Corporate and Other Laws · Share Capital and Debentures

Issue of Shares: Prospectus and Allotment (Sections 25, 26 and 39)

Updated 4 October 2026 · Fact-checked

A public company that offers shares to the public must issue a dated, signed prospectus filed with the Registrar (Section 26). It can allot shares only after the stated minimum amount is subscribed and application money is received (Section 39), then it must file a return of allotment with the Registrar.

Understand Issue of Shares: Prospectus and Allotment

A prospectus is the document through which a public company invites the public to subscribe to its securities. Because the public relies on it, the law fixes what it must contain, who must sign it and when it stops being valid.

Section 26 deals with the prospectus. It must be dated and signed, and it must state the information and financial reports specified by SEBI in consultation with the Central Government. It must also carry a declaration that the Act's provisions are complied with and that nothing in it is contrary to the Companies Act, the Securities Contracts (Regulation) Act, 1956 or the SEBI Act, 1992 and their rules and regulations. The date shown in the prospectus is deemed to be its date of publication.

Before the prospectus is issued, a copy signed by every person named as a director or proposed director (or by his duly authorised attorney) must be delivered to the Registrar for filing. The prospectus must say on its face that a copy has been so delivered, and must specify the documents attached or refer to statements that specify them. If it includes an expert's statement, the expert must not be, and must not have been, engaged or interested in the formation, promotion or management of the company. The expert must also have given written consent and not withdrawn it before the copy goes to the Registrar. The prospectus must state this. A prospectus is not valid if issued more than ninety days after the date the copy was delivered to the Registrar.

Section 25 stops companies from avoiding these rules through an offer for sale. If a company allots or agrees to allot securities with a view to offering them for sale to the public, the document making that offer is deemed to be a prospectus. Unless the contrary is proved, it is evidence of such a purpose if the offer for sale was made within six months after allotment or agreement to allot, or if the whole consideration had not been received when the offer was made.

Section 39 deals with allotment. No allotment can be made out of a public offer unless the minimum amount stated in the prospectus has been subscribed and the application sums for it have been paid to and received by the company by cheque or other instrument. The company must also file a return of allotment with the Registrar after any allotment of securities.

Key rules to remember

Prospectus form (Section 26(1)): Prospectus = dated + signed + SEBI-specified information and financial reports + compliance declaration; The date shown is deemed to be the date of publication.
Filing before issue (Section 26(4)): Copy signed by every director or proposed director (or authorised attorney) → delivered to Registrar on or before date of publication; No prospectus may be issued without this.
Validity of prospectus (Section 26(8)): Invalid if issued more than 90 days after copy is delivered to Registrar; Counted from delivery of the copy under Section 26(4).
Expert's statement (Section 26(5)): Expert must be independent (not engaged or interested in formation, promotion or management) + written consent not withdrawn before delivery to Registrar; The prospectus must include a statement that the expert is independent, has given written consent and has not withdrawn it.
Penalty for defective prospectus (Section 26(9)): Company: fine ₹50,000 to ₹3,00,000. Every person knowingly a party: fine ₹50,000 to ₹3,00,000; Under the text provided, the penalty is a fine only; the earlier imprisonment words have been omitted.
Minimum subscription (Section 39(1)): No allotment until stated minimum amount subscribed AND application sums received by cheque or other instrument; The minimum amount is the one stated in the prospectus.
Application money (Section 39(2)): Application money ≥ 5% of nominal amount of the security (or other percentage or amount specified by SEBI); This is a floor, not a fixed amount.
Refund trigger (Section 39(3)): Minimum not subscribed and application sum not received within 30 days from date of issue of prospectus (or other SEBI period) → amount received must be returned; Until the 30 days lapse, allotment is simply barred. Once the period lapses, refund is due within the time and manner prescribed.
Return of allotment and default penalty (Section 39(4) and (5)): File return of allotment with Registrar. Default under (3) or (4): penalty ₹1,000 per day of default, or ₹1,00,000, whichever is less; Applies to the company and every officer in default, for each default.
Offer for sale (Section 25): Offer-for-sale document = deemed prospectus. Evidence of intent: offer within 6 months of allotment, or full consideration not yet received; The evidence can be rebutted if the contrary is proved. Signing: two directors of the company, or not less than half of the partners of a firm.

How to solve Issue of Shares: Prospectus and Allotment questions

Use this order for any question on public offer of shares. It keeps your answer in the provision-facts-conclusion format.

1Identify the stage: is the question about the prospectus (contents, filing, validity), an offer for sale, or allotment?
2State the provision in plain words with the section number, for example Section 26 for prospectus and Section 39 for allotment.
3List the facts that matter: dates, amounts subscribed, minimum amount stated, who signed, the expert's position.
4Test each fact against the rule. For dates, count the days. For money, compute the percentage.
5For allotment questions, check both parts of Section 39(1): minimum amount subscribed and application sums received by cheque or other instrument.
6If the rule is breached, state the consequence: invalid prospectus, refund of money, or a fine or penalty with the correct range.
7Write a one-line conclusion that answers the question asked.

Quickest way: Checklist method for MCQs and written answers

When to use it: Use it when time is short, especially for scenario MCQs with dates, amounts and numbers.

Underline the numbers in the question. The key ones are 90 days, 30 days, 5%, 6 months, ₹50,000 and ₹3,00,000.
Match each number to its rule: 90 days to validity, 30 days to refund trigger, 5% to application money, 6 months to offer for sale.
In an MCQ, eliminate options that mix up these numbers. Among options with the right number, check the word: application money is a minimum, not a maximum.
For fines, remember the fine is a range with both a lower and an upper limit. An option that gives only a ceiling is incomplete.
In a written answer, use three short blocks: Provision, Facts applied, Conclusion. Mention the section number in the first block to earn the step mark.

Common mistakes in Issue of Shares: Prospectus and Allotment

Treating the 90 days as running from the date of the prospectus.
Students link validity to the prospectus date because that is the date they see on the document.
Fix: Remember it runs from the date the copy is delivered to the Registrar under Section 26(4).
Saying the 30-day period for refund runs from the closing of the issue, or that refund is due the moment the minimum is missed.
Students assume the period starts when subscription ends, or ignore the 30-day window.
Fix: Section 39(3) counts thirty days from the date of issue of the prospectus, or such other period as SEBI specifies. Until then allotment is barred. If the minimum is still not subscribed when the period lapses, the amount must be returned in the prescribed time and manner.
Writing that application money must be exactly 5% of nominal value.
The figure 5% is memorised without the words 'not less than'.
Fix: Write that it must not be less than 5% of the nominal amount, or such other percentage or amount as SEBI specifies.
Thinking minimum subscription is only about shares applied for, ignoring payment.
The phrase is read as applications received only.
Fix: State both conditions: the stated minimum has been subscribed and the sums payable on application have been paid to and received by the company by cheque or other instrument.
Stating that persons knowingly a party to a defective prospectus face imprisonment up to three years. The imprisonment was omitted w.e.f. 21-12-2020 and only a fine now applies.
Old notes or older versions of the law are used.
Fix: Use the current text: fine of ₹50,000 to ₹3,00,000 on the company and on every person knowingly a party to the issue. Revise from updated material.
Applying Section 26(1) contents rules to a rights issue to existing members.
Students forget the exceptions in Section 26(2).
Fix: Remember Section 26(1) does not apply to an issue to existing members or debenture-holders, or to securities in all respects uniform with those already issued and dealt in or quoted on a recognised stock exchange.

Worked examples

Example 1

Moonrise Ltd, a public company, delivered a copy of its prospectus, signed by all its directors, to the Registrar on 1 March. It issued the prospectus to the public on 15 June of the same year. Is the prospectus valid? State the provision.

Show the solution

Provision: under Section 26(8), a prospectus is not valid if it is issued more than ninety days after the date on which a copy is delivered to the Registrar under Section 26(4).
Facts: delivery on 1 March; issue on 15 June.
Count the days: 1 March to 31 March is 30 days; April is 30 days, making 60; May is 31 days, making 91; June 1 to June 15 adds 15, making 106 days after 1 March.
Compare: 106 days is more than 90 days.
Conclusion: the prospectus is not valid, and issuing it contravenes Section 26. The company and every person knowingly a party to the issue are liable to a fine of ₹50,000 to ₹3,00,000 each.

Answer: The prospectus is not valid because it was issued 106 days after delivery to the Registrar, which exceeds the 90 days allowed under Section 26(8).

Example 2

Starlight Ltd offers 10,00,000 shares of ₹10 each to the public. The prospectus states the minimum amount as ₹60,00,000. Thirty days have passed from the date of issue of the prospectus, and only ₹45,00,000 has been subscribed and received as application money. Can the company allot the shares? What must it do?

Show the solution

Provision: 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 have been paid to and received by the company by cheque or other instrument.
Facts: minimum stated is ₹60,00,000; subscribed and received is ₹45,00,000; thirty days have passed from the date of issue of the prospectus.
Compare: ₹45,00,000 is less than ₹60,00,000, a shortfall of ₹15,00,000. Allotment is therefore barred.
Refund rule: under Section 39(3), if the stated minimum has not been subscribed and the application sum is not received within thirty days from the date of issue of the prospectus (or such other period as SEBI specifies), the amount received must be returned within the time and manner prescribed. Here the thirty days have lapsed, so the refund obligation has arisen.
Consequence of default: under Section 39(5), the company and its officer in default are liable to a penalty of ₹1,000 for each day the default continues or ₹1,00,000, whichever is less, for each default.
Conclusion: allotment is not permitted; the company must return the ₹45,00,000 in the prescribed time and manner.

Answer: Starlight Ltd cannot allot the shares. As the thirty days have lapsed without the minimum being subscribed, it must return the ₹45,00,000 within the prescribed time and manner, failing which the company and officers in default face a penalty of ₹1,000 per day up to ₹1,00,000 for each default.

Exam tips

Learn the numbers as a set: 90 days (validity), 30 days (refund trigger), 5% (application money), 6 months (offer for sale), ₹50,000 to ₹3,00,000 (fine). Most MCQs test one of these.
In scenario questions, count dates carefully and write the count in your answer. Step marks go to the working.
Always write both limbs of minimum subscription: subscribed and received. Examiners look for both.
Mention the exceptions in Section 26(2) when the question involves existing members or shares uniform with listed shares.
Check for the word 'knowingly' in the penalty. The fine on persons applies to those knowingly a party to the issue.

Practice questions from Share Capital and Debentures

Issue of Shares: Prospectus and Allotment in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Issue of Shares: Prospectus and Allotment: frequently asked questions

What is the minimum subscription under the Companies Act, 2013?

It is the minimum amount stated in the prospectus. Under Section 39(1), no allotment can be made until that amount has been subscribed and the sums payable on application for it have been paid to and received by the company by cheque or other instrument.

What is the minimum application money on a share?

Section 39(2) says it must not be less than five per cent of the nominal amount of the security, or such other percentage or amount as SEBI specifies by regulations. It is a minimum, so a company may ask for more.

When must a company file a return of allotment?

Whenever a company having a share capital makes any allotment of securities, it must file a return of allotment with the Registrar in the prescribed manner under Section 39(4). Default attracts a penalty on the company and its officer in default.

How long is a prospectus valid?

Under Section 26(8), a prospectus is not valid if it is issued more than ninety days after the date on which a copy was delivered to the Registrar. Count from that delivery date, not from the date printed on the prospectus.

What is a deemed prospectus under Section 25?

When a company allots or agrees to allot securities with a view to offering them for sale to the public, the document making the offer for sale is deemed to be a prospectus issued by the company. The Act treats it as evidence of this intent if the offer for sale came within six months of the allotment, or if the company had not yet received the whole consideration.