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Share Application Money under Private Placement

April 24, 2014     by CS Samrish Bhanja

Earlier, under old Companies Act regime, many companies accepted share application money under private placement and utilized the same for the business purpose even without allotment of shares. Only Schedule VI of the Old Companies Act provided the manner to treat the same in the Balance Sheet of the Company.

Now, Section 42 of the Companies Act, 2013 puts prohibition over the said practice. W.e.f 01-April 2014, Companies accepting Share Application money under private placement have to allot the securities against the Share Application money received within 60 days. If the securities are not allotted within a period of 60 days, the whole application money is required to be refunded within 15 days from the date of completion of 60 days. If the company fails to repay the application money within the said 60 days period, it shall be liable to repay that money with interest @ 12% p.a. from the expiry of the 60th day.

Another important point to be noted is that the Company will have to open separate bank a/c to receive share application money and will not be able to utilize the share application money unless shares are allotted.

Penalty: In case a company contravenes the provisions of section 42, the company, its promoters and directors shall be liable to pay a penalty which may extend to the amount involved in the offer or invitation or Rs. 2 crore, whichever is higher. The company shall also refund all amounts collected to the subscribers within a period of 30 days of the penalty order.

Further as per Companies (Acceptance of Deposit) Rules, 2014, if the securities for which application money was received cannot be allotted within sixty days from the date of receipt of the application money and such application money 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 refund.

FDI: One important question that arises is…..  what happens in case of FDI received. As per FEMA Regulations, the shares are required to be allotted within 180 days of Inward Remittance. And there was no restriction on utilization of the Share Application money received under FDI. Well, needless to say that provisions of Companies Act, 2014 which is more stringent, shall prevail.

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155 thoughts on “Share Application Money under Private Placement

  1. Hello Sir,
    I’ve a query regarding a case. Please reply ASAP.
    A wholly owned subsidiary before incorporation made certain payments through one of its employee’s account. Foreign remittance was sent to purchase desks, pay rent, security deposit against rent, for preliminary expenses etc. No reporting was done.
    How shall we deal with it? Whether it can be considered as some kind of loan or what?

    1. These payments shall be treated as preliminary expenses. Preliminary expenses are borne by the promoters of the company. When the company comes into existence, the promoters are to be repaid to the promoters by the newly incorporated company. The treatment of such expenses is provided in Companies Act and Income Tax Act

  2. Hi Sir,
    One of my client (Private Co.) has come up with rights issue in this year. Company has received Rs. 112.5 Cr towards application money for the same. They received the amount in one scheduled bank A/C & from which they transferred the amounts to 3 different bank accounts and they created FD’s out of it.
    Now, Client is contesting that creation of FD is not utilsation of funds. So, does it contravene provisions of Section 42?

    1. Right issues are dealt under Sec. 62 of Companies Act 2013, Creating FD means company is actually utilizing the money before allotment of securities. As far as contravention of sec. 42 is concerned, this sec. is applicable on Private placement not on right Issues.

  3. Hi sir, if a private company is going for private placement through installment system, what are the procedures to be followed?

    1. A company undergoing private placement will need to follow the provisions as specified in Sec 42 & Sec 62 of the companies Act of 2013 and Rule 13 of Companies (Share Capital and Debentures) Rules, 2014, In case of private placement through installment system application money received in installments shall be treated as separate allotment and within 60 days from date of reciept of such application money the company is required to allot securites against the same.

  4. Last year I gave share subscription money to a private limited company which has yet not alloted me shares & even not ready to refund the money. Can I take this case to NCLT to claim my money back

    1. Considering the facts of the query there are two alternatives:-
      • Filing of INVESTOR COMPLAINT FORM/SERIOUS COMPLAINT FORM
      • Application under section 213 of the Companies Act, 2013

      1. INVESTOR COMPLAINT FORM _-Any investor, shareholder, creditor, employee, deposit holder can file complaint related to shares, debentures, bonds, fixed deposits etc. against a company by filling Investor Complaints form. There is no fee for filing the form.
      SERIOUS COMPLAINT FORM :-Further a complainant may lodge file serious complaint form .
      Alternatively, complaint can be lodged by handing over a written complaint directly to an MCA official in the office of Registrar of Companies.

      2. As per provisions of the section 213 of Companies act 2013 any person may make an application to the tribunal if the, business of the company is being conducted with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive to any of its members or that the company was formed for any fraudulent or unlawful purpose. (This option does not seem to be relevant in your case)

  5. A relative who is BOD In a Company formed in 2003 misused bank accounts to issue shares in his new company without consent and until 2006 went on Purchasing/ increasing amount of equity’s shares; issued preference shares in 2006; deposits in unsecured loan from 2003 till many years ( still standing); issued debentures 0%non convertible deducting from the standing loan amount in 2009- how to deal with this fraud . The person was minor until 2005. And was studying in school college outside. How to deal with this kind of fraud and what’s the procedure for before 2013 transactions ?

    1. At the first instance, a minor cannot be appointed as a director in a Company except if guardian is appointed as director for the same duration.As per Indian Contract Act 1872, a minor cannot be sued for the acts done during his minority.Minor can always his plead his minority despite earlier misrepresenting as major and any contract executed by the minor shall be void ab-initio .Hence no suit can be instituted even after attaining age of majority for the acts done prior to attaining age of majority.
      Further a suit can be institutedagainst the guardian of the minor for compensation for the loss suffered by the aggrieved person, subject to the limitation period specified in this behalf. You may consult a lawyer with complete facts and documents for detailed legal advice

  6. sir,
    i am a student and i am doing research on security deposits treated as share application money in the accounts.
    please specify the provisions or penalties and remedies in such a case and whether such shares can be forfeited or not.

  7. my client ha s a share application money pending allotments which ha s to be refund but not paid till now because of no identification of parties who applied for shares.now what is the auditor responsibility for expressing the opinion on the financial statements. is there any disclosure requirements are there? or have to qualify report?

    1. As per the provisions of Section – 42(6) read with Rule 2(c)(vii) of Companies (Acceptance of Deposits) Rules, 2014, if 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 and hence auditor should give a disclosure to this or qualify his report.

  8. in case of right issue, if one shareholder paid immediately and another taking 30 days time and company wants to use money after receipt from first shareholder, immediately i can say after day 1 due to cash crunch, can company use these funds before allotment or can be allotment done after receipt application money from shareholder 1 and offer is still open for shareholder 2

    1. As per section 2(31) of the Companies Act, 2013, company needs to make allotment within 60 days from the receipt of the application money otherwise application money will be treated as Deemed Deposit. Under Right issue, if one shareholder has paid the money then Company needs to make allotment within 60 days from the receipt of money and the Company cannot use the funds before making allotment. Closing of offer period has no relevance. Allotment can be made by the Company to the first shareholder and the offer stays open for the 2nd shareholder.

  9. Hi..I am Swati Fitkariwala, Company Secretary from Kolkata. I have a query regarding the refund of share application money. Kindly let me know in case I can mail my query to a particular id.
    Thanks

  10. Sir,
    My pvt ltd. company was incorporated in may2016. With paidup capital of Rs500000
    There are initial 3 director im company who have signed as 15000, 15000, 20000 share in mOA.

    Now till date only 2director has paid the subscription amount in october 2016 but share certificatecis not issued and amount is used in business, but will have proper balance amount to two subscription amount till end of finencial year. 1Director has not paid and not willing to pay.

    How this case can be handled? Intermş of company compliance and what will be penalities.
    How to retire one director who is unwilling to pay subscription and get share transfered of his to other director.

    1. As per section 56(4) of companies act 2013 share certificate must be issued within 2 months from date of incorporation to the subscribers of MOA .
      In the view of above provisions it is advised first to issue share certificates.
      There is no provision to change the subscribers to MoA. As per Section 10(2), shares once subscribed shall become debt owed by subscriber towards the company.
      As per section 164(1)(f) the director who has not paid any calls on any shares of the company held by him a six months have elapsed from the last day fixed for the payment of the call shall be disqualified for the appointment of director and as per section 167(1)(a) have to vacate the office of directorship.

  11. We have received the amounts in different installments from director relative from April’16 now the company wants to issue shares for the said relative,can it do so.And can the Pvt Ltd company issue shares and later receive money.

    1. On what account the amounts were received in? Are they loan or share application money? Anyways, assuming that they are Share Application money, our replies are as follows:

      (i) shares should be issued within 60 days from receipt of application money. Otherwise such funds shall be termed as deposits and provisions of Chapter V of Companies Act, 2013 need to be complied with.
      (ii) allotment of shares before receipt of funds is valid only at the time of subscription to memorandum of association and not at any other point of time.

  12. Sir, I hired a CA for company registration. The authorized capital was supposed to be 10 lacs, and paid up capital was supposed to be 1 lac. Our CA messed up and shares worth 10 lac were allotted. Now, the subscription money can’t be deposited by the directors. In this confusion, even bank account for the company has not been opened yet. The company was registered on 19th December, 2016. Kindly suggest the immediate measures that we should take to avoid any penalties. Different CAs and CS suggest differently, and tell us about different consequences.

    1. For immediate measures, you are advised to issue the share certificates to the subscribers as share certificates must be issued within 2 months from the date of incorporation. The money to be received from them may be shown as a loan due from them.

  13. Dear Sir,

    My company is a Private Limited Company. Its is a Joint Venture with Foreign Partner holding 51% & Indian Partner holding 49%. We issue to both the parties in the ratio of 51:49. We have increased our Authorised Share Capital by Rs. 20 Crores on 05.08.2016 and received foreign remittance amounting Rs.102000000 i.e. in the ratio of 51% on 26.09.2016. Indian Partner has refused to invest further so foreign partner has introduced remaining 49% which is Rs. 98000000 on 23.01.2016. We have made Advance foreign Remittance Reporting to RBI. Also We have not issued shares but utilised the money for land purchase and for payment for outstanding of both Foreign & Indian Partners. What should we do now? Also Indian partner does want their sharing percentage to be reduced. Kindly provide the solution. Also if this amount will be treated as deposits, what will be its implications. Kindly reply ASAP.

    Thanks & Regards

    Puneet

    1. 1. As per the provisions of of the FEMA, Act 1999 the Company needs to do the Allotment with in 180days from the Receipt of application Money and para 9 of schedule I of Notification No.FEMA 20/2000-RB dated 03.05.2000 the Company needs to File Form FC-GPR within 30 days from the date of Allotment.
      2. However as per the Provisions of Section2 (31) of the Companies Act, 2013 if the Company has if the Company has not made the allotment within 60 days then it will treated as “Deposits”. The Company needs to Comply with the Provisions of chapter 5 of the Companies Act,2013and any Contravention made in complying chapter V of the Companies Act, 2013 then Company shall be punishable with a penalty of minimum Rs 1crore which may extend to 10 Crore. AND every officer of the Company shall be punishable with imprisonment of upto 7 years and/or fine of not less than 25 lakhs or both. If fraud has been proved on the part of Officer then he shall be booked under section 447 of the Companies Act, 2013.
      3. You have also made a non-compliance of Section 42 when you haven’t used subscription amount for adjusting it against issuing shares or refund money to the person from whom money received but utilised the money for land purchase. Penalty equivalent to amount involved or Rs. 2 crores whichever is higher shall be imposed to promoters and directors.
      But please appreciate, the issues involved in your case is not the non-compliances but it is much more. Both the partners need to sit together and reconcile. Please do revisit the terms of understanding Please do go through the Shareholders Agreement, Articles of Association and take help of a good Practising Company Secretary or a Corporate Lawyer to guide you on this.

  14. Dear Sir,

    My question is if a company received the share application money and partly it has issued shares out of that money but the balance amount is not refunded. What remedy a company has?. the matter is of 10-11.

    waiting for the reply at the earliest

    1. As per Chapter V of the Companies Act, 2013 and rules framed therein, such balance amount shall be treated as deposit and compliance with respect to the provisions of Chapter V shall be done.
      Company needs to refund the amount along with interest and should go for compounding of offence with the permission of Special Court only after making good of default made.

  15. Private limited company was incorporated in 2012 having same subscribers and directors with 50% share each. Three more directors were inducted in the board making total no. of directors to 5 till 6th Dec, 2015. Now what happened one of the First director (Promoter) resigned from the directorship and filed DIR-11 in 7, Dec, 2015. The company also filed DIR-12 of his resignation. But company again appointed him as additional director at the end of Dec, 2015. He again submitted his resignation and filed DIR-11 to Roc in Sep, 2016. So far company has not filed DIR-12 of his resignation to RoC. As a result friction between the First two directors widen and business of the company is getting affected. As another First director and Promoter of the company want his shares get transferred. In fact i requested him to transfer his holding but he refused to do so. How can he bound to pay attention towards the business affairs of the company since he is the promoter of the company? Pls guide.

    1. Unless, there are any terms of understanding, may be by way of Shareholders Agreement or by way of restrictions in the Articles, a Director is free to resign.Doing business as per the constitution of the company is the sole responsibility of management i.e. Board of Directors.
      Please consult a good Practising Company Secretary firm with necessary documents, they would be able to guide you.

  16. Sir,
    I have some queries:
    1. is RBI approval required for Private Placement by an NBFC copany?
    2. is Private Pacement can be done for issuance of shares to a single person?
    3. What are the minimum amount of subscription for single person in case of private placement by an NBFC, Companies (Prospectus and Allotment of Securities) Rules, 2014 says it is 20000 face value of shares and RBI notification (RBI/2012-13/560 DNBD(PD) CC NO. 330/03.10.001/2012-13 dated 27 june, 2013) says that minimum subscription amount for single person is 25 lakh and multiples of rs. 10 lakh thereafter?

    i am confused in respects of above questions, please suggest me.

    1. 1. No, RBI approval is not required for private placement by an NBFC company as per the RBI guidelines on Raising Money Through Private Placement by NBFCs – Debentures, etc.
      2. Yes, private placement can be done for issuance of shares to single person also as there is no such restriction in the Companies Act, 2013 and rules made thereunder.
      3. In case of NBFCs, RBI notification shall prevail. Accordingly, minimum subscription amount for single person is INR 25 lakhs and in multiples of INR 10 lakhs thereafter.

  17. Dear Sir,

    Please give me solution that my client company received application money under Private Placement and 60 days have expired for allotement of securities and further 15 days also expired for refund. And now company want to allot the security against the application money received. Can it do so after payment of 12% p.a interest on it.

    1. It is very clear from sub section (6) of section 42 of the Companies Act,2013, a company making an offer or invitation under this section shall allot 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;

      Otherwise, it will be treated as a deposit after the expiry of 60 days as per Rule 2(1)(c)(vii) of the Companies (Acceptance of Deposits) Rules, 2014.

      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— (a) for adjustment against allotment of securities; or (b) for the repayment of monies where the company is unable to allot securities.

      Non compliance may attract penalty in terms of the provisions of sub section (10) of section 42 of companies Act,2013.

  18. sir my client company has received the application money on 27/10/2016 in bank account but at that time no allotment was made now my client company wants to issue share by way of private placement..so what should i do now?

    1. As per Section 42(6) of the Companies Act, 2013, allotment of securities shall be made within 60 days from the date of receipt of application money. Thus, you still have time to allot the securities upto 25/12/2016 without any contravention of law. Thereafter, file PAS-3 within 30 days of the allotment of securities.

  19. Foreign subsidiary Company incorporated in April 2016. But due to some reason company want to close.
    Company neither has bank account and neither received capital from shareholders.
    But foreign director directly pay indian director bank account money for office setup. Now what the treatment of such amount whether indian director take such funds in his personal accounts as consultancy charges as company is going to shut down it business.

    1. 1. If the Company wants to shut down its business, it can go for FTE (Fast Track Exit) following the proper procedure u/s 560 of the Companies Act, 1956.
      2. If the Foreign director paid money to the Indian director for office set up, it shall be treated as Incorporation/ Preliminary expense and shall be written off as per Accounting Standards.
      3. Refer other laws like Income Tax Act, Service Tax, etc., to determine whether the funds transferred to the personal account of Indian Director may be treated as consultancy charges or not.

    1. In general, Compounding is to settle a matter by money payment in lieu of other liability. It is a process of admission of an offence, through which the person pays the penalty by making an application for compounding of such offence.
      Under Companies Act, 2013, Compounding of an offence can be done if the offence is punishable with Fine only. Power of Compounding of offence lies with Regional Director/ Person authorized by Central Government in case the amount of fine does not exceed 5 lakhs and Tribunal (NCLT) when the amount of fine exceed 5 lakhs.
      Any offence which is punishable with imprisonment or fine, or with imprisonment or fine or with both, shall be compoundable with the permission of the Special Court.

  20. A private limited company has incorporated but the shares are not issued but subscribed. What are the relating provisions for this?

    1. As per Section 56 of the Companies Act, 2013 a company shall issue share certificates to the subscribers within 2 months of the date of incorporation. Therefore, allot the shares to the subscribers and issue share certificates within 2 months of the date of incorporation. In case the delay has happened, the provisions of the Act stands violated and therefore, suitable application be moved for compounding, if required.

  21. Dear sir,

    Thanks for sharing your knowledge. Will really appreciate if you please revert on below mentioned query.
    In pubic co. Will share app. Money ( from director under ESOP scheme) be treated as public deposit , if co. Fails to allot shares to director within the specified period of 60 days and amount is not refunded to director.
    I think sec. 42(6)doesn’t cover ESOP allotment so it will out from the provision of said section.
    My question is with regard to public deposit.

    1. Once the application money received from the employee then shares shall be allotted within a period of 60days, otherwise this would be considered as deposit.
      We understand that Sec 42 is applicable only in cases of Private Placement but pl consider explanation of clause (Vii) of sub rule (1) of rule 2 of Companies (Acceptance of deposit) Rules, 2014
      It is very clear that once application money received then company shall allottee shares within 60 days or refund within next 15 days otherwise it will be considered as deposit.

  22. Sir,
    Mony received by a company for private placement has been used by other purpose and failed to allot shares. In that case, it clears violates the provision of the Ca, 2013. How company can save himself from this situtation?

    1. In contravention of the provision, the Company, promoters and Directors shall be liable for penalty which may extend to the amount involved in the offer or 2 crore whichever is higher as well as refund the amount to subscribers.
      Second option is consider that amount in the form of Loan and can show the amount as Right issue of the shares.

  23. excess money received under FDI is around rs.10,000/- money was received through NRIs bank account outside india. can it refunded to his NRE/NRO account?

  24. Sir,
    A new private limited company has been incorporated in the month of April’16 with Rs.1 lacs capital, with three promoter director on the Boad of company. After incorporation, one director is having some trivial issues with other 2 directors and the same director has given his resignation from the directorship of the company and the same has been accepted & filed with Roc.

    The director who has resigned from Board has not deposited his share allotment amount in the current account opened for depositing the initial share allotment money. My queries are as follows:-
    A. Can he( resigned director) still be treated as the shareholder of the company.
    B. How can he be removed from the shareholders of the company.
    C. Is it necessary as he being a promoter director, he has to deposit the share allotment money in the account. As he has already resigned from Board, he is not ready to deposit the amount.
    D. Can other 2 directors collectively deposit his share of allotment money in the current account.
    E. The company is at fault for breaching any compliance. What is remedy if company has committed any default under such circumstances.
    I am eagerly waiting for your Reply on the above matter.
    Thanks and regards,
    A.K. Singh

    1. A. Not all shareholders are Directors of the company. Resigning director shall be treated as shareholder of the company.
      B. He can transfer his shares to the remaining shareholders. But he has to first pay for the shares subscribed. Only then he gets the right to transfer.
      C. He has to deposit the subscription money as he has subscribed the MOA.
      D. Once the resigning director deposit the money then he can transfer his shares to other members in accordance of articles of the company.
      E. Please take steps to comply with the law. First you need to take steps to stop the continuity of the non-compliance.

      Pl take advise from your consultant. Facts of the case needs to be discussed in detail and solution be arrived.

  25. Dear Sir,

    I have one query Can the company take subscription money(share application) more than its Authorized Capital. If no then what are the restrictions for it under new Companies act??

  26. In some cases when companies receive FDI, due to the prevalent conversion rate, it results in company receiving very nominal amount (approx. Rs.10 to Rs.100) in excess of the Total Issue Price of securities.

    For e.g; aggregate issue price is Rs.1,00,000/-but company received Rs.1,00,020/- (Rs.20 extra)

    Now the procedure to refund the excess amount (Rs.20 in the above example) to Foreign Resident is in itself a cumbersome and lengthy procedure.

    So please suggest a way out.

  27. hello
    i have one query regarding allotment of equity share to pvt co.
    suppose one private company receive cheque for the purpose of allotment of equity share without clearing it into bank company allotted the share and cheque could not be presented within time in to bank and it expired
    now whether the allotment is valid or not and if it is invalid what alternative is possible?

  28. Dear Sir,
    A Private Limited Company would like to issue Right Shares to its Shareholders. All the Shareholders are interested to subscribe to Right Shares except One Shareholder who, though interested in the Right Shares, lack funds and therefore can afford only a small portion (say 1/10th) of the Amount at the moment and the balance amount later. However, he does not want to renounce his right to subscribe Shares since that would amount to dilution of his stake in the Company. Simultaneously, the Company would require the funds from the remaining Shareholders. Considering this, Can the Company go ahead with the Rights Issue by accepting Share Application Money in tranches (i.e., Application, Allotment, First and Final Call) so as to accommodate the Shareholder (who lack funds) to subscribe to his Right Shares by way of paying for the same in Tranches? If yes, can the Company accept the Call money in advance from the Shareholders who can afford paying money instantly? Please share the procedure and provisions to be ensured. As per my understanding, Table ‘F’ permits the same. Please advise. Thanks you.

    1. If shareholder fails to exercise his right within the said time period, then Co. has the option to dispose his right in the best interest of the Co.
      As per the provisions of section 49 of Companies Act, 2013 which says that calls on shares of same class to be made on uniform basis.

    1. As per the Companies (Acceptance of Deposits) Rules, 2014, application money received regarding any securities pending allotment can be utilized only for 2 purposes as follows:
      • Towards allotment of securities, or
      • Refund
      If securities application money pending allotment is not refunded within prescribed time limit than it shall be treated as deposit. It is specifically written in the rules that adjustment of application for any purpose other than specified above shall not be considered as refund.

      CONCLUSION:
      In the given case, share application money pending allotment cannot be converted into loan.

  29. Sir,
    One of my client has received share application money now he wants to utilise the same before allotment as he has offered securities under right issue so u/s 62 it is not mentioned anywhere that the said application money shall be utilised for 2 purposes only i.e adjustment and repayment, so my question is:- Can i utilise it for some other purpose as i have issued shares under right placement and on 1.06.2016 issued share now i.e on 21.06 June 2016 i want to utilise the same and later on i.e within 60 days from the date i have received such amount i will allot the shares.

    1. As such nothing has been prescribed for the utilization of application money in case of right issue, but as per the provision of section 42, where application money shall not be utilized for the purpose other than for adjustment against allotment, or repayment of monies where company is unable to allot securities. However, Section 42 is applicable to Private Placement.

  30. Dear Sir,
    what are the consequences if a Pvt ltd Co, holds Share application money for Two Years continuously?

  31. Hi Samrish,

    my company is pvt ltd and now we want to increase paidup capital 10 cr. by rights issue where one shareholder wants to give 55% at once and other shareholder wants to give 45% in 3 installments. 1) can i issue full shares..? 2) allotment can be done 3 times as co. receive money from other shareholder..? 3) what will be the time limit for making the allotments..?

    1. • company can issue shares in full.
      • Allotment can be done after receiving the application money, within 60days from the date of receipt of application money.
      • Co. can receive 55% from one shareholder BUT the amount above the 45% shall not be eligible for voting and this will be considered as an advance money.
      • Company should call the application money in uniform basis.
      • For complete opinion you should consult an expert, where you need to read some sections together, eg. (62)(1)(a)+42+50+179(3)

    1. As per our understanding TDS is to be deducted as money paid to a company in support of an application for shares is a deposit. Such amount is repayable by the company after the period for allotment of shares comes to an end together with interest, even without a demand in that behalf.
      Accordingly TDS is required to be deducted on such interest paid as per section 194A of Income Tax Act, 1961 @10% if such payment exceeds Rs 5000.

  32. Dear Sir,
    The company has share application money pending allotment (received from its directors only) in Balance Sheet as at 31-3-2016. The said amount is carried forward from 31-3-2013.
    My query is: Now i can issue share or not???

    1. As per MCA notification dated 05/2015, the Share Application money lying with companies as on 31st March, 2014 will be treated as deposit in case the same is not repaid within 2 months i.e. upto 31st May, 2014.

  33. Dear sir,

    In this case why should get money in way of share application money , inspite of Unsecured loans.

    what is the difference getting money in to company in way of share application money or unsecured loans.

    1. o Share application money that Company receives at the time of issue of shares. This amount would be carries as current liability until such time as the stock is issued, then it would be considered as equity. And shares are to be issued within 60 days.

      o Unsecured Loan is the amount obtained without the use of the property as collateral for the loan.There are lots of restrictions for raising money by way of Unsecured loan, the company has to be careful as the unsecured loan might be categorized as deposit.

  34. Sir, we have incorporated one pvt co, 99% of shares held by foreign co, it was incorporated in march 2015, but we have received the money from foreign in may 2014 but upto 31.3.2015 they have filed with rs.200000 paidup capital. after filing of RBI returns they questioned about rs.200000 paidup capital, is there any solution for this

  35. Dear Sir,
    I have to allot the shares for Rs. 485000/- and amount transfered from foreign account is Rs. 485008.20 Then Rs. 8.20 is extra to companys account (and reporting to RBI is for 485008.20) then How to give effect or treat this Rs. 8.20, Pl. clarify.

  36. Can a closely held company can accept an application money in regular used account although compliances with respect to allotment of shares has been done within a period of 60 days under Companies act, 2013. ..

  37. Dear,
    We have recv. Share application money in the form of FDI. We are failed to allot shares within 60 days and we had not refund the amount after the expiry of 60 days too.

    “Moreover, In sub clause (ii) of same Rules 2(c) of Companies (Acceptance of Deposits) Rules, 2014, states that amount received from foreign Body Corporate or citizens in compliance of FEMA , shall not be treated as Deposits.”

    If it is not treated as deposit, same can be treated as loan as it is due after expiry of 60 days. Can we issue it after the expiry of 60 days and pay the interest of 12% p.a.
    Kindly revert for any clarification.

    1. Dear Aditya,
      Sec 42(6) states very clearly what needs to be done if the company fail to allot shares within 60 days. Allotment of shares after the expiry of 60 days is not an option in case of Private placement.

      1. Dear Sir,

        In case company is giving Right offer to the existing shareholder and existing shareholder has renunciation of the offer in favor of other company which is foreign body corporate.

        As given in the Companies (Acceptance of Deposit) Rules 2014, Rule 2(c)(ii) any amount recv. from the foreign body corporate will not be treated as deposit. Hence this amount recv. excludes from the defination of deposit. So in purview of above provision can we draw this conclusion that for Right Issue limitation of allotment of shares within 60 days from the day on which share application money is recv. is not applicable.

        1. Amount received from foreign body corporate towards subscription to any securities is not a deposit provided such securities are allotted within 60 days from the date of receipt of money and in case of non-allotment amount so received is refund within 15 days from the completion of such 60 days.

  38. Sir,

    Please confirm whether the authorised share capital of a private limited company be Rs. 1 Lac or it should be minimum Rs. 5 Lacs?

    Kindly confirm.

    1. The Companies (Amendment) Act, 2015 notified on 26th May, 2015 deleted the requirement of Minimum paid up capital. The Amendment Act deleted the numerical value of Rs. 1 lac and Rs. 5 lac which is been prescribed u/s 2(68) & 2(71) of Companies Act, 2013 (‘Act’) as minimum paid up capital for a private and a public company, respectively.

  39. Sir,

    Please let me know whether a Non-resident Indian can hold shares of Indian private / public limited company and can Indian resident transfer shares to a Non-resident Indian?

    Please confirm.

      1. Thanks for the reply.

        Kindly also let me know whether RBI approval is required or not for NRI for holding shares in an Indian company, if he would be holding 2-5% of shares in the Company.

        Kindly confirm.

  40. Sir,

    A company has already allotted some new shares in July, 2015 to one of its existing members on the basis of valuation report by chartered accountant and now the company wants to transfer its shares to new members. In this case, please let me know whether the same valuation report which was prepared in July, 2015 can also be used for transfer of shares in January, 2016 or else we need to get another valuation report from chartered accountant separately for transfer of shares?

    Kindly clarify.

    1. Rate at which the shares are bought by the buyer from a shareholder is a subject of contractual arrangement between them, i.e. buyer and seller. Company has no role to play w.r.t valuation of shares. However, provisions of section 56(2)(vii) of the IT Act be kept in mind by the contracting parties. To conclude, it is appropriate that the transaction take place at Fair Market value.

  41. is it possible to have the simultaneous private placement of both non Convertible debenture and equity shares in light of Section 42(3)?

  42. We have received share application money from the investor outside India without issuing Rights Offer Letter. It is not possible to return the money as it will involve heavy transaction (money transfer) cost. Should we go for compounding?

    Please suggest what can be done in this case?

  43. Dear samrish, thank you for sharing your precious knowledge with us, I wanted to ask whether share application money pending for allotment refund in cash?? Or is it mandatory to refund through bank only??

    1. As per the provisions of Section 42, even private limited companies will not be allowed to receive share application money in cash. They will require opening a separate bank account for receiving share application cheques and refund of share application money shall be made through such bank account only.

  44. Please tel me if the share application money is received before commencement of the companies act 2013, then how it has to be treated

    1. If share application money was received before the commencement of Companies Act, 2013 then according to Section 74 (1) and Rule 20 of Companies (Acceptance of Deposits) Rules, 2014 the company was required to file a return in Form DPT-4 within 3 months of commencement of the Act and the same was to be repaid or allotted within one year from the commencement of the Act.

  45. Dear Sir/Mam
    AS per Rule 14(2)(d) of the Companies (Prospectus of Securities) Rules, 2014; the payment to be made for for subscription to securities shall be made from the bank account of the person subscribing to securities.
    Does this rule also apply Section 62 in case of Further Issue of share capital or is there a similar rule for Section 62? If there is no such rule, can the payment be received from any bank account?
    Thanks in advance.

    1. Section 62 of Companies Act, 2013 is a very wide section as it includes Rights issue, private placement and ESOPS. You need to specify under what subsection of Section 62 you are referring to when asking about the receipt of share application money from the concerned subscriber’s bank account.

      However, in case of preferential allotment under Section 62 (1)(c), it will have to be read with section 42 and the subscription money must be received format the subscriber’s bank account.

  46. I want to know about fema compliance towards FDI invesetment in india through JV or share subscription money.
    any one have any checklist of any inward remittnace. if any have pl share to me at vinit.goyal11@gmail.com

  47. RBI as per Master Circular on Customer Service in Banks states that banks while opening of current account should obtain NOC from the lending bank(s) if customer is enjoying any credit facility with any other bank.

    If ABC Ltd wants to open account whether NOC is required, as per my understanding it is not because of the following reason
    With regard to ABC LTD Current Account Opening for the purpose of Share Application Money, the No Objection may not be collected. Since opening of account for specific purpose .i.e Share Application Money would neither violate nor defeat RBI purpose (as mentioned below). However, it should be ensured that the account is not used for any other purpose which could be perceived to be abetting the siphoning of funds. Once the share application money process is over the account should be immediately closed. It is also understood that as per CA 2013, the Company will have to open separate bank a/c to receive share application money and will not be able to utilize the share application money unless shares are allotted.
    Purpose of RBI to have such discipline :
    -Credit discipline for reduction in NPA level of banks
    -Non-adherence to the above discipline could be perceived to be abetting the siphoning of funds.

  48. whether provisions relating to allotment of shares within 60 days of receipt of share application also apply in case allotment is made through right issue.

      1. Amount received from Foreign Investors under Right issue, can be utilised by investing in Mututal Fund before allotment?

  49. Hi sir,
    We received FDI on 04-March-2015 in normal bank a/c & we utilized the money.
    we will allot the shares with in the 60days but money received in normal & utilized.
    Please suggest me how to resolve the this issue.

    1. Dear Sir,

      The significant point to be noted is that you will have to show the allotment of shares before the money was utilised by you as according to the first proviso to Section 42(6) of Companies Act, 2013 money shall be kept in a separate bank account and shall be utilised only for adjustment against allotment of securities or for repayment of monies in case the company is unable to allot the securities.

  50. Thanks for such informative blog. It is really very useful.
    I want to know whether company can allot shares in the foll cases
    1 company has recd money from foreign n party but FIRC is not yet obtained.
    2 FIRC is received but UIN from RBI is not yet received.
    Thanks in advance

    1. Acc to Sec 42(6) A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities. Thus, allotment does not depend on the receipt of FIRC and UIN

  51. Hello Samrish,
    A pvt ltd company was incorporated in June 2013. The money towards initial subscription of shares from two non-residents was received in April 2014 as a result the company has Nil ‘Paid up share capital’ in its books as on 31st March 2014. What are the implications of this as per Companies Act 2013?
    Will there be any issues, apart from late fee, while filing the Annual Returns of the Company with the ROC?

  52. Sir, Please let me know, in case of right issue (Sec 62) can renunciation be made in favor of a foreign company. Issue size is in crores and only one foreign company will invest whole money.Regards

    1. If shares are being issued to existing shareholders in proportion to their existing holding, it shall be a rights issue (62(1)(a) of CA 2013). What you are doing is a clear case of preferential issue.

  53. Dear Sir,
    A Pvt. Ltd. Company received foreign remmittance on 27.12.2014 from existing shareholder. Whether company can directly allot shares within 60 days or it need to follow the complete procedure of preferential allotment like filing offer letter etc. ?

    Thanks and Regards
    Surbhi

    1. A rights issue is when a company issues its existing shareholders a right to buy additional shares in the company. Rights issue of shares is regulated by the provisions of section 62(1) (a) of the Companies Act, 2013. A rights issue does not involve all the complicated procedure which has to be followed in the case of a private placement under Section 42 of the Act.

  54. Dear Sir,

    There is share application money(Rs. 2 crore) under Current Liability as on 31.03.2014 and till date no allotment is made. Authorised share capital is Rs. 1 Lac. How we can allot the same if possible.

  55. Dear Sir,

    Are all the provisions of section 42, specially section 42(3)and section 42(6) of the Companies Act, 2013 applicable only to private placement or they are also applicable to rights issue under section 62(1)(a) of the Companies Act, 2013?

    1. The provisions of Section 42 are applicable only to the private placement process and do not apply to rights issue. Rights issue governed by Section 62(1)(a) is a complete section in itself.

      1. Thanks a lot for the answer.

        Further to this query, I have one another query:-
        As per Companies (Share Capital and Debentures) Amendment Rules, 2014, the explanation has been given regarding the valuation report as follows:-
        (ii) in rule 13 of Companies (Share Capital and Debentures) Rules, 2014,
        (a) in sub-rule (2), after clause (j), the following Explanation shall be inserted, namely:-
        “Explanation.- For the purposes of these rules, it is hereby clarified that, till a registered valuer is appointed in accordance with the provisions of the Act, the valuation report shall be made by an independent merchant banker who is registered with the Securities and Exchange Board of India or an independent Chartered Accountant in practice having a minimum experience of ten years”.;

        Also, in the beginning of the notification,
        it has been mentioned as follows:-

        In exercise of the powers conferred under sub-clause (ii) of clause (a) of section 43, sub-clause (d) of sub-section (1) of section 54, sub-section (2) of section 55, sub-section (1) of section 56, subsection (3) of section 56, sub-section (1) of section 62, sub-section (2) of section 42, clause (f) of sub-section (2) of section 63, sub-section (1) of section 64 , clause (b) of sub-section 3 of section 67, sub-section (2) of section 68, sub-section (6) of section 68, sub-section (9) of section 68, sub-section (10) of section 68, sub-section (3) of section 71, sub-section (6) of section 71, sub-section (13) of section 71 and sub-sections (1) and (2) of section 72, read with sub-sections (1) and (2) of section 469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby makes the following rules to amend the Companies (Share Capital and Debentures) Rules, 2014

        In view of the above, please let me know whether the above also applies to the valuation report under the rights issue u/s 62(1)(a) of the Companies Act, 2013 (CA, 2013) or not, since they are also mentioning the applicability of the above amended Rule 13 to sub-section (1) of section 62. However, Rule 13 is for issue of shares on preferential basis u/s 62(1)(c) of the CA, 2013.

        In this regard, kindly let me know if we want to get the valuation report for rights issue u/s/ 62(1)(a), do we need to get the same from Chartered Accountant having 10 years of experience as per the above amended Rule 13 or 5 years of experience as per the Act.

        Thanks.

        1. As far as rights issue of shares is concerned, whether a private company or a public company, it is clear that Section 23 and Section 62 will apply. A rights issue does not involve all the complicated procedures which has to be followed in the case of a private placement within the meaning of the explanation given under Section 42 of the Act.

          Section 42 of the Act contains provisions relating to private placement of securities. Explanation II under sub-section (2) of Section 42 states that a ‘private placement’ means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in this Section. Section 42 has no relevance to a ‘rights issue’ at all. Clause (a) of sub-section (1) of Section 62 states succinctly what a rights issue means.

  56. Dear Sir,

    Kindly let me know when a Company receives FDI, can the money be utilised before allotment of shares towards that money or not.

    – FDI Money utilised – 10th October, 2014
    – Date of allotment of shares for above FDI – 20th October, 2014

    Can the above be possible? Are there any restrictions under FEMA or Companies Act, 2014 for the above?

    1. Section 42(6) of Companies Act, 2013 clearly states that application money received shall not be used for any other purposes other than for adjustment against allotment or for repayment of monies where the company is unable to allot securities. Therefore, your FDI money cannot be utilised before allotment is made.

  57. Dear Sir,
    The company has share application money pending allotment in Balance Sheet as at 31-3-2014. The said amount is carried forward since 31-3-2012.

    My query is: Whether it is mandatory to provide for interest on share application money pending allotment during finalising balance sheet of 31-3-2014 or not ?

  58. Dear sir . Your article is very helpful. But could you please let me know in details the step by step process of share issue and also how to open a seperate bank account for the share application money .

    1. For detailed process please refer to Section 42 of Companies Act, 2013 along with Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014. And please contact your bank on the process for opening a separate bank account in this regard.

  59. What will happen to the filing which has been done under section 62 of the companies act, 2013? If the new notification says has to be filed from 1st april and the allotment has to be made within 60 days, what will be the procedure and what will be the status of the previously filed application before 1st april.

  60. one of my clients received share application money on different dates since 01.04.2014 in a separate bank account but utilised the same before alootment. what can we do

    1. Dear Ashok,
      .
      First proviso to Sec 42(6) of CA 2013 clearly states that the money can not be used for any other purpose except to allot or repay, incase not able to allot. There is no third purpose. Under the circumstances, the best option is to return the money and restart the process with prior planning.
      .
      bsamrish

      1. Will the general law of contract apply in the present case. As the money has been utilised before allotment, the applicant should have the right to get the shares allotted, if the money is not being returned.

  61. Mr Samrish,

    My query is this: Funds have come into India in December 13. FIRC filed in Jan. But the shares have not been alloted. Since CA 2013 came into force from 1.4.2014, how to proceed with allotment? We cannot do a private placement or preferential issue as a lot of formalities are required like sending a offer letter before receipt of money, etc? Rights issue also not possible as the funds are not in proportion to the existing shareholding.

    What is the possible solution?

    Regards,

    R. Sivaraman

    1. Pl understand, there is no specific clarification from MCA on manner of treatment of outstanding share application money on 31-03-2014, and it is only one view to treat the said amount as having received on 01-04-2014. You may ignore this view and follow the procedures of preferential issue. There is no alternative unless you have alloted the shares before 01-04-2014.

      bsamrish

  62. Dear Mr Samrish,

    With respect to the earlier query by Ms Roopali, the FIRC would have already been obtained when the funds have come in in December. So would it be possible to file it again? This is a practical difficulty. So how should the allotment be proceeded with.

    Waiting for your views.

    Regards,

    R Sivaraman

    1. Dear Mr. Siva,

      Could not understand your query? What do you want to file again? If you have not reported your inward remittance in Annexure VI, you may do it with a forwarding letter explaining the delay and requesting for condonation. However, pl note that there is no provision for condonation but nonetheless. Thereafter, you may take such steps as may be advised by the RBI and your consultants.

      bsamrish

  63. Sir, we have FDI for equity share (sh appln money) in Dec 2013, but not made allotment. So can we make allotment now? what is the procedure to be followed?

    1. Dear Roopali,

      Sec 42 of CA 2013 is applicable w.e.f 01-04-2014. And it states that shares are to be allotted within 60 days of receipt of SA money. Since you received the amount in Dec 2013, one view is that you treat it as having received on 01-04-2014. You may have followed / follow the procedures relating to Inward Remittance reporting according. You can read our blog on Post Incorporation Compliances for details.

      Take care

      Samrish

    2. And Roopali, if shares are being issued by way of private placement or preferential issue, you shall also have to follow the procedures as mentioned in the following Sections / Rules

      – Sec.62(1)(c);
      – Section 42;
      – Companies (Prospectus & Allotment of Securities) Rules 2014
      – Companies (Share Capital & Debentures) Rules 2014.

      Cheers

      Samrish

  64. The provisions under the New Act have been made stringent in order to depict the true nature of transactions otherwise there were Private Companies in earlier regime which were doing business of more than hundred crores on a capital of one lakh and the money used to flow back to promoters the moment there was sufficient cash generation in the Company or external funding from Banks/ Financial Institutions is taken in the Company.

  65. Company is mere custodian of money for and on behalf of the person who has contributed the money as share application money. Balance of share application money as on 31st Match, 2014, can be treated as fresh share application money with effect from 1st April, 2014 and the allotment to be made within a period of 60 days i.e. 30th May, 2014 or else the money to be refunded within further period of 15 days from 30th May, 2014 else the same shall be treated as deposit and the compliance related to the same to be completed
    .

    Malleshwari

  66. what if the company has received the share application money before 01.04.2014, say on 01.01.2014.

    what about the complainces, will section 42 apply in this case as companies act, 2013 does not have a retrospective effect.

      1. Hi Samrish,

        Thanks for informative provided by you on ur blog.
        My questions is an investor will give share application money in instalment. How shud i allot shares. Can I issue full lot of shares and then allot them in tranches depending on share application money. Also seprate bank account needs to be open to keep sh. Apllctn money.. But most of the co. Still takes it in their co. Current account. Who shall point our this.. Auditor?

        1. Yes, allotment can be made in tranches depending on the receipt of share application money.

          Section 40(3) provides that all monies received on application from the public for subscription to the securities shall be kept in a separate bank account. Please comply, that’s all we can advise.

          1. If in a private placement offer, offer is made to foreign investor for 43,000 equity shares at Rs 63(Rs 10+ Rs 53) total 27.09 lacs , after the offer being made,the money has been received in three installments on 12 nov -Rs 9Lacs on 12 dec -9L and remaining on 27 feb, now by what time should the company make allotment of shares..??
            Please recommend if I can do the following:
            On 12 nov as I am reciving Rs 9L i.e (Rs 430000 plus premium ), so can I allot shares within 60 days from 12 nov and securities premium money being receivable.Will Securities premium receivable will be treated as deposit?

          2. Yes, you may allot shares within 60 days from 12th November provided the terms of the issue specified the instalments in which money shall be received. Offer letter be examined.

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