How to allot new shares

Share Allotment

ISSUES AND ALLOTMENT OF SHARES

In the course of formation of the company or consequent upon any expansion program, shares are issued for subscription. A public company after incorporation often issues prospectus inviting public for subscribing to the capital of the company. Banks collect share application money and send those to the company concerned. The applicants are allotted with shares on the basis of their application. If subscription surpasses the extent of the offer, the matter is generally settled in the following ways:

a) Full allotment is made to the applicants of minimum acceptable units. Allotment is made for the remainders on pro-rata basis. Refund warrant is issued for the balance amount. Or

b) Allotment is made by lottery or as prescribed by the Securities and Exchange Commission (SEC). Refund warrants are issued to the unsuccessful applicants.

Initial Public Offer or IPO

Business is like a wheel. It keeps moving, and as it moves, it expands. When it expands, it needs further fund to finance the expansion. This fund may be generated from: 1) internal mobilization of resources, 2) bank finance, 3) lease finance, 4) suppliers credit and 5) public floatation of shares etc. In our present context, we will focus on public flotation of shares.

EQUITY

This is the fund available to the organization in the form of capital. Equity, however, also includes the profit generated internally and remaining unpaid to the owners. So, equity consists of capital, reserves and undistributed surplus. When a company, generally the big industrial enterprise, with public limited status, cannot cope with the ever increasing demand of equity, say for working capital needs or for Corporate Laws and Practices 97 meeting the current commitments because of businesses expansion, it takes recourse to public flotation. This is a common, increasingly popular and widely accepted means of raising fund or capital from the market. There are two ways of raising capital from the market, viz. 1) by offering of shares, and 2) by offering of debentures.

Sale of shares: Shares of public limited companies are offered in the open market for buying by the public which is called public subscription. This is an open invitation to the public to participate in the ownership of the company and thereby taking the risk of profit or loss of the undertaking to the extent of their participation. This extent of participation is what is generally referred to by the phrase ‘limited liability’ of the company. The buyers of shares are then known as the shareholders of the company. They sit yearly in a meeting called the annual general meeting, appoint the directors of the company and engage them for running the business. This is the whole philosophy behind public participation in shares of a company.
Issue of debentures: Debenture is an instrument acknowledging a debt by the company. It can also be offered for sale in the open market. The amount borrowed from the public by the sale of debentures is refundable with interest over a period of time. Debentures are issued usually in bonds by a company and are offered by means of prospectus. The formalities for floatation of debenture in the market are the same as in the case of shares. However, in the case of debenture a trust is required to be created before the same is offered to the public. In the case of debenture issues, credit rating and worthiness of the company is an important factor.

FORMALITIES IN PUBLIC SUBSCRIPTION

The following are the steps required for making a public offer of shares:

Drafting of a prospectus.
Sanctioning of capital by the Securities and Exchange Commission beyond certain limit.
Approval of the prospectus by the SEC.
Filing of the prospectus with the Registrar of Joint Stock Companies.
Underwriting agreement with the underwriters.
Arrangement with bankers and Manger to the Issue.
Listing with stock exchange.
Publication of prospectus.
Data entry and summation of applications.
Board meeting for consideration of allotment.
Allotment under SEC guidelines, within a time limit.
Refund of excess subscription, if any, within a time limit.
Return of allotment to be submitted with the Registrar of Joint Stock Companies within a time limit.
Share certificates are to be issues within a time limit.

Underwriting

means a contract to take up a number of shares of the company in consideration of the payment of a certain amount of commission, in case the issue is not fully subscribed for. Those who enter into this contract are known as underwriters. As we have seen before, commission for underwriting must be allowed by the articles and the prospectus must disclose the rate of the underwriter’s commission.

ALLOTMENT RULES

The general rules and procedures governing allotment of share are as follows:

No allotment can be made before filing of the prospectus or a statement in lieu of prospectus with the Registrar of Joint Stock Companies [Sec. 138(1) and 141(1)].
Allotment is to be made on the basis of application on prescribed form. The acceptance of application should be absolute, unqualified and needs to be communicated to the applicants. Mere entry of the applicant’s name in the register is not sufficient to establish that allotment was made.
No allotment can be made unless applications to the extent of minimum subscription as stated in the prospectus have been received and at least 5% of the minimum subscription has been received in cash [sec.148 (1)].
All moneys received from the applicants must remain deposited in a scheduled bank. The money cannot be withdrawn before the receipt of the certificate of commencement [148(4)]
The company shall proceed to make allotment after closure of the subscription list (DSE Listing Regulations).
The work for dispatch of allotment letters after receipt of the applications must be completed within 40 days after the closure of subscription list (Listing Regulations).
In case the prospectus contains reference that application will be made for shares to be traded on the floor or recognized stock exchange, that applications is to be made soonest possible.
Within sixty days after allotment, the company must file with the Registrar a Return of Allotment according to section 151 in respect of shares allotted for cash and otherwise than for cash.

RENUNCIATION OF ALLOTMENT

Renunciation means giving up claim in favor of others. The allottee may be given the right of renounce his title to the shares in favor of his nominee. For this, the allottee will have to forward to the company a Letter of Renunciation, a printed copy of which is often attached to the letter of allotment or generally printed on the reverse side of the allotment letter. The renunciation is preceded by a letter of request from the nominee to the company requesting for enrollment if his name in the register of members in place of the original allottee. The company generally on its own allows a specified date for such renunciation, otherwise, the name of the original allottee will be entered on the register and the transfer after that date will follow the usual transfer procedures.

ISSUE OF SHARES AT A PREMIUM AND DISCOUNT

It is not always that shares of the company have to be issued at par value for subscription by the public. Depending on specific circumstances, a company may, subject to certain control and restrictions by the government, issue its shares at discount, i.e. at a price below the nominal value; or at a premium, that is at a price more than the actual value per share. There are specific provisions in the Companies Act for both situations which are discussed below:

ISSUE OF SHARE AT A PREMIUM

Shares may be issued at a premium that is at a price more than their face value. The Companies Act provides that a company may issue shares at a premium, but stipulates specific application of the premium fund (sec. 57). There is also no prohibition in the Act against issue of shares at differential premiums. But such premiums are to be transferred to a separate Share Premium Account and utilized for certain specific purposes, such as:

In paying up un-issued shares of the company to be issued to members as fully paid bonus shares.
In writing off the preliminary expenses.
In writing off the expenses of or the commission paid or discount allowed on any issue of shares or debentures of the company.
In providing for the premium payable on redemption on any redeemable preference shares or debentures of the company.
Subject to prior approval, for adjustment or amortization of intangible assets.

Shares issued at a premium and accepted by the public establish the strength and trust owned by the issuing company.

ISSUE OF SHARE AT A DISCOUNT

There is specific statutory provision for issuance of shares at a discount. Section 153 of the Companies Act provides that a company can issue shares at a discount, i.e., at a value lee than its face value if the following conditions are fulfilled:

Such issuance of shares at a discount must be Sanctioned by the court, Authorized by shareholders in general meeting.
The resolution of the shareholders must be specific, that is – It must fix the rate of discount This rate cannot exceed 10% as the maximum.
The company cannot issue shares at a discount before expiry of at least one year from the date of its commencement of its business.
The issuance of shares at a discount must be made within six months of the sanction of the court, or within such extended time as is allowed by the court. Corporate Laws and Practices 100
It is provided further in sub-section (2) of this section that the prospectus for the issue and the balance sheet issued subsequently must contain detailed particulars of the discount allowed, failing which a fine of Taka five hundred is prescribed in sub-section (3) of this section.

SHARE CERTIFICATE

Letters of allotments are supposed to be exchanged by definitive scrips called the share certificates. A share certificate is often referred to as ‘scrip’ (not script) by the trading circle, meaning an instrument containing shares. This term is in vogue particularly in the stock exchange.

The Act provides ninety days’ time after allotment by which period those certificates are to be completed and kept ready for delivery [sec. 185(1)]

Share certificates are issued only in pursuance of a Board resolution and in exchange of allotment letters. If the letter is lost or destroyed, sufficient indemnity in the form of an indemnity bond and other formalities, such as FIR at the police station and press announcement shall have to be made by the incumbent. If the share certificate is lost or destroyed the same procedures need to be followed. Before issuance of a duplicate certificate, it is a good practice to notify the Stock Exchange about the matter.

The share certificate should also conform to certain degree of standards so far as size, thickness and contents etc. are concerned. However, there is no such rule framed so far in Bangladesh in this regard. Based on the usage and practice, a share certificate should match and include the following:

It should look like a certificate of worth with a consecutive number.
Name of the company with monogram, authorized capital with nominal value.
Specification of the shareholder.
Number of shares, distinctive numbers and folio.
Embossed Common Seal of the company.
At least two authorized signatures.
Revenue stamp as per the Stamp Act (if required).

Share certificates should be delivered to the shareholders without incorporating the details of each certificate in the members’ register and in the scrip book. The best is to make out the computerized print.

SHARE WARRANTS

By virtue of section 46 of the Companies Act, a public limited company, limited by shares, if authorized by its articles may, in respect of fully paid shares, issue under its common seal, a share warrant stating that the bearer thereof is entitled to shares therein specified and may further provide for the payment of future dividends on the shares included in the warrants by means of coupons or otherwise.

It is to be noted that, only public companies may issue share warrants and that too on the fulfillment of certain conditions as stated below. A public company may issue share warrants under its common seal provided:

there is authority in the articles to issue them;
the shares are fully paid up.

Since share warrants entitle the bearer to the shares specified in it, and since the shares may be transferred by mere delivery of the share warrant, it follows that a share warrant, unlike a share certificate, is a negotiable instrument.

Section 50(1) provides that on the issue of a share warrant, the company must strike out of its register of members the name of the member and must enter the following particulars:

The fact of the issue of the share warrant;
the description of the shares included in the warrant, distinguishing each share by its number;
date of issue of the warrant.

RIGHT SHARES

Right shares are those shares which are issued after the original issue of shares, but having an inherent right of the existing shareholder to subscribe to these shares in proportion to their holdings. This right has been conferred on the equity shareholders by the Companies Act in section 155(1). This right has authorized the directors to issue right shares. The articles of the company may also include similar provisions. These shares can, however, be issued to the non-members when the existing shareholders renounce or do not accept the offer within a prescribed time limit. The issue of right shares must be within the limit of authorized capital of the company.

Generally right shares are issued to the existing shareholders at a concessive rate, that is when the prevailing market price of the shares are much above par they are offered to the existing shareholders at nominal value. Alternatively, if shares are sold in the market at par or even below the face values, right shares may be offered at a price lower than that.

Right issues are to be made as per SEC guidelines and listing regulations. According to regulation 22(1) of the DSE listing regulations, a listed company shall issue entitlement letters or right offers to all the shareholders within a period of forty five days from the date of re-opening of the share register of the company closed for this purpose.

Share certificates

The Act provides ninety days time after allotment by which period those certificates are to be complete and kept ready for delivery [sec. 158(1)].

Share certificates are issued only in pursuance of a Board resolution and in exchange of allotment letters. If the letter is lost or destroyed, sufficient indemnity in the form of an indemnity bond and other formalities, such as FIR at the police station and press announcement shall have to be made by the incumbent. If the share certificate is lost or destroyed the same procedures need to be followed. Before issuance of a duplicate certificate it is a good practice to notify the Stock Exchange about the matter.

The share certificate should also conform to certain degree of standard so far as size, thickness, format and contents etc. are concerned. However, there is no such rule framed so far in Bangladesh in this regard. Based on the usage and practice a share certificate should match and include the following:

It should look like a certificate of worth with a consecutive number.
Name of the company with monogram, authorized capital with nominal value.
Specification of the shareholder.
Number of shares, distinctive numbers and folio.
Embossed Common Seal of the company.
At least two authorized signatures.
Revenue stamp as per the Stamp Act (if required).

Share certificates should not be delivered to the shareholders without incorporating the details of each certificate in the members register and in the scrip book. The best is to make out the computerized print.

All blocks, forms, and documents in connection with the issue of share certificates and all blank certificates meant for future use should be kept in a safe custody with the Company Secretary or the Managing Director.

LIMITATION OF TIME FOR ISSUE OF CERTIFICATES (According to the act of SEC.-158):

(1) Every company shall, within ninety days after the allotment of any of its shares, debentures or debenture-stock, and within ninety days after the registration of transfer of any such shares, debentures or debenture-stock complete and have ready for delivery the certificates of all shares, debentures, and the debenture-stock allotted or transferred unless the conditions of issue of the shares, debentures or otherwise provide. debenture-stock

(2) If default is made in complying with the requirements of this section, the company, and also every officer of the company who is knowingly a party to the default shall be liable to a fine not exceeding five hundred taka for every day during which the default continues.

Reference: file:///Z:/NETWORK%20SERVER/Sajjad%20Hossain%20Sohag/Company%20Secretary/6665Corporate%20Laws%20Manual%20Final%202021.pdf