Allotment of Shares — explained: this guide covers what Allotment of Shares — means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
What Is Allotment of Shares?
Allotment of shares is the process by which a company creates and issues new shares to persons who have applied for them and paid the consideration. It is the formal acceptance by the Board of Directors of the application made by the proposed shareholder. After allotment, the applicant becomes a member (shareholder) of the company with all rights attached to the shares — voting, dividend, transfer, and participation in surplus on winding up.
Allotment is different from transfer: in allotment, NEW shares are created (increasing paid-up capital); in transfer, EXISTING shares change hands (no change in paid-up capital). Every allotment must be reported to ROC through Form PAS-3 within 30 days — failure to file attracts penalty and the allotment may be treated as irregular.
Types of Allotment
1. Allotment to Subscribers at Incorporation
When the company is incorporated, the subscribers to the MOA are deemed to have been allotted shares as mentioned in the MOA. No separate Board resolution or PAS-3 is required for this initial allotment — it happens automatically on incorporation. Share certificates must be issued to subscribers within 60 days of incorporation.
2. Rights Issue Allotment — Section 62(1)(a)
New shares offered to existing shareholders in proportion to their existing holding. Ordinary resolution sufficient. 15-30 day offer period. Shareholders who accept and pay: allotted shares. Unsubscribed shares: Board allots as it deems beneficial.
3. Preferential Allotment — Section 62(1)(c) read with Section 42
New shares offered to specific identified persons (angel investors, VCs, strategic partners). Special resolution required. Maximum 200 invitees per offer (private placement rules). Valuation by registered valuer mandatory. Entire consideration must be received before allotment. This is the most common route for startup fundraising.
4. ESOP Allotment — Section 62(1)(b)
Shares allotted to employees who exercise their stock options after the vesting period. Special resolution for ESOP scheme required. Allotment happens when the employee exercises the option and pays the exercise price.
5. Bonus Share Allotment — Section 63
Shares allotted FREE to existing shareholders from the company's reserves (capitalization of profits). No consideration received from shareholders. Authorized capital must be sufficient. Board and ordinary resolution required.
Step-by-Step Allotment Procedure (Preferential Allotment)
Step 1: Board Meeting — Propose the Allotment
Board passes resolution: (a) approving the allotment proposal, (b) determining the number of shares, price per share (face value + premium), and class of allottees, (c) recommending the proposal to shareholders for special resolution, (d) fixing date for general meeting.
If shares are issued at a premium: obtain valuation report from a registered valuer justifying the premium. For income tax purposes under Section 56(2)(viib) — the 'angel tax' provision — the premium must not exceed the fair market value determined by DCF or NAV method.
Step 2: General Meeting — Special Resolution
Pass special resolution (75% majority) at EGM or AGM under Section 62(1)(c). The explanatory statement must disclose: (a) objects of the issue (what the company will use the funds for), (b) total shares to be allotted, (c) price and basis of price (valuation method), (d) class of persons and number of allottees, (e) proposed time within which allotment will be made (must be within 12 months of special resolution), (f) interest of directors/promoters in the allotment.
Step 3: Private Placement Offer Letter — PAS-4
Issue Private Placement Offer Letter in Form PAS-4 to the identified allottees (maximum 200 per offer). The offer letter must be serially numbered and addressed to specific persons. It cannot be circulated publicly. Each allottee must apply in the prescribed application form and pay the full consideration by cheque/DD/banking channel (no cash).
Step 4: Receive Application Money
Allottees submit application forms with full payment (face value + premium). Money received must be kept in a separate bank account and cannot be used until allotment is complete. If allotment is not made within 60 days of receiving money: must be refunded within 15 days (otherwise interest at 12% per annum).
Step 5: Board Meeting — Approve Allotment
Board passes allotment resolution: "RESOLVED THAT pursuant to Section 62(1)(c) of the Companies Act, 2013 and the Special Resolution passed by members on , equity shares of Rs. each at a premium of Rs. per share, aggregating to Rs. , be and are hereby allotted to: ."
Step 6: File PAS-3 with ROC (Within 30 Days)
File Form PAS-3 (Return of Allotment) with ROC within 30 days of allotment. Attachments: (a) list of allottees with number of shares, price, and amount paid, (b) Board resolution for allotment, (c) special resolution, (d) valuation report (for allotment at premium), (e) compliance certificate by CA/CS, (f) PAS-4 offer letter. Fee: Rs. 200 (normal) — additional fee for late filing.
Step 7: Issue Share Certificates (Within 60 Days)
Issue share certificates to allottees within 60 days of allotment (2 months). For demat shares: credit shares to allottees' demat accounts through the depository (NSDL/CDSL) within the same period. Share certificate must contain: company name, CIN, certificate number, distinctive numbers, number of shares, face value, paid-up value, and be signed by 2 directors.
Step 8: Update Register of Members
Enter allottee details in the Register of Members (Section 88): name, address, number of shares, distinctive numbers, date of allotment, amount paid, and demat account details (DP ID, Client ID).
Section 56(2)(viib) — Angel Tax on Share Premium
If a private company issues shares at a premium to a RESIDENT (Indian), and the premium exceeds the fair market value of the shares: the EXCESS premium is taxed as income of the COMPANY (not the investor) under Section 56(2)(viib) at 30% + surcharge + cess. This is the infamous 'angel tax' provision.
How to avoid angel tax:
(a) Get a valuation from a registered valuer using DCF or NAV method under Rule 11UA
(b) Issue shares at or below the fair market value determined in the valuation report
(c) Maintain detailed documentation — business plan, financial projections, valuation assumptions
(d) Exemptions: shares issued to non-residents (FEMA pricing), specified investors (SEBI-registered Category I AIF, VC funds), and DPIIT-recognized startups (exempt from angel tax entirely since 2024 amendment)
Common Allotment Mistakes to Avoid
1. Allotting beyond authorized capital: Verify authorized capital is sufficient BEFORE allotment. If not: first increase through SH-7, then allot.
2. Not obtaining valuation for premium: Every allotment at premium (above face value) in a private company needs a valuation report. Without it: angel tax risk.
3. Cash payment: All consideration must be received through banking channels (cheque, DD, NEFT, RTGS). Cash is prohibited under Section 42(6).
4. Exceeding 200 invitees: If offer is made to more than 200 persons: becomes a public offer requiring SEBI-compliant prospectus. Count invitees (not allottees) — even persons who decline count toward the 200 limit.
5. Late PAS-3: File within 30 days without fail. Late filing triggers additional fees that can be 12x the normal fee for delays beyond 180 days.