A complete 2026 guide to allotting new shares in a private company — board and shareholder approvals, PAS-3 return of allotment, share certificates, stamp duty and timelines.
Share Allotment in a Private Limited Company: Process, PAS-3 Filing and Compliance Guide (2026)
Every time a private limited company brings in a new investor, rewards a co-founder with more equity, or converts a loan into ownership, it is doing one thing at the legal level — allotting shares. This single act increases the company's paid-up capital, changes ownership ratios, and triggers a set of mandatory filings with the Registrar of Companies (ROC). Get the paperwork wrong, and the allotment can be treated as invalid, exposing the company and its directors to penalties.
This guide walks founders and finance teams through the entire share allotment lifecycle in 2026 — from the board resolution to the filing of Form PAS-3, issuing share certificates, and paying stamp duty — so that every round, big or small, is closed cleanly.
What Is Share Allotment and Why It Matters
Share allotment is the formal act by which a company creates and appropriates new shares to a specific person or entity in exchange for money, assets, or a conversion of existing debt. It is distinct from a "transfer" of shares — transfer moves existing shares between two shareholders, while allotment creates fresh shares and increases the company's total issued share capital.
Allotment typically happens in situations such as:
- Bringing in an angel investor or venture capital fund in a funding round
- Issuing shares to founders or key employees under an Employee Stock Option Plan (ESOP) on exercise
- Converting a Convertible Note, SAFE-equivalent instrument, or Compulsorily Convertible Debenture into equity
- Capitalising unsecured loans from directors or promoters
- A rights issue to existing shareholders or a preferential allotment to select investors
- Bonus issue of shares out of free reserves
Because allotment permanently changes the capital structure and the rights attached to it, the Companies Act, 2013 requires the company to follow a defined sequence of approvals and filings — primarily under Sections 42, 62, and 39, along with Rule 12 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
When Share Allotment Is Triggered
Founders should treat allotment as a compliance event, not just an accounting entry, whenever any of the following occur:
- A term sheet closes and investor funds hit the company's bank account
- The company's board approves ESOP exercise requests from employees
- A loan-to-equity conversion is agreed with a lender or promoter
- The company decides to issue bonus shares from reserves
- A rights issue is rolled out to existing shareholders under Section 62(1)(a)
In each case, the trigger is the same: the moment the company decides to create and allocate new shares, the statutory clock for approvals and post-allotment filings starts running.
Step-by-Step Process for Share Allotment
Step 1: Check Authorised Share Capital
Before any allotment, confirm that the company's Authorised Share Capital (as stated in the Memorandum of Association) is sufficient to cover the new issue combined with existing issued capital. If not, the company must first pass a resolution to increase authorised capital and file Form SH-7 with the ROC — this has to be completed before allotment.
Step 2: Convene a Board Meeting
The Board of Directors must pass a resolution approving the proposed allotment. This resolution typically covers the number and class of shares, the price per share (and the basis of valuation, where relevant), the persons to whom shares are being allotted, and the mode of payment. Notice of the board meeting must be circulated as per Section 173 and the Secretarial Standards (SS-1).
Step 3: Obtain Shareholder Approval Where Required
Depending on the route of issue:
- Private placement (Section 42): requires a special resolution of shareholders approving the offer, along with the offer letter in Form PAS-4, before the offer is circulated.
- Rights issue (Section 62(1)(a)): generally requires only a board resolution, since it is offered proportionately to existing shareholders, though the Articles of Association should be checked for any additional requirement.
- ESOP exercise, bonus issue or conversion of instruments: approval requirements depend on the scheme already approved by shareholders at the time the ESOP or convertible instrument was created.
Step 4: Receive Application Money and Maintain a Separate Bank Account
For private placement offers under Section 42, application money must be received through banking channels and kept in a separate bank account of the company — it cannot be used until the allotment is made and Form PAS-3 is filed. Using this money prematurely is a common and serious compliance lapse.
Step 5: Pass the Allotment Resolution
Once funds are received and any conditions (such as due diligence or valuation) are satisfied, the board passes a formal resolution allotting the shares to identified applicants, specifying the number of shares, class, and consideration received against each allottee.
Step 6: File the Return of Allotment (Form PAS-3)
Within 30 days of the allotment (this timeline should always be reconfirmed against the current MCA rules, as filing windows have been amended in the past), the company must file Form PAS-3 with the ROC, reporting the details of the allotment.
Step 7: Issue Share Certificates
Share certificates must be issued to allottees, generally within 2 months of allotment for shares issued to subscribers of the memorandum or on further allotment, as prescribed under Section 56 of the Companies Act. Certificates should be signed by two directors (or a director and the company secretary) and affixed with the common seal, if any.
Step 8: Update the Register of Members
The company must update its Register of Members (Form MGT-1) to reflect the new shareholding immediately after allotment, and this register should be maintained at the registered office.
Step 9: Pay Stamp Duty
Stamp duty on the issue of share certificates is payable under the Indian Stamp Act (as amended) or the relevant state stamp legislation, typically calculated on the value of shares allotted. Since 2020, stamp duty on issue of securities is centrally administered and collected by the depository or the company itself, with rates that may be revised — always verify the applicable rate at the time of allotment.
Forms and Documents Required
- Board resolution approving the proposed allotment
- Special resolution (for private placement under Section 42) along with explanatory statement
- Form PAS-4 — private placement offer letter, where applicable
- Form PAS-5 — record of private placement offers, maintained internally
- Form PAS-3 — return of allotment, filed with the ROC, along with a list of allottees
- Valuation report, where shares are issued at a premium or to persons other than existing shareholders at fair value, particularly relevant for compliance with Rule 11UA and FEMA pricing guidelines
- Share certificates in Form SH-1 or a company's own prescribed format
- Form SH-7, if authorised capital needs to be increased first
- Board and shareholder meeting minutes, attendance registers, and notices as evidence of due process
Fees Involved (2026 Estimates — Please Reconfirm)
Costs associated with share allotment generally fall into three buckets:
- Government/ROC filing fees for Form PAS-3: these are slab-based, depending on the company's nominal share capital, and can range roughly from a few hundred rupees for small companies to several thousand rupees for companies with higher authorised capital. Additional fees apply for increasing authorised capital via Form SH-7.
- Stamp duty on share certificates: generally a small percentage of the value of shares issued (historically around 0.005% under the amended Indian Stamp Act framework for delivery of securities, though this should be reconfirmed for the specific state and year).
- Professional fees: valuation reports, drafting of resolutions and offer letters, and filing assistance from a CA/CS firm typically range from a modest fixed fee for simple allotments to a higher fee for structured funding rounds involving multiple classes of shares — this varies widely by transaction complexity, so an all-inclusive quote is recommended before starting.
Because MCA fee slabs and stamp duty rates are periodically revised, treat any specific number quoted here as indicative only and always confirm the current rate before filing.
Timeline for Completion
A straightforward allotment — say, to a single investor after funds are received — can typically be completed end-to-end (board approval to PAS-3 filing) within 7 to 15 working days, assuming documentation is ready. Where a special resolution and a 30-day minimum gap for private placement offers apply, or where authorised capital needs to be increased first, the process can extend to 4 to 6 weeks. Delays are most often caused by incomplete KYC of allottees, unresolved valuation questions, or mismatches between the offer letter and the amount actually received.
Tax Angle on Share Allotment
Share allotment carries tax implications for both the company and the investor that founders should not overlook:
- Section 56(2)(viib) — Angel Tax perspective: where a closely held company issues shares to a resident investor at a price exceeding the fair market value, the excess may historically have been taxable as income in the company's hands. The government has periodically revised the scope and exemptions for this provision (including relief for DPIIT-recognised startups), so eligibility and current applicability should be checked at the time of allotment.
- Valuation compliance: shares issued at a premium generally need to be supported by a valuation report from a registered valuer or a merchant banker, particularly for premium pricing to be defensible under both company law and tax law.
- FEMA pricing guidelines: where shares are allotted to a non-resident, pricing must also comply with FEMA's pricing guidelines (typically requiring the issue price to be at or above fair value determined per an internationally accepted methodology).
- Capital gains for the investor: while allotment itself is not a taxable event for the investor, the cost of acquisition recorded at allotment becomes the base for computing capital gains on any future sale.
- Stamp duty as a cost, not tax-deductible per se: stamp duty paid on issuance is generally treated as a capital cost rather than a revenue expense.
Given how frequently these provisions are amended, it's advisable to have a CA review the pricing and tax position before finalising any allotment involving a premium.
Common Pitfalls to Avoid
- Allotting shares before increasing authorised capital, which renders the allotment technically invalid until capital is increased and can create downstream cap table complications.
- Missing the 30-day window for filing Form PAS-3, which attracts additional fees and can also expose the company and officers to penalty under the Companies Act.
- Using private placement application money before allotment, a specific violation under Section 42 that can trigger refund obligations and penalties.
- Not maintaining a separate bank account for private placement money as mandated by Rule 14 of the Prospectus and Allotment of Securities Rules.
- Skipping the valuation report when shares are issued at a premium, leading to tax exposure later under Section 56(2)(viib) or FEMA pricing scrutiny.
- Delaying share certificate issuance beyond the statutory window, which can create disputes about effective ownership dates.
- Poor documentation of board and shareholder approvals, which becomes a red flag during due diligence in a future funding round or exit.
- Ignoring pre-emptive rights of existing shareholders under Section 62, especially in family-run or closely held companies where the Articles carry additional restrictions.
FAQ
Q1: What is the difference between share allotment and share transfer?
Allotment creates new shares and increases the company's issued capital, while transfer simply moves existing shares from one shareholder to another without changing total issued capital.
Q2: Is Form PAS-3 required for every type of share allotment?
Yes, Form PAS-3 (return of allotment) is generally required for allotment of any type of security by any company, whether through rights issue, private placement, ESOP exercise, or bonus issue, though the accompanying attachments differ by route.
Q3: What happens if PAS-3 is filed late?
Late filing typically attracts additional government fees on a scaled basis depending on the delay period, and can also expose the company and its officers to penal consequences under the Companies Act — it is best to file well within the prescribed window.
Q4: Do private companies need a valuation report for every allotment?
Not always — a formal valuation report from a registered valuer is generally necessary when shares are issued at a premium, to non-existing shareholders, or where fair value needs to be demonstrated for tax and FEMA purposes; simple par-value rights issues to existing shareholders may not require one.
Q5: Can share allotment happen without receiving actual money?
Shares can be allotted for consideration other than cash — for example, against conversion of a loan or in exchange for assets — but this must be clearly documented through a valuation and appropriate board/shareholder approval.
Q6: How soon must share certificates be issued after allotment?
Share certificates are generally required to be issued within a couple of months of allotment, subject to the specific provision applicable to the type of issue; delays should be avoided as they can complicate the cap table and future transactions.
Q7: Is stamp duty payable on every share allotment?
Yes, stamp duty is generally payable on the issuance of share certificates or on the relevant instrument of allotment, calculated as a small percentage of the value of shares issued, though exact rates depend on the current stamp duty framework applicable at the time.
Q8: What if the company allots shares beyond its authorised capital?
Any allotment beyond authorised capital is not valid until the company increases its authorised share capital through the prescribed process and files the relevant form with the ROC — this step must precede, not follow, the allotment.
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