Allotment Of Shares – Unlisted Companies – Critical Aspects

In the changed landscape of Company Law, we have thought it fit to cover the critical aspects of allotment of shares, its related regulations under Foreign Exchange Management Act, 1999 vis-à-vis Companies Act, 2013 read with rules made there-under. For keeping the topic simple and useful, we have listed out relevant provisions of respective law 

Foreign Exchange Management Act, 1999 read with FEM (Transfer or Issue of Security by a person resident in India) Regulations, 2000 [Notification No. 20/2000], (as amended from time to time), normally referred as FEMA FDI Regulations, Foreign Investment is prohibited in the following sectors3:

Sl.	SECTORS	POLICY	NIC CODE-
No.			20084
1.	Lottery Business including Government/private lottery, online	Prohibited	92009
	lotteries, etc.
2.	Gambling and Betting including casinos etc.	Prohibited	92009
3.	Chit funds	Prohibited	64990
4.	Nidhi company	Prohibited	64990
5.	Trading in Transferable Development Rights (TDRs)	Prohibited	66110
6.	Real Estate Business or Construction of Farm Houses	Prohibited	68200
7.	Manufacturing of cigars, cheroots, cigarillos and cigarettes, of	Prohibited	12001-
	tobacco or of tobacco substitutes		12009
8.	Activities/sectors not open to private sector investment e.g.	Prohibited	35104,
	Atomic Energy and Railway Transport (other than permitted		49110,
	activities mentioned in para 6.2).		49120

Note: Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

Process flow under the FEMA and the Companies Act, 2013: 

1. Board Approval: Convening of Board Meeting to consider issue of shares to Investor and calling of EGM for obtaining approval from Members (Section 42 read with Rules made there under) 

2. Valuation Report:

1. The company has to obtain valuation report from a Chartered Accountant to arrive at the value of shares proposed to be issued
2. In case of listed company the valuation >= the value decided under SEBI regulations
3. In case of Unlisted Companies, the valuation has to be done as per internationally recognized method of valuation (RBI A. P. (DIR Series) Circular No. 4, dated 15/07/2014 and for justification of issue price, pursuant to provision to Sub rule (2) 

(a) of Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 

3. Intimation to ROC: The company shall File Form MGT-14 with ROC within 30 days of Board Resolution
4. Shareholders Meeting:

 

1. The company needs to call General Meeting (EGM/AGM) to obtain the approval of members by way of special resolution
2. The company shall File Form MGT-14 with ROC within 30 days of Shareholder approval

 

5. Letter of Offer (LOO): The Board has to approve Letter of Offer (in PAS-4) along with share application (serially numbered) to be sent to the investor(s). The number of proposed offer to the investors cannot exceed 200 persons aggregate in a FY. 

6. Filing of LOO with ROC: Company has to prepare the details/record of Letter of Offer (LOO) in Form PAS-5, and file the same with ROC along with the LOO, within 30 days of circulation of LOO. The value of such offer or invitation per person shall be with a minimum investment size of 20,000/- of face value of the securities

 

 

7. Open Escrow Bank Account: The company has to open separate bank account (escrow account) to receive the proposed subscription and can adjust such money only either for allotment of shares or for refund of money

 

8. Remittance: The investor remits the amount into the Company in eligible currency

 

9. Intimation to RBI:

 

1. The company shall intimate RBI through AD within 30 days of remittance

 

2008. The intimation to be made in Annexure II of Circular 44 dated 30/05/2008. The said annexure has been attached as Annexure 5 to DIPP Circular 1/2014 and Annexure 6 to RBI Master Circular dated 01/07/2014

 

10. KYC:

 

1. The company needs to facilitate the AD to obtain KYC information of the remitter from their counterpart bank

 

2008. The KYC format is prescribed vide Annexure III of Circular 44 dated 30/05/2008. The said annexure has been attached as Annexure 6 to DIPP Circular 1/2014 and Annexure 7 to RBI Master Circular dated 01/07/2014

 

11. UIN:

 

1. RBI upon receipt of the intimation allots Unique Identification Number (UIN) for each such remittance and intimates the company

 

1. This UIN has to be quoted at the time of filing the FC-GPR / refund of the money

 

 

12. Allotment / Refund: The company shall allot Shares / CCPS / CCD within 60 days⁵ of the remittance failing which the money shall be refunded within 15 days thereafter (Section 42 of Companies Act, 2013 read with rules made there under)

 

 

13. PAS-3: Return of allotment is required to be filed with the ROC within 30 days in Form PAS-3, along with the prescribed details/information[Filing pursuant to Sec. 42(9) and Rule 14

 

• of the Companies (Prospectus and Allotment of Securities) Rules, 2014]
• Though it is 180 days as per Proviso to Paragraph 8 (ii) of Schedule 1 FEM (Transfer or Issue of Security by a person resident in India) Regulations, 2000 [Notification No. 20/2000], (as amended from time to time), the time stands reduced to 60 days due to rule of Harmonious Construction. 

 

14. Form FC-GPR:

 

1. The company after allotting the shares/ CCPS/CCD shall file form FC-GPR with AD who have received the remittance

 

2014. The intimation to be made in Annexure I of Circular 102 dated 11/02/2014. (Previous format has been attached as Annexure 1 to DIPP Circular 1/2014 and Annexure 8 to RBI Master Circular dated 01/07/2014) 

Intimation from RBI: Upon receipt of the Form FC-GPR RBI after scrutiny of the form, allots registration no. for FC-GPR which shall be used at the time repatriation by the investor

This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.