employees under an employee stock option scheme (ESOP). The shareholders’ association argued that the allotment of shares to employees was not in compliance with the provisions of the Companies Act, 1956.
The court held that the allotment of shares to employees under the ESOP scheme was in compliance with the provisions of the Companies Act, 1956. The court also stated that the shareholders’ association did not have the locus standi to challenge the allotment of shares under the ESOP scheme.
Ajanta Pharma Limited v. Securities and Exchange Board of India (2016)
In this case, Ajanta Pharma Limited had issued shares to its promoters without complying with the provisions of the Companies Act, 2013 and SEBI regulations. SEBI had directed the company to refund the money raised through the issuance of shares to the promoters.
The court held that the company had violated the provisions of the Companies Act, 2013 and SEBI regulations by issuing shares to the promoters without complying with the rules and regulations. The court directed the company to refund the money raised through the issuance of shares to the promoters.
Examples:
Initial Public Offering (IPO)
One of the most common examples of allotment of securities by a company is an Initial Public Offering (IPO). An IPO is the first sale of shares by a private company to the public. It allows the company to raise capital from a large pool of investors and provides liquidity to existing shareholders. The process of an IPO involves the appointment of an investment bank or underwriter, who facilitates the issuance and distribution of shares to the public.
The allotment of shares in an IPO is typically done through a book-building process. This process involves the determination of the price range of the shares based on investor demand. Investors then bid for shares at a price within the price range, and the shares are allocated to the highest bidders. The allotment of shares in an IPO is a complex process that involves the consideration of several factors, such as investor demand, market conditions, and regulatory requirements.
Private Placement
Another example of allotment of securities by a company is a private placement. A private placement is the sale of securities to a select group of investors, such as institutional investors or high net worth individuals. Private placements are typically used by companies to raise capital quickly and without the need for regulatory compliance.
The allotment of securities in a private placement is typically done through negotiations between the company and the investors. The investors may be required to sign a confidentiality agreement and provide information about their financial status and investment objectives. The allotment of securities in a private placement is generally faster and less expensive than an IPO, but it is also less transparent and may not provide liquidity to existing shareholders.
Rights Issue
A rights issue is another example of allotment of securities by a company. A rights issue is the issuance of new shares to existing shareholders at a discounted price. This allows existing shareholders to maintain their proportionate ownership of the company and provides an opportunity for them to invest more in the company.
The allotment of shares in a rights issue is typically done through a pro-rata basis. This means that existing shareholders are given the right to purchase a specified number of shares at a discounted price in proportion to their existing shareholdings. The allotment of shares in a rights issue is a relatively straightforward process that involves the calculation of the number of shares to be issued and the determination of the discounted price.
Bonus Issue
A bonus issue is another type of allotment of securities by a company. A bonus issue is the issuance of free shares to existing shareholders based on their existing shareholdings. This allows the company to reward its existing shareholders without diluting their ownership.
The allotment of shares in a bonus issue is typically done on a pro-rata basis. This means that existing shareholders are given additional shares based on their existing shareholdings. The allotment of shares in a bonus issue is a straightforward process that involves the calculation of the number of shares to be issued and the distribution of the free shares to existing shareholders.
Convertible Securities
Convertible securities are another example of allotment of securities by a company. Convertible securities are securities that can be converted into equity shares at a later date. This provides investors with the opportunity to participate in the growth of the company while also providing the company with an alternative source of financing.
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