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Section 39: Allotment of securities by company

Companies Act • Official Statutory Text & Practice Guide

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Act 2013
Section 38 All 470 Sections of Companies Act Section 40
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Legal Commentary & Landmark Judgments: Section 39

Section 39 of the Companies Act, 2013 regulates the statutory conditions precedent for the allotment of securities by a company, mandating the receipt of minimum subscription, the segregation of application monies, strict timelines for refund upon undersubscription, and the mandatory filing of a return of allotment with the Registrar.

  • Condition Precedent of Minimum Subscription: No allotment of any securities of a company offered to the public shall be made unless the minimum amount stated in the prospectus has been subscribed and the sum payable on application—which must not be less than 5% of the nominal amount of the security or such other percentage as specified by SEBI—has been paid to and received by the company by cheque or other acceptable banking instrument.
  • Mandatory Refund Window and Interest Penalty: If the stated minimum subscription is not received within thirty days from the date of issue of the prospectus (or such period as prescribed by SEBI), the application money received must be refunded within fifteen days from the closure of the issue; default attracts liability to repay the money with interest at the rate of 15% per annum under Rule 11 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
  • Return of Allotment in Form PAS-3: Whenever a company having a share capital makes any allotment of securities, it must file with the Registrar a return of allotment in Form PAS-3 within thirty days, accompanied by a complete list of allottees, Board resolutions, and valuation reports where securities are allotted for consideration other than cash; defaults attract statutory fines under subsection (5).
Key Landmark Precedents:
  • Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd., AIR 1964 SC 250 : (1963) 33 Comp Cas 862 (SC): The Constitution Bench settled that 'allotment' denotes the appropriation out of previously unappropriated share capital of a company of a certain number of shares to a designated person; re-issuance of forfeited shares does not constitute an allotment under company law.
  • SEBI v. Sahara India Real Estate Corporation Ltd., (2013) 1 SCC 1: The Supreme Court ruled that an offer of optionally fully convertible debentures to more than fifty persons constitutes a deemed public offer, requiring strict compliance with Section 39 minimum subscription rules and escrow accounts; failure to file returns of allotment and comply with subscription mandates renders the collection illegal and triggers mandatory restitution with 15% interest.
  • Babu Lal Choukhani v. Western India Theatres Ltd., AIR 1952 Cal 65: The Calcutta High Court held that an application for shares is merely an offer which remains revocable by the applicant until communication of allotment; an allotment without communication or beyond a reasonable time lapses and cannot bind the applicant.
Courtroom Practice & Strategic Litigation Guidance:

In Section 241/242 oppression and mismanagement petitions, challenge clandestine allotments made without issuing statutory notices under Section 62 or without convening a valid Board meeting. Establish that Form PAS-3 was filed with fabricated attachments to alter shareholding ratios, seeking an interim injunction under Section 242(2)(g) to restrain the voting of such allotted shares.

Section 38 All 470 Sections of Companies Act Section 40