Relevant Sections and Rules:
Section 42(5), 42(6), 62 of Companies Act, 2013, Rule 13 of Companies Share Capital and Debenture Rules 2014, Rule 2(c)(vii) of Companies (Acceptance of Deposits) Rules, 2014
These are the following ways available for the private limited company to issue or allot shares:
- Private Placement under section 42 of Companies Act, 2013
- Issue of shares to its existing members under section 62(1)(a) of Companies Act, 2013
- Issue of shares to employees of the company under section 62(1)(b) of Companies Act, 2013
- Preferential Issue under section 62(1) (c) of Companies Act, 2013
- Issue of Sweat Equity Shares under section 54 of Companies Act, 2013
Share application money pending allotment is restricted to 60 days in the below-mentioned issues for all types of companies.
1. For Private Placement and Preferential allotment:
- Section 42(5) read as follows:
“All monies payable towards subscription of securities under this section shall be paid through cheque or demand draft or other banking channels but not by cash.”
- Section 42(6) read as follows:
“A company making an offer or invitation under this section shall allow its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the date of completion of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent per annum from the expiry of the sixtieth day:
Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose other than—
- for adjustment against allotment of securities; or
- for the repayment of monies where the company is unable to allot securities.”
- Rule 13 of Companies (Share Capital and Debentures) Rules, 2014 read as follows:
“For the purposes of clause (c) of sub-section (1) of section 62, If authorized by a special resolution passed at a general meeting, shares may be issued by any company in any manner whatsoever including by way of a preferential offer, to any persons whether or not those persons include the persons referred to in clause (a) or clause (b) of sub-section (1) of section 62 and such issue on preferential basis should also comply with conditions laid down in section 42 of the Act”
Reading of Rule 13 makes it clear that all provisions of section 42 (Private Placement) are also applicable to issue of shares under section 62(1)(c) (Preferential allotment).
Section 42(5) mandates acceptance of share application money in the form of a cheque, draft or any other banking channel.
Section 42(6) mandates allotment of shares within 60 days of receipt of share application money and if it is not allotted, money shall be refunded within 15 days. If not refunded, the company shall pay interest at the rate of 12% per annum.
Consequences of non-compliance:
As per section 42(10) of Companies Act, 2013 “If a company makes an offer or accepts monies in contravention of this section, the company, its promoters, and directors shall be liable for a penalty which may extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher, and the company shall also refund all monies to subscribers within a period of thirty days of the order imposing the penalty.”
2.For Other issues:
Rule 2(1) (c) (vii) of Companies (Acceptance of Deposit) Rules 2014 reads as follows:
“deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include
(vii) any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for;
Explanation- For the purpose of this sub-clause, it is hereby clarified that –
- Without prejudice to any other liability or action, if the securities for which application money or advance for such securities was received cannot be allotted within sixty days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a deposit under these rules.
- any adjustment of the amount for any other purpose shall not be treated as a refund.”
From the provisions of Rule 2(1)(c ) (vii) of Companies (Acceptance of Deposit) Rules 2014, it is clear that share application money shall not be treated as a deposit, however, if it shall not be refunded within 60 days from acceptance, it shall be treated as deposits.
Consequences of non-compliance:
Section 76A of Companies Act, 2013 reads as follows:
“Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under section 73 or section 76 or rules made thereunder or such further time as may be allowed by the Tribunal under section 73:
- the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees; and
- every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both:
Provided that if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under section 447.”
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