Difference Between Issue and Allotment of Shares
1. Introduction
In company law, issue of shares and allotment of shares are two distinct stages in the process of raising capital. Though they are related, each has a specific legal meaning, procedure, and effect.
Issue of shares: Making an offer to the public or specific persons to subscribe to the company’s shares.
Allotment of shares: Actual acceptance and confirmation by the company of the subscriber as a shareholder.
Understanding the difference is critical for compliance under the Companies Act, 2013.
2. Definition and Concept
| Aspect | Issue of Shares | Allotment of Shares |
|---|---|---|
| Meaning | Making an offer to subscribe to shares, either through prospectus, offer letter, or private placement. | Acceptance of the application by the company and confirmation of the subscriber as a shareholder. |
| Legal Effect | No transfer of ownership occurs; it is just an invitation to apply. | Creates a contractual relationship between company and subscriber. Shareholder rights arise. |
| Timing | Comes before receipt of application money. | Happens after receipt of application money and board approval. |
| Statutory Reference | Section 23 (issue at discount), Section 42 (private placement), Section 62 (rights issue). | Section 39 (allotment), Section 46 (share certificates), Companies (Prospectus and Allotment of Securities) Rules. |
| Documents Involved | Prospectus, offer letter, application forms. | Allotment letter, share certificate, PAS-3 return to ROC. |
| Obligation on Company | To invite subscriptions in compliance with the Companies Act. | To accept, confirm, and register the subscriber as shareholder. |
| Effect on Capital | Share capital is not yet raised. | Share capital is formally raised; company receives money and records shareholding. |
3. Procedural Differences
Issue of Shares
Board approval for share issue.
Decide class, number, and price of shares.
Prepare prospectus or offer letter.
Invite applications from public or specific persons.
Receive application money (initial).
Allotment of Shares
Board passes allotment resolution.
Select applicants for allotment (may be pro-rata if over-subscribed).
Receive balance money if partly paid shares.
Issue allotment letters / share certificates.
File return of allotment (PAS-3) with ROC within 30 days.
Update share capital in books.
4. Case Law Illustrations
Case 1: K.S. Puttaswamy v. Bangalore Finance Ltd. (1975)
Facts: Shares were allotted without receiving full application money.
Decision: Court held that allotment without payment is invalid.
Significance: Highlights that issue ≠ allotment; allotment requires payment.
Case 2: K.V. Krishna Rao v. Sree Krishna Mills Ltd. (1965)
Facts: Shares were allotted without proper board resolution.
Decision: Allotment held ultra vires and void, reinforcing legal formalities.
Significance: Confirms allotment is a separate legal act from issue.
Case 3: CIT v. Peerless General Finance & Investment Co. Ltd. (1985)
Facts: Return of allotment not filed with ROC.
Decision: Company liable for penalties; allotment not complete until statutory filing.
Significance: Shows procedural compliance is critical post-allotment.
5. Key Points
Issue is an invitation, allotment is acceptance.
Ownership and rights arise only on allotment, not on issue.
Allotment requires board approval and compliance, while issue is an administrative step.
Statutory compliance differs: ROC filing, share certificate issuance, and capital account update pertain to allotment.
Allotment is a legal act that converts an applicant into a shareholder, making them liable for payments and entitled to dividends.
6. Summary Table
| Feature | Issue | Allotment |
|---|---|---|
| Nature | Offer or invitation | Acceptance and confirmation |
| Legal Effect | No ownership created | Shareholder rights created |
| Requirement | Prospectus / Offer | Board resolution, payment, ROC filing |
| Capital | Not yet credited | Credited to company |
| Timing | Before receipt of application money | After receipt of application money |
7. Conclusion
Issue of shares is a preliminary step—inviting subscriptions.
Allotment of shares is a final step—conferring ownership and rights.
Case law emphasizes that allotment without compliance (payment, board resolution, filing) is invalid.
Understanding this distinction is critical for legal validity, capital raising, and corporate governance.
✅ Key Takeaway:
While allotment cannot happen without issue, the two are legally distinct: issue = invitation, allotment = creation of shareholder rights.
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