The arrival of joint-stock companies was indeed a revolutionary step in the industrial scenarios of the Indian economy. The Companies Act that came in 1956 to govern joint-stock companies in India was recently replaced by an improved and enhanced Act passed in 2013. Even 6 years later, there are a lot of misconceptions and confusion surrounding basic legal procedures and regulations under the Act. The general public is at the same time attracted to the security of joint-stock companies in terms of liabilities and is a bit reluctant due to the complex regulations applicable.
Companies are bound by several regulations in acceptance of funds either as Capital, loan funds, or deposits. Share Application Money was one of the major sources through which companies (mostly private companies) raised funds. But with the arrival of the 2013 act, several rules and regulations also stepped into the scenario.
What is Share Application Money?
Share application money is the amount of advance received from a prospective shareholder. As per section 39(2), Share Application Money should not be less than 5% of the nominal value of a share or any other amount specified by SEBI. This amount is later transferred to share capital account on the issue of shares or refunded in case the issue fails to take place.
Refund of Application Money
For public companies:
Section 39(3) governs the allotment of shares of a public company;
- The minimum application money should be 5% of the nominal value
- If the minimum subscription is not received, the whole amount collected should be refunded within 30 days of the end of the subscription period (or the date specified by SEBI).
- If a minimum subscription is collected, shares should be allotted by filing the details with the Registrar of Companies
- Penalty for failure in refund or allotment shall be ₹1000 per day or ₹1 Lakh whichever is lesser.
For private companies:
- For private placements, invitation to subscribe should be given to less than 50 people (excluding Qualified Institutional Buyers and employees under ESOP)
- Fresh allotments should not be made until allotments under earlier offers are completed or withdrawn.
- Subscriptions should be collected only in modes other than cash
- Shares should be allocated within 60 days of completion of the subscription period, else all money collected should be refunded within 15 days from that date. (with an interest of 12% p.a from the date of expiry of 60 days)
- Share Application monies should be received in a separate bank account, the balance of which should remain unutilized until allotment.
- Violation of provisions under section 42 shall make the private placement be deemed as a public offer, and SEBI regulations shall apply at such a juncture.
- Penalty on default – the amount involved in the offer or 2 Crores whichever is higher. (to promoters/directors)
How would these amendments affect private companies?
The practice under the old Companies Act regime was collecting funds under private placement to cater to immediate fund deficiencies and keep them without allotment for a long period. The New Companies Act puts a prohibition on this practice by bringing in a time limit of 60 days for allotment or cancellation of the issue of shares. When the company fails to refund the application money as stipulated, the said balance will be treated as a Deposit under the Companies (Acceptance of Deposit) Rules, 2014.