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Share capital

Yash (Articled Assistant) (30 Points)

04 June 2013

Can Issued Share Capital+Share Application Money Pending Allotment be more than Authorised Share Capital in a Private Company ?

Pls do support your answers with "Relevant" Section no. or any case law...

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6 Replies

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 04 June 2013

Hi,

As per facts provided by you existing paid up capital along with share application money pending allotment will exceed current authorised capital.

As per my opinion receipt of share application money over and above of Authorised capital is not a default at all. Reason being share application money is not in the nature of paid up capital unless and until allotment of share against the share application money.

In other words only after allotment of share you can consider such share application money as paid up share capital. But before passing allotment resolution you have to increase your Authorised capital.

Making application to the company for allotment is just an offer pending acceptance from the company. Without acceptance the same would not be a binding contract for the company. Refer Indian Contract Act, 1872. Company reserves the right to reject the application and refund the share application money with or without interest as per the terms of acceptance of share application money.

If the Company has accepted Share Application Money you may do one simple thing. You may record the above transaction i.e. receipt of share application money and assurance given to proposed allottee in the board meeting minutes.

Further collect the share application form from the proposed allottee for your record. You may download the sample share application from the link mentioned below:

/share_files/files_display.asp?files_id=11908

Best Regards

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 04 June 2013

Share Application Money Amendment_December 2011

Please take note of the changes made by MCA w.r.t. Share Application Money, vide its Notification dated December 14, 2011.

Ministry of Corporate Affairs has vide its notification dated 14.12.2011, amended the Unlisted Public Companies (Preferential Allotment) Rules, 2003.

Through this change the following areas are regulated regarding Share Application Money:

Time Limit within which Allotment of security should be done against the receipt of application money.

Time Limit within which Application money should be refunded in case of failure to allot security within 60 days of receipt of application money.

Penal provisions i.e. charging of interest on application money @ 12% p.a., in case fail to repay the same within prescribed time limit.

Restriction on use of application money.

Please find below the relevant and highlighted clause regarding amendment in Share Application Money provisions:

Rule 8 of Unlisted Public Companies (Preferential Allotment) Rules, 2003, regarding Invitation and allotment of securities.-

(1) No fresh offer or invitation shall be made unless the allotment with respect to any offer or invitation made earlier have been completed in terms of sub-section (9) of section 60B of the Companies Act, 1956.

(2) Any offer or invitation not in compliance with sub-section (1A) of Section 81 read with sub-section (3) of section 67 of the said Act, shall be treated as a public offer and the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and the Securities and Exchange Board of India Act, 1992 (15 of 1992) shall be complied with.

(3) All monies payable on subscripttion of securities shall be paid through cheque or demand draft or other banking channels but not by cash.

(4) Any allotment of securities shall be completed within sixty days from the receipt of application money and in case the company is not able to allot the securities within the period of sixty days, it shall repay the application money within fifteen days thereafter, failing which it will be required to be re-paid with interest at the rate of twelve percent per annum:

Provided that t he monies received on such application shall be kept in a separate bank account and shall not be utilised for any purpose other than—

(i) for adjustment against allotment of securities; or

(ii) for the repayment of monies where the company is unable to allot securities.

(5) No company offering securities shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.

Thanks

Yash (Articled Assistant) (30 Points)
Replied 04 June 2013

I would like to take your attention towards case law "ITO v. Nandi Promoters (P.) Ltd. [2011]", wherein judgement was given that: "A company cannot receive any money more than its authorized share capital under garb of share application money"..

Ankur Garg (Company Secretary and Compliance Officer) (114773 Points)
Replied 04 June 2013

The decision given in the case of ITO Vs. Nandi Promoters (P) Ltd, was based on certain facts and figures. So interpreting the decision if ITAT, that “no company can receive any money more than its Authorized Share Capital under the Cover of Share Application Money”, in its literal sense is an example of lack of application of mind.

In that particular case the contention of company management were mala fide and the shareholders were also aware that company did not intend any increase in share capital, and in fact no application for increase has been filed by the company with ROC.

A procedure has been prescribed under the companies act and other applicable laws for increasing the authorized capital. However Company has not made any efforts for increasing the authorized capital. So the ITAT was bound to give such decision to control the wrong activities of the company.

Further such decision should not be taken in literal sense keeping in view the following points:

Existence of Contract Laws.
Existence of specific share application money provisions in company law.
Mala fide intentions of the company to misuse share application money provision

Conclusion: If the company is within 4 corners of law and transaction is genuine i.e. there is proper investor with duly filled share application money form, one can definitely accept share application money over and above the authorised capital. Regarding receipt of share application money, compliance with the provisions of Unlisted Public Companies (Preferential Allotment) Rules, 2003, regarding Invitation and allotment of securities is a must.

Needless to say that no restriction has been imposed by by the Companies Act, 1956 in this regard and the decision of ITAT is not conclusive and does not have the conclusive force of law and can be challenged on the basis of facts and legal provisions of company and contract laws. Well this is my personal opinion and you are free to draw your own inference.

Thanks

Ankur

Yash (Articled Assistant) (30 Points)
Replied 04 June 2013

Talking about a genuine case is a different thing. A company already in the process of getting its authorised capital increased can keep application money more than authorised capital. Increasing the authorized capital has its own procedures under the Companies Act and other provisions of applicable laws. Ignoring the same, one cannot declare the cash received from the shareholders as share application money.

Hence, a proper view to the same can be that application money can be more than the authorised share capital BUT only for a temporary period seeing the genuinity of the case.

Regards,

Yash

Sudarshan (Chartered Accountant) (59 Points)
Replied 21 July 2014

Dear Friends,

One of our client want to issue bonus shares u/s 63 of companies act 2013 out of free Reserve. Please suggest me the detail procedure to such allotment and also tell me the applicability of provisions of section 42, Section 62(1) (a) of Companies Act, 2013 in such allotment.

Thanks