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Companies will not be able to receive share app money in cash

CA Nitesh Kumar More 
on 08 November 2013

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Penalty upto 2 crores: Private/Public Ltd. Co. will not be able to receive share application money in cash, utilize share application money for business & will have to open separate a/c for share application

Many of the private limited companies receives share application money in cash, deposits cheques for share application  in the same company account and  utilize share application money for the business purpose even without allotment of shares. Sec 42 of the Companies Act, 2013 whose expected effective date is 1st April, 2014 puts prohibition on above. After the application of this sec, even private limited company will not be able to receive application in cash, 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. If a Company makes an offer to more than 50 or prescribed higher number, the offer shall be deemed to be an offer to the public. Companies making private placement have to allot the securities within 60 days.  

Comment- Recent case of Sahara India Real Estate Corp. Ltd vs. SEBI (Civil Appeal No. 9813 of 2011) provides basis of this section. Section 42 of the Companies Act, 2013 has introduced a new provisions regarding private placement of securities. The Companies Act, 1956 is silent on this issue.

Clause 42: Offer or invitation for subscription of Securities on Private Placement (Similar to Section 67 of The Companies Act, 1956)

Comment- Provisions for offer or invitation for subscription of securities on private placement basis revised to ensure more transparency and accountability. ‘Private placement’ defined, with detailed provisions for such placement.

A company may make an offer or invitation of securities by way of Private Placement. It provides the conditions through which invitation can be made. QIB & Employees are out of the preview of private placement.  If a Company makes an offer to more than 50 or prescribed higher number, the offer shall be deemed to be an offer to the public. Companies making private placement have to allot the securities within 60 days.

(1) Without prejudice to the provisions of section 26, a company may, subject to the provisions of this section, make private placement through issue of a private placement offer letter. 

(2) Subject to sub-section (1), the offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding fifty or such higher number as may be prescribed, (excluding qualified institutional buyers, and employees of the company being offered securities under a scheme of employees stock option as per provisions of clause (b) of sub-section (1) of section 62), in a financial year and on such conditions (including the form and manner of private placement) as may be prescribed.”. 

Explanation I—If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognized stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall accordingly be governed by the provisions of Part I of this Chapter. 

Explanation II.— For the purposes of this section, the term 

(i) “qualified institutional buyer” means the “qualified institutional buyer” as defined in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 as amended from time to time. 

(ii) “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.’. 

(3) No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company. 

(4) Any offer or invitation not in compliance with the provisions of this section shall be treated as a public offer and all provisions of this Act, and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be required to be complied with. 

(5) 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.

(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 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 12% 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 utilised 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. 

(7) All offers covered under this section shall be made only to such persons whose names are recorded by the company prior to the invitation to subscribe, and that such persons shall receive the offer by name and that a complete record of such offers shall be kept by the company in such manner as may be prescribed and complete information about such offer shall be filed with the Registrar within a period of thirty days of circulation of relevant private placement offer letter.

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

(9) Whenever a company makes any allotment of securities under this section, it shall file with the Registrar a return of allotmentin such manner as may be prescribed, including the complete list of all security holders, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.

(10) 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.

CAN A COMPANY GIVE LOAN/TRANSFER MONEY/GUARANTEE TO GROUP COMPANIES UNDER COMPANY ACT, 2013?     

Many corporate including Pvt Ltd Cos have other related group companies and they transfer money to & from other company as and when require. Stop doing this, even retrospectively from 12th Sep, 2013 as these can be treated as interest free loan u/s 185 of new company law. Loan has not been defined u/s 185. These transfers can be treated as loan. Any transaction of giving money to be returned with or without interest can be treated as loan. However, fund can be transferred to public ltd co. if less than 25% of total voting power is exercised or controlled by "such director(s)".

Section 185 of the Companies Act, 2013 has been made operational from 12-09-2013.This sec is applicable for all companies. This sec states that:

a. No company can advance loan to its “directors” or to “other persons in whom directors are interested”.

b. No company can give any guarantee or provide any security in connection with any loan taken by him or such other person.

EXCEPTIONS:

1. the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

2. a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

The expression “TO ANY OTHER PERSON IN WHOM DIRECTOR IS INTERESTED” means—

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director; 

(b) any firm in which any such director or relative is a partner;

(c) any private company of which any such director is a director or member;

(d) any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or “controlled” by any such director, or by two or more such directors, together; or

(e) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

"Control" has been defined as to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting inpidually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding or management rights or shareholders agreements or voting agreements or in any other manner. [Section 2(g) of the Companies Act, 2013]

IMPRISONMENT & PENALTY UPTO 25 LAKHS: If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

COMMENTS: Kindly note the following observations:

1) Existing loan on 12th sep is not affected by above provisions. However, it should not be renewed & should be repaid on due date.

2) If any loan had already been given after 11th sep., you should book it as advance  for property/ purchase of goods/ materials etc. backed by adequate documentation . These should be return as soon as possible.

3) Deposits or advance for property/ purchase of goods, services etc  is not covered.

4) Company in the ordinary course of business can give loan at not below bank rate.

5) Sec 372 of the Companies Act, 1956 is applicable after 11th sep.

6) Above is my opinion only, you may have different opinion.

PRIVATE LTD COMPANIES HAVING TURNOVER UPTO 60 LAKHS SHOULD BE CONVERTED TO LLP

1) LLP is not a company, hence proposed limit of audit of 20 company / CA will not be applicable.

2) As companies Act will not be applicable, you can transfer fund from one LLP to another group LLP. 

3) Many of exemption which Pvt Ltd company enjoy under old Companies Act has been withdrawn, which are not applicable to LLP.

4) Compliances under new companies Act for Pvt Ltd Companies has been substantially increased, which are not applicable for LLPs.

5) There is heavy penalty for non compliances under New Company Act. Penalty of rs 50000 is a small amount for a single violation.

6) Cost benefit analysis suggests that these should be converted into LLP.

7) However, as per sec 47(xiiib) of Income tax Act, for tax neutrality of such conversion , turnover of Pvt Ltd company  in any of last 3 years must not exceeds 60 lakhs. So, if turnover exceeds 60 lakhs than such conversion will be subject to income tax.

PRIVATE LTD COMPANIES SHOULD  BE CONVERTED INTO PUBLIC LTD COMPANIES

1) Sec 185 of New Co Act is not applicable to public ltd co at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together

2) We can plan accordingly and take benefit.

3) So, we can convert our existing Pvt Ltd companies to public Ltd companies and take benefits.

THE COMPANIES ACT, 2013

185. (1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:

Provided that nothing contained in this sub-section shall apply to—

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

Explanation.—For the purposes of this section, the expression “to any other person in whom director is interested” means—

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director; 

(b) any firm in which any such director or relative is a partner;

(c) any private company of which any such director is a director or member;

(d) any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

Warm Regards 

CA Nitesh Kumar More |  FCA


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