How to Issue and Allot Shares in a Private Limited Company

Issuing and allotting new shares is the primary method for private limited companies to raise capital from investors, reward employees, or bring in strategic partners. The process requires board approval, share valuation, ROC filing of Form PAS-3 within 15 days, and share certificate issuance within 2 months. Professional fees start at Rs 5,000 plus government filing charges. This guide covers all methods of share issuance -- rights issue, private placement, bonus shares, and preferential allotment -- with the exact steps, forms, timelines, and compliance requirements under the Companies Act, 2013.

What is Share Allotment?

Share allotment is the appropriation of a specific number of shares to an applicant (allottee) by the board of directors, creating a binding contract between the company and the new shareholder. Unlike share transfer (which involves existing shares changing hands), allotment creates new shares, increasing the company's issued and paid-up capital. The allotment is governed by Sections 39 to 42 and Section 62 of the Companies Act, 2013, and requires compliance with the Companies (Share Capital and Debentures) Rules, 2014.

When the board passes an allotment resolution, the allottee becomes a shareholder of the company with all associated rights: voting rights proportional to shareholding, right to receive dividends when declared, right to participate in further issues (rights issue), right to inspect statutory records, and right to a share in surplus assets during winding up. The allotment must be recorded in the company's register of members and reported to the ROC through Form PAS-3.

Methods of Share Issuance in Private Companies

Private limited companies can issue shares through four primary methods, each with distinct compliance requirements:

Rights Issue (Section 62(1)(a))

The simplest method for private companies to raise additional capital. Shares are offered to existing shareholders in proportion to their current holding. The company sends a letter of offer giving shareholders at least 15 days to accept. If any shareholder declines, their portion can be offered to other persons as the board decides. A rights issue requires only a board resolution (no special resolution) and is the fastest method, typically completing in 15 to 20 days.

Private Placement (Section 42)

The most common method for fundraising from external investors. Requires a special resolution, offer letter in Form PAS-4, separate bank account for application money, allotment within 60 days, and detailed compliance with Section 42 provisions. The 200-person annual limit (excluding QIBs and ESOP employees) must be tracked carefully. Non-compliance with private placement provisions attracts severe penalties: fine up to Rs 2 crore or the amount raised, whichever is lower.

Step-by-Step Share Allotment Process

The following steps apply to all methods of share issuance. Additional requirements for specific methods (private placement, bonus issue) are noted within each step.

Step 1: Check and Increase Authorized Share Capital

The company's authorized share capital (stated in the MOA) must be sufficient to cover all existing issued shares plus the proposed new shares. For example, if the authorized capital is Rs 10 lakh, current issued capital is Rs 8 lakh, and you plan to issue shares worth Rs 5 lakh, you must first increase the authorized capital to at least Rs 13 lakh.

Step 2: Obtain Share Valuation Report

Engage a registered valuer (registered with IBBI) to determine the fair market value (FMV) of shares. The valuation report is mandatory for allotment at premium, allotment to non-residents, and private placement. Common valuation methods: Discounted Cash Flow (DCF), Net Asset Value (NAV), Comparable Companies Multiple (CCM), and Price-to-Earnings (P/E) method. For allotment to non-residents, RBI mandates DCF or NAV as the valuation method under FEMA regulations. The valuation report is valid for 90 days from the date of issuance.

Step 3: Pass Board Resolution

Convene a board meeting with at least 7 days' notice (or shorter notice with consent of all directors). The board resolution must specify: number and class of shares to be issued, face value and premium (if any), names and details of proposed allottees, method of issuance (rights/private placement/bonus), source of consideration, and the purpose of the share issuance. The resolution must be passed by a majority of directors present at the meeting. File Form MGT-14 with the ROC within 30 days.

Step 4: Pass Shareholder Resolution (If Required)

A special resolution (75% majority) is required for: private placement under Section 42, preferential allotment under Section 62(1)(c), ESOP scheme under Section 62(1)(b), and issue of shares at a discount under Section 53. Convene an EGM with 21 clear days' notice or conduct a postal ballot. The resolution must specify maximum shares, price range, proposed allottees, and purpose. File MGT-14 within 30 days of passing the special resolution.

Step 5: Send Offer Letter and Collect Application Money

For private placement, send the offer letter in Form PAS-4 to identified allottees containing: company details and CIN, share details (number, face value, premium, total consideration), purpose of the issue, material risks, rights attached to shares, and the application deadline. For rights issue, send the letter of offer to existing shareholders giving 15 days to respond. Collect application money through banking channels (cheque, NEFT, RTGS) -- cash payments exceeding Rs 20,000 are prohibited under Section 269SS of the Income Tax Act.

Step 6: Pass Allotment Resolution at Board Meeting

After receiving the application money, convene a board meeting to pass the allotment resolution. The resolution must specify: exact number of shares allotted to each allottee, consideration received from each allottee, distinctive numbers of shares allotted, and the allotment date. The allotment date is the date of the board resolution (not the date of receiving money). For private placement, allotment must occur within 60 days of receiving application money. Record the resolution in the minutes book.

Step 7: File Form PAS-3 with ROC

File Form PAS-3 (Return of Allotment) with the ROC within 15 days of the allotment date. The form requires:

Mandatory attachments: board resolution for allotment, special resolution (if applicable), share valuation report, list of allottees with details, and bank statement confirming receipt of consideration. Affix the DSC of a director and the Compliance Professional (if appointed). Pay the filing fee based on the company's authorized capital.

Step 8: Issue Share Certificates and Update Statutory Records

Issue share certificates to each allottee within 2 months of the allotment date (Section 56(4)). Each certificate must be signed by two directors and bear the company's common seal (if adopted). Pay stamp duty on share certificates as per state regulations. Update the Register of Members (Form MGT-1) within 7 days of allotment. Update the company's Annual Return (MGT-7) to reflect the new shareholding pattern at the next filing. Maintain all allotment records for a minimum of 8 years.

Share Allotment Cost Breakdown

FEMA Compliance for Non-Resident Allotment

Allotting shares to NRIs, foreign nationals, or foreign companies requires additional compliance under the Foreign Exchange Management Act:

Common Mistakes in Share Allotment

1. Allotting Shares Beyond Authorized Capital

Companies sometimes allot shares exceeding the authorized capital stated in the MOA, making the allotment void. Always verify the available headroom (authorized capital minus issued capital) before any allotment. If insufficient, increase authorized capital through SH-7 filing before proceeding with the allotment.

2. Missing the PAS-3 Filing Deadline

The 15-day PAS-3 deadline is frequently missed, especially when the Compliance Professional is managing multiple filings. Late filing attracts additional fees that compound quickly (12x normal fee after 180 days). Set a reminder on the allotment date for PAS-3 filing within the first week.

3. Not Maintaining a Separate Bank Account for Private Placement

Section 42(6) requires application money received through private placement to be kept in a separate bank account until allotment. Companies that commingle private placement money with their operating accounts risk penalties and allotment challenges. Open a dedicated bank account before issuing the private placement offer letter.

Related Resources

• Private Limited Company Registration -- register a new company with share capital
• Annual Compliance for Private Limited -- ongoing filing requirements including MGT-7
• How to File MGT-14 for Board Resolutions -- mandatory filing for allotment resolutions
• First Board Meeting After Incorporation -- includes initial share allotment to subscribers
• How to Alter MOA/AOA -- required for authorized capital increase

Summary

Share issuance and allotment in a private limited company follows a structured process: verify authorized capital, obtain valuation, pass board/shareholder resolutions, collect application money, pass allotment resolution, file Form PAS-3 within 15 days, and issue share certificates within 2 months. The total cost ranges from Rs 5,000 to Rs 30,000 for simple allotments and Rs 15,000 to Rs 1 lakh+ when authorized capital increase is needed. Private placement requires the most compliance (special resolution, PAS-4 offer letter, 200-person limit, separate bank account), while rights issue is the simplest method for existing shareholder funding.