Allotment of Securities by a Company

Section 23: Prohibition on issue of shares at a discount – It prohibits companies from issuing shares at a discount, which means that a company cannot issue shares at a price. That is less than the face value of the shares or at price i.e., lower than the value determined by a registered valuer. The purpose of this provision is to protect the interests of the shareholders of the company by ensuring that they receive fair value for their investment.

The section also provides that any shares issued in contravention of this provision shall be void, and the company and its officers who are responsible for the issuance of such shares shall be liable to pay a penalty. The penalty for the contravention of this provision can be up to five times the amount of the discount allowed or the amount of the gain, whichever is higher.

Section 26: Matters to be stated in the prospectus or statement in lieu of prospectus- It specifies the matters that must be mentioned in a prospectus or a statement in lieu of prospectus. It is a document that a company must file with the ROC before making a public offer of securities. The section requires the prospectus or statement in lieu of prospectus to contain the following information:

• The name and registered office address of the company issuing the securities
• The objectives and details of the project for which the securities are being issued
• The details of the securities being offered, including their nature, number, and price
• The terms and conditions of the issue of the securities
• The minimum subscription amount for the securities being offered
• The details of the lead manager, underwriters, and brokers to the issue, if any
• The details of the auditors, bankers, and legal advisors to the issue, if any
• The details of the directors, promoters, and key managerial personnel of the company
• The details of the company’s shareholding pattern and the names of the significant shareholders
• The details of the company’s financial performance, including its profits, losses, and assets and liabilities
• The details of any pending litigation or regulatory proceedings against the company or its directors
• The details of any material changes in the company’s affairs since the date of the last audited financial statements
• Any other information that may be necessary for investors to make an informed decision about the investment.

The purpose of this provision is to ensure that investors are provided with adequate and accurate information about the company and the securities being offered, to enable them to make an informed investment decision.

Section 31: Shelf prospectus- It provides for the issuance of a shelf prospectus by a company. A shelf prospectus is a kind of prospectus that permits a company to offer and issuance of securities to the public on an ongoing basis, without the need for filing a new prospectus for each issue.

According to this section, a company can file a shelf prospectus with the ROC having all the significant information mentioned u/s 26. The shelf prospectus is valid for a period of one year from the date of its filing with the ROC.

If the company decides to make a public offer of securities during the validity period of the shelf prospectus, it can do so by filing a prospectus supplement with the ROC. The prospectus supplement contains the specific details of the new offer, such as the number of securities being offered, the issue price, and the terms and conditions of the offer.

Section 32: Red herring prospectus- It defines the term red herring prospectus. It is a preliminary prospectus filed by a company with the ROC and SEBI before making a public offer of securities. It contains all the significant information about company and the securities being offered, except for the details of the price and the no. of securities being offered.

The red herring prospectus is so called because it contains a prominent statement on the cover page in red ink that states that the information contained therein is incomplete and subject to change.

The purpose of a red herring prospectus is to provide investors with preliminary information about the company and the securities being offered, and to generate investor interest in the offer. Once the price and the number of securities to be offered have been finalized, a final prospectus is filed with the ROC and SEBI, which contains all the details of the offer, including the issue price and the number of securities being offered.

Section 33: Issue of securities through prospectus- It deals with the issue of securities by a prospectus. A prospectus is a document that gives investors with all the relevant information about the company and the securities being offered, likewise the price, no. of shares, terms and conditions of the offer, and other necessary details.

As per this section, a company cannot issue securities to the public unless a prospectus has been filed with the ROC and the SEBI. The prospectus must comply with all the requirements set out in Section 26 of the Act, which outlines the information that must be included in the prospectus.

The prospectus must be dated and signed by the company’s directors, and must be filed with the ROC and SEBI at least three days before the securities are offered to the public. The prospectus must also be published in at least one English language newspaper and one regional language newspaper in the place where the company’s registered office is situated.

The prospectus must be accompanied by an application form that investors can use to apply for the securities being offered. The application form must contain all the necessary details, such as the investor’s name and address, the number of securities applied for, and the amount of money being paid.

Section 42: Private placement of securities- It handles with the private placement of securities, which means to offer and sale of securities by a company to a select group of persons, rather than to the public at large. According to this section, a company can form a private placement of securities, subject to certain conditions. These conditions are as:

• The private placement must be made only to persons who have been identified by the company’s board of directors.
• The number of persons to whom the securities are being offered cannot exceed 200 in a financial year.
• The offer must be made only to persons who are capable of evaluating the risks and merits of the investment, and who are not related to the promoter or director of the company.
• The company must issue a private placement offer letter, which must contain all the relevant details about the offer, including the number and price of the securities being offered, the terms and conditions of the offer, and the risks associated with the investment.
• The company must obtain the prior approval of its shareholders through a special resolution, which must be passed at a general meeting.
• The company must file a return of allotment with the ROC within 15 days of the allotment of securities.
• The company cannot make a public announcement of the private placement offer.

The minimum investment amount for each investor and the mode of payment for the subscription of securities must be specified in the private placement offer letter. The private placement offer cannot be withdrawn after it has been made.

Section 62: Further issue of capital- It deals with the further issue of capital by a company, which means that the issuance of shares by a company to increase additional funds after the initial issuance of shares at the time of incorporation or during subsequent fundraising rounds. Under this section, a company can make a further issue of capital by way of a rights issue or a preferential allotment. The key provisions of Section 62 are as follows:

• Approval of shareholders: A company must obtain the approval of its shareholders through a special resolution passed at a general meeting, before making a further issue of capital.
• Rights issue: A company can make a rights issue of shares to its existing shareholders in proportion to their existing shareholding. The price of the shares must not be less than the price determined by a registered valuer.
• Preferential allotment: A company can make a preferential allotment of shares to any person(s) or group of persons, subject to certain conditions. The price of the shares must not be less than the price determined by a registered valuer.
• Issue of shares to employees: A company can issue shares to its employees under a scheme of employee stock option or employee stock purchase, subject to certain conditions.
• Approval of the board: The further issue of capital must be approved by the board of directors of the company.
• Allotment within 60 days: The allotment of shares must be made within 60 days of receipt of the application money.
• Filing of return of allotment: The company must file a return of allotment with the ROC within 30 days of the allotment of shares.

Section 71: Debentures- It deals with issuance of debentures by a company. Debentures are debt instruments issued by companies to raise funds from the public or financial institutions. Debenture holders are creditors of the company and have a right to receive interest and principal payments.