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Corporate and Other Laws · Prospectus and Allotment of Securities

Allotment of Securities and Return of Allotment (Section 39)

Updated 4 October 2026 · Fact-checked

Allotment is the company's acceptance of applications and the issue of securities to applicants. For a public offer, Section 39 allows allotment only after the minimum subscription in the prospectus is received, with application money of at least 5% of nominal value. The company then files a return of allotment with the Registrar.

Understand Allotment of Securities and Return of Allotment

When a company offers securities to the public through a prospectus, investors send applications with money. Allotment is the company's act of accepting these applications and appropriating securities to the applicants. Until allotment, the applicant is only an offeree. After allotment, a binding contract exists.

The law protects investors by controlling when a company may allot. Under Section 39(1), no allotment of securities offered to the public can be made unless the minimum amount stated in the prospectus has been subscribed, and the sums payable on application for that amount have been paid to and received by the company by cheque or other instrument. This is called minimum subscription.

Section 39(2) also fixes a floor on application money. The amount payable on application on every security must not be less than 5% of the nominal amount of the security, or such other percentage or amount as SEBI specifies by regulations. This stops a company from collecting a token amount and then claiming it has subscribed capital.

If the minimum amount is not subscribed and the application sum is not received within 30 days from the date of issue of the prospectus (or such other period as SEBI specifies), the amount received must be returned in the time and manner prescribed. Section 40 adds two more controls. The company must apply to a recognised stock exchange for permission to deal in the securities before making a public offer. All application money must be kept in a separate bank account in a scheduled bank. It can be used only for adjustment against allotment (where the exchange permission is in place) or for repayment if the company cannot allot.

After any allotment, a company with share capital must file a return of allotment with the Registrar under Section 39(4), in the manner prescribed. Failure to refund under sub-section (3) or to file the return under sub-section (4) attracts a penalty under Section 39(5). Section 42 has its own rules for private placement, which are separate and should not be mixed up with Section 39.

Key rules to remember

Minimum subscription (Section 39(1))
Allotment allowed only if: amount subscribed ≥ minimum amount stated in prospectus AND application sums for it received
Applies to securities offered to the public for subscription. Payment must be received by cheque or other instrument.
Minimum application money (Section 39(2))
Application money per security ≥ 5% of nominal amount
Or such other percentage or amount as SEBI specifies by regulations. Example: nominal ₹10 means at least ₹0.50 on application.
Time limit for minimum subscription (Section 39(3))
Minimum amount subscribed and application money received within 30 days from the date of issue of prospectus
Or such other period as SEBI specifies. The 30 days is the time to reach the minimum, not a refund period. If the minimum is not met within it, the amount received is returned in the time and manner prescribed.
Return of allotment (Section 39(4))
Whenever a company having share capital allots securities, it must file a return of allotment with the Registrar in the manner prescribed
Section 39(4) requires filing in the prescribed manner. It gives no number of days or form name, so take any period or form from the Rules and say so if you cite it.
Penalty for default (Section 39(5))
₹1,000 per day of default, or ₹1,00,000, whichever is less
Applies to default under sub-section (3) or (4). Liable: the company and every officer in default, for each default.
Stock exchange permission (Section 40(1))
Apply to one or more recognised stock exchanges BEFORE making the public offer
The prospectus must name the exchange(s) if it states that an application has been made (Section 40(2)).
Application money account (Section 40(3))
Separate bank account in a scheduled bank
Use only for adjustment against allotment (where permission to deal is granted) or for repayment where the company is unable to allot.
Penalty under Section 40(5)
Company: fine ₹5,00,000 to ₹50,00,000. Officer in default: fine ₹50,000 to ₹3,00,000
Imprisonment for officers was removed with effect from 21-12-2020.

How to solve Allotment of Securities and Return of Allotment questions

Use this order for any question on allotment. It helps you pick the right rule and write a conclusion that earns marks.

  1. 1Identify the type of issue. If it is a public offer through a prospectus, apply Sections 39 and 40. If it is private placement, Section 42 applies instead, so do not use Section 39 tests.
  2. 2Check minimum subscription. Compare the amount subscribed with the minimum stated in the prospectus, and check that the application sums for it were actually received.
  3. 3Check the application money. Is it at least 5% of the nominal amount (or the SEBI percentage)? Compute it in rupees.
  4. 4Check the timing. Was the minimum subscription received within 30 days from the date of issue of the prospectus? If not, the amount must be returned in the time and manner prescribed.
  5. 5Check Section 40 compliance: stock exchange application made before the offer, exchange named in the prospectus, and money kept in a separate scheduled bank account.
  6. 6Check the filing. Section 39(4) requires the return of allotment to be filed with the Registrar in the prescribed manner. Do not state a number of days unless the question gives it.
  7. 7State the consequence: refund, penalty under Section 39(5) or Section 40(5), and who is liable (company and officers in default).
  8. 8Write the answer in provision, facts, conclusion form: state the rule, apply it to the numbers, then conclude clearly.

Quickest way: Three-gate check for allotment questions

When to use it: Use for MCQs and for short written answers when time is tight.

  1. Gate 1, money: minimum subscription received? Application money at least 5% of nominal? If no, allotment cannot be made.
  2. Gate 2, place and time: stock exchange permission applied for and separate scheduled bank account used? Minimum raised within 30 days of prospectus issue?
  3. Gate 3, filing: return of allotment filed with the Registrar? If a question asks the penalty, recall ₹1,000 per day up to a maximum of ₹1,00,000.
  4. For MCQs, eliminate options that mix Section 42 numbers (60 days, 15 days, 12% interest, fifty persons) into a Section 39 question.
  5. For written answers, use three lines: rule with section number, application of facts with figures, one-line conclusion. Step marks come from naming the section and doing the arithmetic.

Common mistakes in Allotment of Securities and Return of Allotment

  • Applying Section 42 numbers (60 days, 15 days, fifty persons) to a public issue.

    Both sections deal with allotment and students blend the figures.

    Fix: Link Section 39 to public offers through a prospectus and Section 42 to private placement. Section 39 uses 30 days from the issue of the prospectus for reaching the minimum subscription.

  • Saying minimum subscription is 90% of the issue.

    A fixed percentage is easy to memorise, so students quote it without checking the section.

    Fix: Section 39(1) requires the minimum amount stated in the prospectus to be subscribed. The Act contains no fixed 90% figure. Write it that way.

  • Treating 5% as 5% of the issue price including premium.

    Students read 'amount' loosely.

    Fix: Section 39(2) says 5% of the nominal amount of the security. Calculate on face value only.

  • Forgetting that money must be kept in a separate scheduled bank account and used only for allotment adjustment or refund.

    This sits in Section 40, not Section 39, so it is missed.

    Fix: Whenever a question mentions application money, add the Section 40(3) point along with the stock exchange permission under Section 40(1).

  • Stating the wrong penalty, such as a flat ₹1,00,000 or the Section 40 fine for Section 39 defaults.

    Both sections have monetary penalties and the figures look alike.

    Fix: Section 39(5): ₹1,000 per day or ₹1,00,000, whichever is less, for each default. Section 40(5): fine of ₹5 lakh to ₹50 lakh on the company.

  • Forgetting that the return of allotment is required for every allotment by a company with share capital.

    Students link the return only to public issues.

    Fix: Section 39(4) says 'whenever a company having a share capital makes any allotment of securities'. It covers all allotments.

Worked examples

Example 1

ABC Ltd. issues a prospectus on 1 June for 10,00,000 equity shares of ₹10 each at par. The prospectus states the minimum amount to be subscribed as ₹60,00,000. Thirty days from the date of issue of the prospectus have now passed, and applications with money for only ₹45,00,000 have been received. Can ABC Ltd. allot shares? What must it do?

Show the solution
  1. Rule: Under Section 39(1), no allotment can be made unless the minimum amount stated in the prospectus has been subscribed and the application sums for it have been received.
  2. Facts: Minimum stated is ₹60,00,000. Amount received is ₹45,00,000.
  3. Shortfall: ₹60,00,000 − ₹45,00,000 = ₹15,00,000.
  4. Time: the 30 days from the date of issue of the prospectus under Section 39(3) have expired and the minimum has not been reached.
  5. Consequence: the amount received must be returned in the time and manner prescribed.
  6. Section 40(3): until it is returned, the ₹45,00,000 must sit in a separate account in a scheduled bank and be used only for repayment.

Answer: ABC Ltd. cannot allot because ₹45,00,000 is below the stated minimum of ₹60,00,000, and the 30-day period has expired. It must return the ₹45,00,000 in the prescribed time and manner. Under Section 39(5), default in this refund attracts a penalty on the company and every officer in default: ₹1,000 for each day of default or ₹1,00,000, whichever is less.

Example 2

XYZ Ltd. offers shares of nominal value ₹10 each at a premium of ₹5 per share. It fixes application money at ₹0.40 per share. Does this comply with Section 39? What is the least application money per share?

Show the solution
  1. Rule: Section 39(2) says the application money on each security must not be less than 5% of the nominal amount, or such other percentage or amount as SEBI specifies.
  2. Base: use the nominal amount, which is ₹10. Do not use the issue price of ₹15.
  3. Calculate: 5% of ₹10 = ₹0.50.
  4. Compare: ₹0.40 is less than ₹0.50.
  5. Conclusion on compliance: the application money is below the required floor.

Answer: No. The application money of ₹0.40 is below 5% of nominal value, which is ₹0.50. The least application money is ₹0.50 per share, unless SEBI regulations specify a different percentage or amount.

Exam tips

  • Write the section number with every rule. Section 39 for allotment conditions and return, Section 40 for stock exchange and separate account, Section 42 for private placement.
  • Do the arithmetic in rupees before concluding. Examiners award step marks for the 5% calculation and the shortfall calculation.
  • For MCQs, the usual traps are 5% of nominal versus issue price, and 30 days versus the 60 days of private placement. Read the option values carefully.
  • For the return of allotment, state that Section 39(4) requires it to be filed with the Registrar in the prescribed manner. Do not invent a number of days or a form number; use one only if the question gives it.
  • End every written answer with the consequence: refund, penalty and who is liable.

Practice questions from Prospectus and Allotment of Securities

Allotment of Securities and Return of Allotment: frequently asked questions

What is minimum subscription under Section 39?

It is the minimum amount stated in the prospectus that must be subscribed before any allotment is made. The application sums for that amount must also have been received by the company by cheque or other instrument. Without it, the company cannot allot securities offered to the public.

What happens if minimum subscription is not received in 30 days?

If the stated minimum is not subscribed and the application sum is not received within 30 days from the date of issue of the prospectus, the amount received must be returned. The refund must be made in the time and manner prescribed. Failure to refund attracts a penalty under Section 39(5).

What is the penalty for not filing the return of allotment?

Under Section 39(5), the company and every officer in default are liable to a penalty for each default. It is ₹1,000 for each day the default continues or ₹1,00,000, whichever is less.

Does Section 39 apply to private placement?

No. Section 39 deals with securities offered to the public through a prospectus. Private placement is governed by Section 42, which has separate rules on identified persons, allotment within 60 days and the return of allotment within 15 days.

Why must application money be kept in a separate bank account?

Section 40(3) requires all money received on application from the public to be held in a separate account in a scheduled bank. It can be used only to adjust against allotment, where the securities have been permitted to be dealt with on the named stock exchange, or to repay applicants if the company cannot allot. This protects investors until allotment is valid.