The process of allotment of shares of or debentures in a company commences with an application, which is an offer made by a prospective investor to the company to accept the shares of the company. The company may or may not accept the offer, which means that the company has the discretion to accept in full or in part or to reject in toto, the offer of the applicant or the offeror. The offeror may revoke his offer till it is accepted by the company, i.e. till the shares are allotted in response to the offer. Sub-section (3) of Section 56 of the Companies Act, 1956 lays down that no one shall issue any form of application for shares in or debentures of a company, unless the form is accompanied by a memorandum containing such salient features as may be prescribed, which complies with the requirements of the section.
The second proviso to the Sub-section (3) lays down that the sub-section shall not apply if it is shown that the share application form was issued – (a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to the shares or debentures; or (b) in relation to shares or debentures which were not offered to the public.
The Government has instructed that share application form should be a part of the abridged prospectus, being attached to it along a perforated line. The abridged prospectus and the share application form should bear the same printed serial number. The investor may detach the share application form along with the perforated line after he had an opportunity to study the contents of the abridged prospectus, before submitting the same to the company or to its designated banker. The Central Government later allowed companies and their merchant bankers to print application forms, accompanying one abridged prospectus, being attached to it, along the perforated line, bearing separate printed numbers.
The same procedure should also be followed while making available copies of the prospectus under Section 56 of the Act.
In this connection, it may be pointed that contravention of the provisions of Section 56(3) is punishable with fine which may extend to Rs. 50,000.