Companies Act Section 39

Companies Act Section 39: Allotment of Securities by Company

1. Conditions for Allotment of Securities

Section 39 of the Companies Act establishes specific conditions that must be met before a company can allot securities that have been offered to the public for subscription. 

The primary purpose of this provision is to ensure that companies do not prematurely allot securities without securing the necessary financial backing and support from investors. 

Key Conditions:

Minimum Subscription Requirement: 

Before a company can make any allotment of securities to the public, it must ensure that the minimum amount specified in the prospectus has been fully subscribed. 

This requirement acts as a safeguard to ensure that the company has enough financial commitment from the public to proceed with the securities issue.

The minimum subscription amount is a critical threshold. 

It represents the minimum sum of money that the company must raise in order for the securities issue to be viable. 

If this threshold is not met, the company cannot proceed with the allotment, and the securities offering must be reconsidered.

Payment of Application Money: 

Additionally, the sums payable on application for the minimum subscription amount must have been paid to and received by the company. 

The payment must be made either by cheque or another approved financial instrument. 

This provision ensures that the company has actually received the funds promised by investors before moving forward with the allotment process.

2. Minimum Application Amount

The Companies Act also specifies the minimum amount that investors must pay when applying for securities. 

This is designed to provide a fair and consistent approach to the application process.

Five Percent Minimum: 

The amount payable upon application for each security must be no less than five percent of the nominal value of the security. 

This five percent minimum serves as a benchmark to ensure that investors are making a meaningful financial commitment when applying for securities.

Regulatory Modifications: 

The Securities and Exchange Board of India (SEBI) has the authority to modify this minimum percentage or amount. SEBI may issue regulations to specify a different percentage or amount if it deems necessary based on the nature of the securities market or the specific offering. 

This provision gives SEBI flexibility to adapt to changing market conditions and investor needs.

3. Refunds for Insufficient Subscription

If the minimum subscription amount is not reached, or if the application funds are not collected within a specific timeframe, the company is required to refund the money to the applicants.

Timeframe for Subscription: 

If the company fails to receive the minimum subscription amount within thirty days from the date of the prospectus, or within another period specified by SEBI, the securities cannot be allotted, and the offering must be deemed unsuccessful. 

This timeline ensures that the process moves forward efficiently and that investors are not left in limbo.

Refund Obligations: 

In such cases, the company is obligated to return the application money to the applicants. 

The refund must be made within a prescribed period and in the manner specified by regulations. 

This is crucial for investor protection, as it ensures that investors are not unfairly penalized or left without their funds if the securities issue does not proceed.

4. Return of Allotment

Once a company with share capital has successfully allotted securities, it is required to submit a formal report known as a Return of Allotment to the Registrar.

Filing the Return: 

The return must be filed in the prescribed manner and contain details of the securities allotted, including the number of securities issued and the names of the allottees. 

This filing serves as an official record of the allotment and ensures transparency in the company's shareholding structure. 

The return of allotment is important because it allows regulatory authorities and other interested parties to verify that the securities allotment has been conducted in accordance with the law and the terms set out in the prospectus.

5. Penalties for Non-Compliance

The Companies Act imposes penalties on companies and their officers if they fail to comply with the requirements outlined in this section, particularly those related to the return of allotment and refunds for insufficient subscriptions.

Failure to Refund: 

If the company does not return the money to applicants within the prescribed time after failing to meet the minimum subscription amount, both the company and any officer responsible for the default are subject to penalties. 

This provision holds those in charge accountable for ensuring timely refunds to investors.

Failure to File the Return of Allotment: 

Similarly, if the company fails to file the return of allotment with the Registrar, the company and its officers are liable for penalties. 

The law ensures that companies adhere to the regulatory framework and maintain accurate records of securities transactions.

Specific Penalties: 

The penalties for default are clearly defined. For each day that the default continues, the company and its officers are liable to pay a fine of either:

One thousand rupees per day, or

A maximum of one lakh rupees, whichever amount is lower.

This structured penalty system emphasizes the importance of compliance while capping the total fine to prevent disproportionate financial consequences for prolonged, unintentional non-compliance.